Cablegate: Chile: Economic Highlights Week of November 3

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TAGS: ECON EFIN ETRD EINV ECIN PGOV PREL CI

SUBJECT: CHILE: ECONOMIC HIGHLIGHTS WEEK OF NOVEMBER 3

REFS: SANTIAGO 975 AND PREVIOUS

1. (SBU) 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 7, there was a
decrease in copper prices, some appreciation in the exchange rate,
and losses/gains in the stock market. There was an unexpected
increase in economic activity in September and inflation in October.
The GOC announced a $1.5 billion package to assist small- and
medium-sized enterprises and home buyers. Experts at a seminar on
the impact of the global financial crisis in Chile predicted a
decrease in growth and Foreign Direct Investment. Banco de Chile
contacts reported the financial crisis has impacted the construction
industry, cut some international credit lines, and although
liquidity is currently adequate, the GOC needs to switch to
longer-term measures. END SUMMARY.

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

2. (U) Copper prices on the London Metals Exchange decreased three
days in a row to close the week at about $1.71/pound on November 7,
a loss of approximately 16% from its close on October 30.
Antofagasta PLC, one of Chile's largest private copper consortiums,
announced it was moving ahead with planned investments of $3 billion
despite the recent decline in copper prices. The group believes
prices will rise again in the medium-term, though it is unlikely
they will return to the highs at the beginning of 2008.

Chilean Peso Appreciates Against U.S. Dollar
--------------------------------------------

3. (U) The exchange rate closed higher for the week on November 7,
at 638.3 Chilean Pesos to 1 U.S. Dollar (appreciating almost 6% from
its close on October 30).

An Up Week For The Stock Market
-------------------------------

4. (U) The IPSA closed at 2575.12 points on November 7, gaining
about 3% on the close of October 30.

Economic Activity Up, GDP Growth Will Probably Fall
--------------------------------------------- ------

5. (U) Chile's monthly indicator of economic activity (IMACEC)
jumped to an unexpected 5.5% in September. However, a Central Bank
survey of economic expectations (based on the opinions of national
experts) forecast 4% growth in 2008 and 2.5% in 2009 (downward
revisions for both figures from previous months).

An Unexpected Jump In Inflation
-------------------------------

6. (U) The Consumer Price Index (CPI) rose unexpectedly by 0.9% in
October (it's highest rate for the month of October since 2002),
bringing the annual inflation rate to 9.9%, its highest level in
fourteen years. The increase was driven by continuing high food and
fuel prices (e.g., the largest increase in the CPI was for tomatoes
which registered a 45% increase in price).

7. (U) The latest CPI calculations do not include the recent,
significant decline in oil prices. In fact, the inflation rate is
expected to decrease in the medium-term due to falling commodity
prices, and may drop to 4.5% in 2009. However, the annual inflation
estimate for 2008 remains at over 8.5%. October's inflation rate
increases the likelihood the Central Bank will raise or at least
maintain the current interest rate (8.25%).

Government Announces Package for SMEs
-------------------------------------

8. (U) On November 4, the GOC announced a $1.5 billion plan to
assist small- to medium-size enterprises (SMEs) and homebuyers. The
plan will provide temporary subsidies to those in the market for a
new home (primarily middle-income families) as well as guarantees
for certain mortgages. The measure is designed to spur new
construction and employment. The Small Business Guarantee Fund
(FOGAPE) and the Chilean Economic Development Agency (CORFO) will
have more funds and guarantees to make available to SMEs. The GOC
also will inject $500 million into Banco Estado (state-owned). This
step is intended to increase lending as private banks compete with
Banco Estado's new rates/loans. Preliminary reaction from Chilean
opposition parties to the plan was positive.

Seminar On Impact Of Financial Crisis
-------------------------------------

9. (U) At a November 6 seminar sponsored by Chile's major financial
periodical, "Diario Financiero," Alberto Ramos, Goldman Sachs of
Latin America, predicted the global growth rate will slow as a
result of the financial crisis. Latin American economic growth will
probably average 2.7%. Ramos predicted Chile's GDP growth will fall
from 3.6% in 2008 to 2.6% in 2009 as a correction to commodity
prices. He also projected a 30% decrease in Foreign Direct
Investment (FDI) globally.

10. (U) Martin Wolf, "London Financial Times," predicted a deep,
global recession, which would take 3-4 years to return to 2007 GDP
levels. Sebastian Edwards, an economist and professor at UCLA,
projected a 16-24 month recession. He was optimistic about Chile's
economic future, foreseeing a deceleration in growth, but not a
collapse of the financial system.

Bank Reports Impact on Real Economy
-----------------------------------

11. (SBU) Embassy contacts at Banco de Chile described how the
financial crisis has impacted Chile. The construction sector has
been hit hard. Most construction projects, in which the Bank is
invested, have been suspended. At the beginning of the financial
crisis, some international lines of credit to Chilean banks had been
severed, in particular by one German bank. During the uncertainty
surrounding Wells Fargo's purchase of Wachovia (which has a large
presence in Chile's banking sector), many experts worried about that
more lines of credit would be cut. However, to date, those lines of
credit reportedly remain intact.

12. (SBU) An Embassy contact at Banco de Chile reiterated that the
Central Bank and Ministry of Finance have moved with alacrity to
maintain liquidity in financial markets, which was currently
adequate. However, he noted these were short-term measures, and the
GOC needed to start thinking about long-term steps. In particular,
he thought the tax burden in Chile was quite high, especially for
small- to medium-sized enterprises. He recommended the GOC should
consider, for example, repealing the stamp tax, paid on each new
loan.
SIMONS

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