SCENESETTER FOR CODEL MEEKS

UNCLAS SANTIAGO 001061

STATE FOR H - JULIE BULGRIN

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PREL PGOV ECON ENRG CI

SUBJECT: SCENESETTER FOR CODEL MEEKS

Summary
--------------


1. (SBU) The Embassy looks forward to your visit to Santiago, which
will be seen as supporting our shared vision of strong democratic
institutions; market-based, trade-oriented economies; and solid
cooperation on issues ranging from energy to education to defense.
You will be arriving in Chile six weeks after nationwide municipal
elections set the stage for the 2009 presidential election season.
Several political parties are expected to decide on candidates in
the coming weeks. President Michelle Bachelet is constitutionally
precluded from seeking a second term and, although personally
popular and seen as performing well on the international stage, has
struggled with domestic political problems, including a perceived
failure to implement an ambitious social agenda. Economically,
Chile is beginning to feel the effects of the global financial
crisis, although the country is entering this difficult period with
a strong economy and sound policies. Chile faces an energy crisis
which has slowed economic growth but spurred significant U.S-Chile
collaboration on energy policies. End summary.

Concertacion: Still in Power after 18 Years
--------------


2. (U) Chile's center-left coalition government, the Concert of
Parties for Democracy, or Concertacion, has been in power
continuously since the end of Pinochet's military dictatorship in

1990. The election of current president Michelle Bachelet in
December 2005 was heralded as historic. Bachelet is Chile's first
female president, a single mother and agnostic in a country with
strong conservative Catholic roots, and a survivor of torture during
the Pinochet regime. While Bachelet started her presidency with
soaring popularity and high expectations, a series of domestic
problems--from large student protests to the expensive failed reform
of public transportation in the capital--have kept her approval
ratings in the 40s for most of her term. Three cabinet shuffles
(with a possible fourth in the works),an energy crisis, the whiff
of corruption in several ministries, increasing concerns over the
disenchanted indigenous Mapuche minority, and the loss of her
working majority in Congress, have all contributed to potential
"Concertacion fatigue" on the part of the electorate. On the other
hand, polls show that the Chilean public is disillusioned with the
center-right opposition coalition, Alianza, as well as the ruling
group.


3. (U) Nationwide elections for municipal offices, which were held
on October 26, were widely seen as a bellwether of the national
political mood. They delivered mixed results. The center-right
coalition, Alianza, made significant gains in the number of mayoral
posts it holds, exceeding the number held by Concertacion for the
first time in two decades and capturing the most important municipal
position in the country: mayor of Santiago. However, in the city
council races, which are seen as a more reliable indicator of party
strength, Alianza failed to significantly close the 10 point lead
Concertacion enjoyed after the last municipal election.

Chile on the International Stage
--------------


4. (SBU) Despite domestic political missteps, Bachelet performs
well on the international stage and has contributed to Chile's
rising international stature. In September, she convened a summit
of UNASUR, the nascent South American political union, which helped
to defuse, at least temporarily, the crisis in Bolivia and prevented
the meeting from degenerating into an anti-American forum. Chile
serves as UNASUR's president pro tempore; has the largest group of
Latin American peacekeepers in Haiti; and is generally active, if
behind the scenes, in regional multilateral fora. Chile and the U.S.
see eye to eye on many regional and international issues, but
Bachelet has made it clear that Chile does not blindly follow where
the U.S. leads. In recent comments during the UN General Assembly,
Bachelet said that the U.S. and Chile were "political friends, but
not unconditional friends" and criticized the U.S. for its role in
precipitating the financial crisis. She has repeated the latter
charge in other public fora as well.


5. (SBU) There are some tensions between Chile and its neighbors
Peru and Bolivia over territorial disputes stemming from the 19th
century War of the Pacific. In January, Peru submitted a case to
the International Court of Justice in the Hague asking for a
decision on a new maritime border with Chile. For its part, Bolivia
would like to regain direct access to the sea. Nonetheless, all
parties are committed to a peaceful resolution of these issues and
Chile has said that it is committed to strengthening relations with
both countries. In the past week, tensions with Peru have dominated
local headlines. Recently unearthed remarks by the Peruvian Army
Commander-in-Chief promising to return any Chileans who enter Peru
in a "coffin or plastic bag" led Chile to demand his resignation and
disinvite the Peruvian Defense Minister from a high-profile naval
exposition in Valparaiso. However, no one expects this flap to
permanently damage relations. Relations between Chile and Venezuela
are often frosty, with Chileans objecting to Chavez's grandstanding
and arrogance --particularly when he tried to take credit for
Bachelet's September meeting on Bolivia or when his outbursts stole
the limelight at the November 2007 Ibero-American Summit in
Santiago.

