SCENESETTER FOR CODEL ENGEL

UNCLAS SANTIAGO 000971 SENSITIVE SIPDIS STATE FOR H--JULIE BULGRIN E.O. 12958: N/A TAGS: PGOV ECON PREL ENRG CI SUBJECT: SCENESETTER FOR CODEL ENGEL 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 just 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, 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 both of the political coalitions, not only with the ruling group. ¶3. (U) Nationwide elections for municipal offices, which were held on October 26, are 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. ¶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. 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 Senator Evelyn Matthei, Senator Hernan Larrain, or former Santiago mayor and two time presidential contender Joaquin Lavin as its candidate. A plethora of Concertacion candidates have been vying for their coalition's nomination, including Soledad Alvear, Senator and President of the Christian Democrat Party; Jose Miguel Insulza, the Secretary-General of the Organization of American States and a member of the Socialist Party; former president Ricardo Lagos, a member of both the Socialist Party and the Party for Democracy; 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 USD $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 3-4% 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 has fallen 50% in the last 100 days (although experts predict prices will recover in 2009). The financial crisis has affected liquidity in the Chilean banking system, making it harder for some companies to maintain access to capital. There are initial signs of lower demand for Chilean exports. 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 (9.2% in September),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. seem to be headed toward a resolution acceptable to producers in both countries. Facing a Serious Energy Crisis -------------- ¶12. (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 very much underway. The National Energy Commission is currently studying the issue and several presidential candidates are pro-nuclear. ¶13. (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. SIMONS