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Cablegate: Chile: Economic Highlights Week of November 17

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TAGS: ECON EFIN ETRD EINV ECIN PGOV PREL CI

SUBJECT: CHILE: ECONOMIC HIGHLIGHTS WEEK OF NOVEMBER 17

REFS: SANTIAGO 1011 AND PREVIOUS

1. SUMMARY: This continues a series of regular updates on major
developments in Chile's economy since the acceleration of global
financial turmoil. By week's end, November 21, there were decreases
across the board in copper prices, the exchange rate, and the stock
market. Chilean exports dropped by 6.2% in October. Large
investment projects have been suspended and investment is forecast
to fall in 2009. A strike by public sector employees had caused
significant export losses. The GOC's agreement to raise wages for
government workers was not expected to have a direct impact on
inflation. The Central Bank is continuing to offer currency swaps
to maintain liquidity. The state-owned BancoEstado is offering
incentive mortgages to help spur housing starts. END SUMMARY.

Copper Prices Decrease
----------------------

2. Copper prices on the London Metals Exchange closed at
$1.57/pound on November 21, down 6.5% from their close on November
14. Copper prices hit their lowest point in three and a half years
during the week, bringing the average price for November to about
$1.70/pound.

3. Chile's state copper company, CODELCO, announced November 18 it
will focus on preventing losses due to the continuing fall in copper
prices. The steps will include: cost control measures, austerity
and fiscal discipline, suspending the hire of new workers, and
revision of existing contracts. Experts now project that copper
prices will not be high enough to cover the GOC's 2009 budget, with
some forecasting a 1% budget deficit next year.

Chilean Peso Depreciates Against Dollar
---------------------------------------

4. On November 21, the exchange rate closed down sharply (by almost
20 pesos) at 683 Chilean Pesos to 1 U.S. Dollar (a depreciation of
6.7% from its close on November 14). During the day, the peso
reached a 5-year low.

Significant Losses In The Stock Market
--------------------------------------

5. The IPSA closed at 2369.65 points on November 21, down more than
7% on the close of November 14. The IPSA has lost value for five
days in a row.

Exports Drop In October
-----------------------

6. Data from Chilean Customs shows exports decreased by 6.2% in
October 2008 when compared with the same month in 2007 (a decrease
of almost $400 million). The drop is blamed on reduced copper
shipments (down by 20%) due to lower demand (reflected in lower
copper prices). Copper still accounted for 61% of exports. Exports
also decreased because of a fall-off in demand from several key
trading partners. Exports to the U.S. dropped by 30% (the U.S. was
Chile's second top export destination in 2007), and exports to
Canada dropped by 50%.

Large Investments Postponed, Projections Fall
---------------------------------------------

7. The Chilean Corporation of Capital Goods (Corporacion de Bienes
de Capital - CBC) reported that 19 major investment projects in
Chile have been suspended due to effects of the financial crisis
(involving investments estimated at $2.36 billion). Construction
projects accounted for 17 of the 19. Latin America Consensus
Forecast projected a sharp drop in investment, with gross fixed
capital formation forecast to grow 16.8% in 2008 but only 1.9% in
2009.

Effects of Government Strike
----------------------------

8. A four-day strike by public sector employees caused significant
disruption to public services (most notably trash collection) across
Chile. It ended November 20 when the Chilean Congress approved a
compromise between the GOC and public sector unions for a 10% raise
in wages. Government employees had originally demanded a 14% raise,
ostensibly because of Chile's relatively high inflation. Some
experts estimate that Chilean exporters lost over $1 billion as
result of the strike, which paralyzed Customs operations across
Chile (and occasioned some frantic calls by U.S. exporters to the
Embassy and the Department). However, the raise for public sector
employees was not expected to have a direct impact on inflation.

Central Bank Continues Currency Swaps
-------------------------------------

9. The Central Bank continued to offer currency swaps to help
maintain adequate levels of liquidity in the banking system. The
Bank offered $500 million on November 18 for 63 days at LIBOR + 106
basis points. Banks opted to use only $100 million.

State Bank Offers Incentive Mortgages
-------------------------------------

10. On October 18, BancoEstado (state-owned bank) signed a deal with
30 real-estate companies across the nation. Under the agreement,
BancoEstado will offer 30-year mixed-rate mortgages at 3.9% for the
first 36 payments, for up to 90% of the assessed value of the home.
The mortgages will only be available for new homes and are designed
to spur housing-starts (negatively impacted by the global financial
crisis). The mortgages will be made available largely from an
injection of funds from the Government (see Santiago 989).
SIMONS

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