All Eyes on the Presidential Race
--------------


6. (U) With the municipal elections over, all eyes are on Chile's
presidential election set for December 2009. Sebastian Pinera of
the opposition National Renewal party leads the polls, with nearly
60% of Chileans predicting that he will be the next president,
according to a recent survey. While this certainly reflects
discontent with the current government, these high ratings likely
also reflect the fact that parties belonging to the progressive
Concertacion coalition and the other conservative party have yet to
coalesce around a candidate. The other member of the Alianza
coalition, the Democratic Union (UDI),may put forward its own
candidate. The Concertacion seems to have narrowed its field of
candidates to two: Jose Miguel Insulza, the Secretary-General of the
Organization of American States and a member of the Socialist Party;
and former president Eduardo Frei, a member of the Christian
Democrat party.

Chile's Strong Economy Put to Test by Financial Crisis
-------------- --------------


7. (U) Chile is fortunate to be in a strong economic position as the
global financial crisis unfolds. The country maintains a budget
surplus; has relatively low debt; and has over $21 billion in
offshore sovereign wealth funds, much of it from record copper
revenues. Poverty has dropped from 40% of the national population
in 1990 to 14% in 2006. Nonetheless, the consensus among Chilean
economists is that a global economic downturn is inevitable and will
have a significant effect on Chile. Economic growth will likely
slow to 2-3% or less in 2009; trade is likely to decline; and
domestic economic activity will decrease, creating higher
unemployment. Despite high worldwide commodity prices, economic
growth in 2007 was limited to 5.1% and will likely decrease to 3-4%
in 2008.


8. (U) A dramatic decline in copper prices, a potential economic
slow-down, and an accompanying rise in unemployment top the list of
Chilean economic concerns. Copper accounted for 64% of Chile's
exports in 2007, and the price hit its lowest point in three years
last month. The financial crisis has affected liquidity in the
Chilean banking system, making it harder for some companies to
maintain access to capital. Demand for Chilean exports is
decreasing, as demonstrated by a drop of 6% in exports in October
2008 when compared with the same period in 2007. These factors have
caused many companies to reduce investment plans, cut costs, and
begin laying off workers. Unemployment, which was 7.1% in 2007, is
expected to be between 7.8% and 8.0% in 2008, and some predict it
may rise by an additional 0.5% to 2% in 2009. Other economic
worries include recent high inflation (8.9% in November),high
levels of consumer indebtedness, and low business confidence.

Chile: A Trade Liberalization Leader
--------------


9. (U) Chile has been a global leader in trade liberalization for
the past 20 years. It boasts trade agreements with 60 countries. A
new FTA with Australia will come into effect in January 2009, and
the country is currently negotiating FTAs with Thailand, Malaysia,
and Turkey. Chile supports an FTA of the Asia-Pacific. As a member
of the P-4 (Trans-Pacific Partnership Agreement),Chile strongly
supported USTR Susan Schwab's September announcement that the U.S.
will explore joining this arrangement in 2009.

The U.S. and Chile: Strong and Increasing Trade
-------------- ---


10. (U) The U.S. is Chile's largest trading partner, and Chile is
our fifth largest trading partner in Latin America. Overall
bilateral trade has grown by 170% during the four years that the
U.S.-Chile FTA has been in place, reaching USD 17 billion in 2007.
Chile's top three exports to the U.S. in 2007 were copper (39%),
fruit (11%),and seafood (11%). The top three U.S. exports to Chile
were non-crude oil (24%),machinery (21%),and cars (10%). Chilean
exports to the U.S. dropped 5.5% in the first 9 months of 2008. In
September, Chile ran its first trade deficit in six years, with
imports rising 48% compared to September 2007, whereas exports only
increased 1%. Nevertheless, Chile is still forecast to maintain a
total trade surplus of USD $16.3 billion in 2008.


11. (SBU) Despite this success, some economic sticking points
between the U.S. and Chile remain. Chile is on the Special 301
Priority Watchlist for its poor performance in protecting
intellectual property, including copyrights, trademarks,
pharmaceutical patents, and proprietary clinical
trials. In October, the Chilean Senate took a positive step by
passing the Patent Cooperation Treaty. However, Chile still has a
long way to go in its IPR protections, including approving a draft
copyright law (now before Congress) and improving enforcement
mechanisms. For its part, Chile is concerned about negative U.S.
press reports related to sanitary conditions in the salmon industry
(the second leading export sector, after copper). Negotiations over
the timing of Chilean grape exports to the U.S. have been resolved
with the acceptance of producers in both countries.

