UPDATE ON CHILE'S ECONOMY: OCTOBER 15 MARKETS SLIDE BACK

UNCLAS SANTIAGO 000923 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 15 MARKETS SLIDE BACK DOWN REFS: SANTIAGO 921 AND PREVIOUS ¶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 15 copper prices fell and Chile's state-owned copper company projected lower profits. There were also decreases in the exchange rate and the Chilean stock market. The Central Bank published a poll of Chilean banks showing the majority are restricting lending due to fear of greater risk. Chile's Association of Manufacturing Exporters claims it has been lightly impacted by the current crisis. END SUMMARY. Copper Prices Close Lower -------------- ¶2. (U) Copper closed at approximately $2.33/pound, a drop of almost 8% on yesterday's price. Press reports indicate Chile's state owned copper company, CODELCO, is projecting a surplus of $7.4 billion in 2008, a decrease of 12% from 2007. The decrease is due to lower copper prices and higher production costs for the company, trends which will mean a significant cut in profits by 2012. CODELCO's estimate was made before the latest fall in copper prices resulting from the global financial crisis. Chilean Peso Down vs. U.S. Dollar -------------- ¶3. (U) The exchange rate fell, closing at 627 Chilean Pesos to 1 U.S. Dollar (a decrease of about 2.5% on yesterday's rate). Small Decrease In The Stock Market -------------- ¶4. (U) The IPSA fell by less than 1% from yesterday's close. Central Bank Poll Shows Banks Hesitant To Lend -------------- - ¶5. (U) The Central Bank published a poll of Chilean banks that shows 50% have increased restrictions on consumer loans and 61% have done the same on mortgages due to fears of greater credit risks resulting from the global financial crisis. 91% of banks have restricted lending to large companies, whereas 74% report greater restrictions on loans to small- to medium-sized firms. According to the poll, 67% of banks reported a fall in the demand for credit. Smaller Exporters See Little Negative Impact -------------- ¶6. (SBU) Embassy contacts at the Chilean Association of Manufacturing Exporters (ASEXMA) report their members have been lightly impacted by the global financial crisis. ASEXMA's members are mostly small- to medium-sized enterprises who export products but also maintain a significant presence in domestic markets. Since the beginning of the crisis ASEXMA's members have successfully diversified their export markets. They report no problems with liquidity, no slow down in investment, and they do not have debt held by foreign institutions. Members do not envision significant layoffs (nor do they expect to hire many new workers). ¶7. (SBU) ASEXMA feels well insulated from the effects of tightening credit among banks because the majority of members deal directly with importers in foreign countries. ASEXMA is concerned about the potential for future growth in their sector. Members have been pushing for longer-term financing programs in Chile (most programs are focused on short-term lending). As a result of the financial crisis, most banks are unwilling to take on greater risk, so the focus will likely remain on the short-term. SIMONS