Cablegate: Update On Chile's Economy: October 10 Sees Continued Fall

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TAGS: ECON EFIN ETRD EINV ECIN PGOV PREL CI

SUBJECT: UPDATE ON CHILE'S ECONOMY: OCTOBER 10 SEES CONTINUED FALL
IN MARKETS

REF: SANTIAGO 909

1. (U) SUMMARY: This is the second in a series of reports on major
developments in Chile's economy in the face of recent, global
financial turmoil. On Friday, October 10, there were continued
declines in the price of copper, Chile's exchange rate, and the
stock market. Chile's private pension funds reported significant
losses due to the financial crisis. Liquidity has remained stable
in Chile's banking sector, due mostly to interventions by the
Central Bank, but remains an issue of concern, especially as it
affects lending to local small- and medium-sized enterprises. END
SUMMARY.

Copper Prices Slump Again
-------------------------

2. (U) 3-month futures on the London Metals Exchange were down 11%
on the day to $2.14/pound. Copper was down 20% for the week, its
lowest point since March 2006.

Chilean Peso Down vs. U.S. Dollar
---------------------------------

3. (U) The Chilean Peso lost more ground against the U.S. Dollar,
closing at 638 Chilean Pesos to 1 U.S. Dollar (down over 4%). The
Peso has fallen 20% year-to-date and was at its lowest level against
the Dollar in 4 years.

Stock Market Drops Again
------------------------

4. (U) The IPSA index dropped again, losing more than 5% of its
value from yesterday's close. The IPSA has dropped more than 20%
this week.

Private Pension Funds Take A Big Hit
------------------------------------

5. (U) Chile's Superintendency of Pension Fund Administrators
announced that the nation's private pension funds had been impacted
heavily by the effects of the global financial crisis. The "A
Fund," the riskiest fund which invests in stocks, lost 11.8% of its
value in the month of September alone.

Central Bank Holds Key Rates Steady
-----------------------------------

6. (U) The Central Bank announced it will keep interest rates at
8.25% (instead of raising them to fight inflation), in view of the
global financial turmoil.

Central Bank Changes Reserve Requirements
-----------------------------------------

7. (U) The Central Bank will temporarily allow Chilean banks to meet
reserve requirements in currencies other than U.S. Dollars (e.g.,
Chilean peso).

Central Bank Focused On Maintaining Liquidity
---------------------------------------------

8. (SBU) Contacts at the Central Bank told the Embassy that the Bank
has formed a special committee to monitor international credit
conditions. The Central Bank sees its principal role as assuring
liquidity in the financial sector, and believes it has sufficient
reserves to do that job. Liquidity is thought to be adequate at the
moment, as can be seen in response to the Central Bank's offers of
currency swaps. The terms of the swaps have been increased from 28
days to 180 days. In the first offering of $500 million, only $350
million was taken, and only $30 million of the $500 million was
taken in the second offer.

Banking Superintendency Sees Adequate Liquidity
--------------------------------------------- --

9. (SBU) Contacts at the Superintendency of Banks told the Embassy
that liquidity is at "normal" levels (both in local and foreign
currency) in the banking sector, given the current situation.

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Heads of Chilean banks met Wednesday, October 8, to assess sector
conditions. The consensus was that there is no panic, but credit is
tightening, and the Central Bank needs to assist in maintaining the
current levels of liquidity.

Local Lending Worries Head of Banking Association
--------------------------------------------- ----

10. (SBU) In a conversation with Ambassador Simons, Hernan
Somerville, President of Chile's private bank association said
Chile's banks are well equipped on the liability side to withstand
the crisis. International lines of credit are tightening somewhat
but can be easily replenished from auctions of Central Bank reserves
and, if needed, Chile's $25 billion in sovereign wealth funds.
Banks are pleased with the responsiveness thus far of Finance
Minister Velasco and Central Bank President De Gregorio.

11. (SBU) Somerville was more worried about the asset side. If
banks cut back too severely on credit lines to small/medium
businesses and hoard cash, this could impact the real economy. He
is trying to convince the banks to keep credit broadly available.
The local stock market was falling in line with international
trends. Somerville believed the U.S. needed to send a firmer signal
on the bank rescue to stop the downward trend. Local stock market
drops could eventually affect public support for Chile's privatized
pension system as equity-rich funds had taken big hits. This could
also motivate big family holders to buy back cheap equity, which
would not be good for the depth of capital markets in Chile.

Local Bank Says Credit Tighter for Smaller Companies
--------------------------------------------- -------

12. (SBU) Contacts at BCI, a private Chilean bank, noted it was
becoming quite difficult for small- to medium-size enterprises in
the Chilean private sector to take out new loans (mostly because of
heightened credit requirements). However, BCI was willing to
renegotiate the terms of existing loans if these companies ran into
trouble.
SIMONS

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