The U.S. and Chile: Partners Across the Board
--------------


12. (U) The U.S. and Chile continue to partner on a broad set of
initiatives, including education, scientific research, and
military-military cooperation. In May 2008, President Bachelet
announced government plans to significantly increase scholarships
for Chileans to study abroad. The new GOC scholarship program is
currently being launched with plans to send over 1,000
students/scholars overseas this year and 2,500 in 2009. Program
leaders estimate that approximately one third may choose to study in
the U.S. These exchanges build on the success of the U.S.-Chile
Equal Opportunities Scholarship Program, inaugurated in 2007, to
sponsor English and academic studies for Chilean PhD students who
come from disadvantaged and rural areas that have not traditionally
had access to English language schools or study abroad
opportunities.


13. (U) In June 2008, President Bachelet and Gov. Arnold
Schwarzenegger launched the Chile-California Partnership for the
21st Century. The partnership will foster collaboration between
individuals, government, and the private sector in areas such as
agriculture, energy efficiency, environmental resource management,
and education. A similar program existed from 1963-1970 and this
renewed effort will seek to leverage the numerous economic and
geographic similarities between Chile and California.


14. (SBU) The U.S. and Chile also enjoy a strong military-military
relationship. The capability and professionalism of the Chilean
Armed Forces, along with our continuing, positive bilateral
engagement, make Chile an ideal training partner especially when
compared with the other militaries in the region. There are regular
exchanges between the U.S. and Chilean military, to include
operational forces, academy students and technical experts, as well
as reciprocal visits between military leaders from both countries.
Chile actively participates in joint exercises and is pursuing a
military modernization program that will rely heavily on U.S.
equipment, thus increasing interoperability. Already Chile boasts
the largest Foreign Military Sales program in SOUTHCOM, and more
purchases are pending. A State Partnership Program, which links a
U.S. State National Guard with the Chilean Armed Forces, was
recently approved with the State of Texas by the National Guard
Bureau and the SOUTHCOM Commander. This program will further
strengthen military ties and open new avenues for military to
military cooperation.


Facing a Serious Energy Crisis
--------------


15. (SBU) Chile continues to face a serious energy crisis which, at
least in the shorter-term, is being addressed by industry making
adjustments to accommodate fluctuating hydroelectric generation and
reduced natural gas supplies. Uncertainty about how Chile will meet
the projected 12,000 MW
it needs over the next 10 years, however, is having a negative
impact on the country's economic growth and investment prospects.
The country's electricity matrix is dominated by hydropower and
thermal plants with limited spare capacity. However, last year
record low water levels forced hydropower plants to operate at
minimum capacity and Argentina has reduced exports of natural gas to
the bare minimum needed for residential use, forcing the entire
thermal infrastructure to rely more heavily on expensive diesel and
to consider increasing use of coal. Chile is attempting to increase
its hydroelectric generation and building liquid natural gas (LNG)
terminals, but natural gas supplies will still be subject to
fluctuations in price and availability (and growing demand from
China),as well as the need to increase capacity to transport it to
the center of the country from terminals. Moreover, due to
resistance from environmentalists and growing public concerns, the
future of a large hydroelectric project in Patagonia is very much in
question. Although President Bachelet has promised not to introduce
nuclear power during her administration, a national debate over
nuclear generated power is underway. The National Energy Commission
is currently studying the issue and presidential candidates Insulza,
Frei, and Pinera have indicated a willingness to explore nuclear
power options.


16. (SBU) The GOC clearly recognizes the need to reduce energy
consumption, increase energy efficiency, and explore the full range
of energy sources, including renewables and nuclear. The situation
is complicated by the fact that although Chile has a Minister of
Energy, Marcelo Tokman, responsibility for energy policy is
currently distributed among several government agencies and the
formation of a Ministry of Energy is still under discussion and is
unlikely to be resolved until next year. President Bachelet, and
nearly every minister with whom the Ambassador has met since his
arrival, have emphasized that Chile welcomes increased bilateral
energy cooperation with the U.S. across the board. As the GOC
struggles to develop a coherent energy policy, we are working with
U.S. agencies and the Chilean Ministry of Energy to increase
bilateral cooperation in four target areas: renewable energy;
nuclear power for electricity generation; energy policy formation;
and energy efficiency.