CHILE: ECONOMIC HIGHLIGHTS WEEK OF NOVEMBER 10

UNCLAS SANTIAGO 001011 STATE PLEASE PASS TO USTR KATE DUCKWORTH STATE PLEASE PASS TO FEDERAL RESERVE TOM CONNORS TREASURY FOR SSENICH COMMERCE FOR KMANN SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD EINV ECIN PGOV PREL CI SUBJECT: CHILE: ECONOMIC HIGHLIGHTS WEEK OF NOVEMBER 10 REFS: SANTIAGO 989 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 14, there was a slight decrease in copper prices and relative stability in the exchange rate and stock market. Fitch Ratings reduced Chile's credit rating to "stable." The Central Bank maintained interest rates at their current level, revised many economic projections downward, and injected more liquidity in the banking system. Private pension funds reported further losses. Consumer confidence fell. Figures were released on mergers and acquisitions. Chile fell in the rankings for the "Paying Taxes 2009" report. END SUMMARY. Copper Prices Decrease -------------- ¶2. Copper prices on the London Metals Exchange decreased November 14, closing the week at $1.68/pound, down almost 2% from their close on November 7. Chilean Peso Remains Relatively Stable -------------- ¶3. On November 14, the exchange rate closed at 637 Chilean Pesos to 1 U.S. Dollar (practically the same level as its close on November 7). A Stable Week For The Stock Market -------------- ¶4. The IPSA closed at 2550.91 points on November 14, down less than 1% on the close of November 7. Fitch Reduces Chile's Credit Rating to "Stable" -------------- -- ¶5. On November 10, Fitch Ratings announced a change in Chile's credit rating, from "positive" to "stable." Chile's long-term foreign currency Issuer Default Rating (IDR) was set at "A" and its long-term local currency IDR was set at "A+" ("AAA" is Fitch's top rating). Fitch justified the decision noting a global recession would disproportionately impact Chile's small economy and the decline in commodity prices would hurt its external liquidity position. Fitch believed Chile's macroeconomic policies, fiscal management, and flexible exchange rate would help it absorb shocks. Central Bank Keeps Rates Steady, Revises Forecast -------------- -------------- ¶6. In its monthly meeting, November 13, the Board of the Central Bank of Chile decided to maintain the monetary policy interest rate at 8.25% annually (unchanged from the previous two months). The Central Bank also committed to reduce inflation to 3% over the policy horizon. In October, inflation was high (0.9% for the month, 9.9% annualized) and various measures of core inflation remained elevated. Wage dynamics continue to be in line with historical patterns and medium-term inflation expectations have fallen. ¶7. The Central Bank also unexpectedly revised its key economic projections downward for 2009. GDP growth was forecast at 4% - 4.5% in 2008 (down from 4.5% - 5%) and between 2% and 3% in 2009 (down from 3.5% - 4.5%). The price of copper was projected at an annual average of $1.65/pound for 2009 (down significantly from $3.10/pound). Inflation was predicted to fall to 4% in 2009 (down from the previous projection of 4.9%). Central Bank Offers More Liquidity -------------- ¶8. On November 11, the Central Bank, acting as Fiscal Agent for the Ministry of Finance, announced another step designed to inject more liquidity in the country's banking system. The Bank began a seasonal surplus investment program in U.S. dollars through auction of 91-day deposits in winning institutions. The process was opened to all banking institutions or branches of international banks operating in Chile. On November 12, the Central Bank opened the bidding process for the first $350 million. Local banks acquired 94.8% of the total amount offered, or $332 million, at LIBOR + 327 basis points. There will be a second auction on November 19 for $350 million. Private Pension Funds See Further Losses -------------- ¶9. The global financial turmoil took its toll on Chile's private pension fund system in October. The riskiest "A Fund," which invests primarily in equities, lost 21.3% of its value (after a loss in September). The pension fund system as whole was valued at more than $69 billion at the end of October, almost a 27% decline from its value in September. Consumer Confidence Drops -------------- ¶10. In a monthly poll, the Chilean firm Adimark-GfK measures public perceptions of the economy on an index. In their findings for October, consumer confidence dipped significantly. On a scale of 1 - 100 (100 being the best),Chilean consumer confidence rang in at 34.5, its lowest point on the index since early 2002. Chilean perceptions of the economic situation facing businesses also hit its lowest point since mid-2003. Similarly, perceptions of future unemployment were at a six-year low (meaning those surveyed are expecting a marked increase in unemployment). Mergers and Acquisitions Reported -------------- ¶11. According to a report issued by Ernst and Young Consulting Company, mergers and acquisitions in Chile totaled $5.1 billion from January to October 2008 (with some 42 transactions). Transactions in the mining, energy and transportation sectors represented 70% of the total. Chile Falls In "Paying Taxes" Ranking -------------- ¶12. Pricewaterhouse Coopers and the World Bank have published their "Paying Taxes 2009" report, which analyzes national tax regimes and the ease of paying taxes in each country. Chile fell from number 34 (last year) to 41 on the list (the U.S. was ranked number 46). According to the report, the total tax rate for businesses in Chile is approximately 26%, and they spend about 316 hours in a year preparing taxes. The study is a significant component in the World Bank's "Doing Business" report. SIMONS