UPDATE ON CHILE'S ECONOMY: OCTOBER 14 MARKED BY

UNCLAS SECTION 01 OF 02 SANTIAGO 000921 STATE PLEASE PASS TO USTR KDUCKWORTH/MSULLIVAN TREASURY FOR SSENICH COMMERCE FOR KMANN SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD EINV ECIN PGOV PREL CI SUBJECT: UPDATE ON CHILE'S ECONOMY: OCTOBER 14 MARKED BY VOLATILITY AS MARKETS MOVE UP AGAIN REFS: A) SANTIAGO 909 B) SANTIAGO 915 C) SANTIAGO 919 ¶1. (U) SUMMARY: This is another in a series of updates on major developments in Chile's economy in the face of global financial turmoil. On October 13, the GOC held an all-political party, unity summit on the state of the economy. On October 14, there were further gains in copper prices, the exchange rate, and the Chilean stock market amid increased volatility. Gasoline prices were forecast to fall. The Central Bank continued its program of currency swaps aimed at maintaining liquidity in the banking sector. The Government also announced it would launch an $850 million program to guarantee credit to small- and medium-sized enterprises. The negative effects of the global financial crisis are limiting smaller companies' business plans in Chile. END SUMMARY. GOC Holds All-Political Party Summit On Economy -------------- -- ¶2. (U) On October 13, President Bachelet hosted a summit of the leaders of every major political party to discuss the state of the economy. Bachelet and the group declared their unity in protecting Chile's economy from the effects of global financial turmoil. Each political party will name representatives to work with the GOC's economic team on a list of measures to help prevent negative impacts from the crisis. Copper Prices Rise Again -------------- ¶3. (U) Copper closed at approximately $2.52/pound, more than a 10% increase on yesterday's price. Chilean Peso Up vs. U.S. Dollar Again -------------- ¶4. (U) The exchange rate saw an increase in volatility, reaching a high of 595 Chilean Pesos to 1 U.S. Dollar, before closing lower at about 612 Chilean Pesos to the Dollar (an increase of less than 1% on yesterday's rate). Stock Market Recovers More Ground -------------- ¶5. (U) The Chilean stock market was also marked by volatility. Despite the drop in U.S. markets, the IPSA surged initially to an almost 7% increase on the day before, but tapered off to close up about 3% from yesterday's close. The IPSA is up more than 16% in the first two days of trading this week. Gasoline Prices Forecast to Fall -------------- ¶6. (U) As oil fell to under $80/barrel in the U.S., the GOC modified the effect of oil prices on the Energy Price Stabilization Fund (Fepco, designed to shield Chile's consumers from energy price fluctuations). Forecasts now show a decrease in most domestic energy prices, including gasoline which is expected to fall 4.4% (to 709 Chilean Pesos/liter for 93 octane). Central Bank Offers Another Currency Swap -------------- ¶7. (U) As part of continuing efforts to maintain liquidity in the banking sector, the Central Bank offered a 91-day currency swap of $500 million at LIBOR + 107 basis points, of which $200 million was taken. GOC Launches Program To Guarantee Credit -------------- ¶8. (U) The Ministries of Economy and Finance will offer $850 million (mostly in loan guarantees) to small- and medium-sized enterprises, in an effort to ensure this portion of the private sector retains access to credit (often critical to ongoing operations). Banks have reportedly become more restrictive in their lending to small- and medium-sized companies (see Refs). Companies Limiting Operations Due To Crisis SANTIAGO 00000921 002 OF 002 -------------- ¶9. (SBU) Embassy contacts in the private sector have reported that smaller Chilean companies are feeling the impact of the global financial crisis. Numerous construction firms have halted or are limiting projects around town (including a major mall being built near the Embassy). In addition, we hear that some Chilean companies working with multinationals have delayed payment for services (in U.S. Dollars) in the hope that the Chilean Peso will continue to appreciate. SIMONS