CHILE: ECONOMIC HIGHLIGHTS WEEK OF FEBRUARY 16

UNCLAS SANTIAGO 000161 STATE PLEASE PASS TO USTR KATE DUCKWORTH STATE PLEASE PASS TO FEDERAL RESERVE TOM CONNORS TREASURY FOR BLINDQUIST COMMERCE FOR KMANN SENSITIVE SIPDIS C O R R E C T E D C O P Y E.O. 12958: N/A TAGS: ECON EFIN ETRD EINV ECIN PGOV PREL CI SUBJECT: CHILE: ECONOMIC HIGHLIGHTS WEEK OF FEBRUARY 16 REFS: SANTIAGO 111 AND PREVIOUS ¶1. (SBU) SUMMARY: This continues a series of updates on major developments in Chile's economy since the acceleration of global financial turmoil. By February 20, copper prices slid backward as copper production fell, the Peso remained stable against the Dollar, and the stock market closed lower. Chile's Central Bank cut the key interest rate to 4.75%. Chile's trade surplus fell 71% in January and the U.S. displaced China as Chile's primary export destination. Chile's private pension funds were worth less in January than a year before. The GOC plans to create a fund to help businesses. The wine, salmon, and auto industries have seen a fall-off in exports and sales. Investment fell by 11% in December 2008. END SUMMARY. Copper Prices Slide Back Down -------------- ¶2. (U) On the London Metals Exchange, copper closed down at approximately $1.42/pound on February 20, falling almost 10% from its close on January 20. On February 16, the Central Bank reported Chile's copper exports fell to $1.5 billion in January 2008, a reduction of 58% when compared with the same month in 2007. On February 17, Chile's Copper Commission (Cochilco) reported Chile's copper production fell to 5.3 billion tons (down by 4.1%) in 2008 when compared with 2007. Copper exports fell to 5.4 billion tons (down by 4.7%) during the same period. Chilean Peso Remains Stable Against Dollar -------------- ¶3. (U) On February 20, the observed exchange rate closed at approximately 619 Chilean Pesos to 1 U.S. Dollar (a depreciation of less than 1% from the close on February 6). Stock Market Loses Ground -------------- ¶4. (U) The IPSA closed at 2593.03 on February 20, down almost 3% on the close of February 6. Central Bank Cuts Interest Rate -------------- ¶5. (SBU) On February 12, the Central Bank made an unexpectedly large cut in the key interest rate (monetary policy rate) of 250 basis points bringing it to 4.75%. This is the largest single cut since September 1998 (during the Asian financial crisis). Central Bank Governor De Gregorio told visiting WHA DAS McMullen February 13 that inflation was falling so rapidly the Bank would likely meet its inflation target (3%) in the next 3-4 months. Trade Surplus Falls, More Exports Go to U.S. -------------- ¶6. (U) According to Chile's Industrial Association (Sofofa), industrial exports to the U.S. fell by more than 10% in 2008 compared with the year before, although total industrial exports for the year actually increased by 14% (reaching $22.5 billion or 32% of total exports). The Central Bank reported February 17 that Chile's imports of durable goods fell by almost 47% in January 2009 when compared with the same month in 2008. The drop was blamed on falling internal demand. ¶7. (U) On February 9, the GOC announced that Chile's trade surplus had decreased in January 2009 to $667 million. This was a more than 70% reduction from the same month in 2008, blamed mostly on falling exports of copper. Chile's trade surplus for all of 2008 was $10 billion, a 57% decrease from 2007. In January 2009, Chile exported $715 million to the U.S., representing nearly 20% of Chile's total exports that month. The U.S. displaced China as the top export destination for Chilean goods; however, Chile's exports overall were down by 43% when compared with January 2008. Pension Funds Show Effects of Slow-Down -------------- ¶8. (U) On February 10, the Superintendancy of Pensions reported that Chile's privatized pension funds made positive returns in January. The A Fund had a 0.23% return, the B Fund a 1.42% return, the C Fund a 2.14% return, the D Fund a 2.66% return, and the E Fund a 2.87% return. The total worth of the funds was approximately $77 billion on January 31, 2009. This is a more than 15% drop in value compared with January 2008. Government Planning SME Fund -------------- ¶9. (U) Acting Minister of Finance Maria Olivia Recart announced February 10 that the GOC is proposing the creation of a fund to assist small-to medium-sized enterprises (SME's) in Chile. The fund would help these companies access credit (tighter in Chile's financial markets due to the global crisis) and permit the renegotiation of loans at lower interest rates or for longer periods of time. Wine Sector Pressed By Crisis -------------- ¶10. (U) Chile's vineyards reported overall exports of over $1 billion in 2008, an almost 8% increase from the year before. However, almost 97% of all wine exports are concentrated in the 100 largest vineyards (out of a total of 250). One out of every three vineyards actually reported a drop (of up to 50% for some) in exports during 2008 as compared with the year before. Salmon Industry's Woes Continue -------------- ¶11. (SBU) On February 16, the Institute of Fishing Promotion (IFOP) reported Chile's exports of salmon and trout rose to almost $2.5 billion in 2008 (an increase of more than 6%). However, the increase was credited to an early harvest by companies looking to avoid the impact of the ISA virus, which has been infecting Chilean fish stocks. Many experts predict Chile's production could fall by 50% in March due to the effects of the disease. Mission's Foreign Agricultural Service Attache recently visited Chile's salmon producing regions. He reported a bleak atmosphere as many companies are threatened by falling profits, the effects of the ISA virus on fish stocks, and press reports in the U.S. and Chile about the use of pesticides not approved by the FDA. There has also been a significant rise in unemployment in the sector. Auto Sales Drop -------------- ¶12. (U) According to press reports, about 10,000 automobiles were sold in Chile in January. This represents a drop of 8.3% compared to December 2008, and a drop of more than 50% compared to January ¶2008. Investment Falls -------------- ¶13. (U) The National Chamber of Commerce (CNC) reported February 16 that investment fell by almost 11% to more than $1.9 billion in December 2008 compared with the same month the year before. The CNC estimated that almost 30% of that investment had been put on hold to wait for more favorable economic conditions. SIMONS