GOC LAUNCHES NEW INITIATIVE TO STIMULATE CREDIT

UNCLAS SANTIAGO 000316

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E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV ECIN PGOV PREL CI
SUBJECT: GOC LAUNCHES NEW INITIATIVE TO STIMULATE CREDIT

REF: A) SANTIAGO 23 B) SANTIAGO 75


1. SUMMARY: On March 29, the GOC announced a new "Pro-Credit
Initiative" designed to stimulate bank and non-bank credit by
generating an extra US$3.6 billion in private loans. The Initiative
comes in the face of worsening unemployment and industrial output
and places an emphasis on increasing competition in the financial
markets as a mechanism for improving access to capital for
small-/medium-sized enterprises and individuals. The plan is
comprised of many new measures aimed at creating more options for
those who need access to financing, spurring risk-averse financial
institutions to increase lending to those hit hardest by the
financial crisis, and providing support for micro-business
initiatives. Some experts have applauded the new measures while
others are concerned about the timing of its implementation. END
SUMMARY.

ECONOMIC NUMBERS SHOW NO SIGNS OF IMPROVEMENT
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2. The GOC launched a $4 billion economic stimulus package in
January to cope with the international economic crisis (refs).
However, most macroeconomic indicators have yet to show improvement
or signs that the effects of the crisis in the Chilean economy have
been contained. The stimulus package was designed to create 100,000
jobs and maintain an economic growth rate of 2-3 percent. Recently
released data shows an increase in unemployment and a steady
contraction of industrial production.


3. The unemployment rate rose to 8.5 percent during the
December-February 2009 trimester, slightly above market estimates
and during a traditionally robust employment season. Industrial
activity has declined by 10 percent during the first two months of
the year. According to the Federation of Chilean Industry (SOFOFA),
industrial production registered a drop of 9.6 percent during
February 2009, while physical sales fell by 8.8 percent. The
production of consumer goods fell by 5 percent.

GOC RESPONDS WITH NEW MEASURES TO ENSURE CREDIT
-------------- --


4. In light of this recent data confirming a stronger than expected
economic contraction, the GOC announced a new supplemental package
of measures on March 29. This "Pro-Credit Initiative" is designed
to stimulate bank and non-bank credit to generate an extra US$3.6
billion in private loans. The measures will be aimed primarily at
boosting access to credit for small-/medium-sized enterprises (SMEs)
as well as individuals, who have been hit hardest by the financial
crisis.


5. Many economic analysts in Chile have noted that while larger
companies have maintained access to capital, SMEs and individuals
have had a much harder time doing so. Minister of Finance Andres
Velasco has said: "We are placing the emphasis on competition as a
mechanism for getting the funds to those who need them." He also
believes the Pro-Credit Initiative will create the conditions
necessary for Chile to become a platform for exporting financial
services.

PROMOTING COMPETITION IN THE FINANCIAL SECTOR
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6. The Initiative, comprised of many new measures, seeks to improve
access to capital for those who have had difficulty maintaining
liquidity, rolling over debt, or taking out new loans because of the
financial crisis. The hoped-for result will be stimulated
production, demand, and employment. The Initiative il create more
options for access to financing for companies as well as
individuals, promote greater competition in the financial system to
improve access to capital, and provide support for SMEs and
micro-businesses. Measures are structured under three main
pillars:

-- Measures to Support Micro-Business Activities:
1) Increase resources to fund seed-capital;
2) Increase subsidies to cover operational costs of financial
institutions that provide credit to micro-enterprises;
3) Extend up to 3 years the period for renegotiation of payment of
tax liabilities.

-- Measures to Facilitate Banking Credit:
4) Increase the percent of a home's value covered under the state
housing subsidy program;
5) Strengthen current CORFO (Chile's Development Promotion Agency)
programs that provide state guarantees for small companies that need
access to credit or need to renegotiate outstanding loans;
6) Increase coverage and availability of funds for working capital
for SMEs and micro-enterprises.

-- Measures to Facilitate Non-Banking Credit:
7) Increase loan capacities for insurance companies, by allowing
them to lend a larger proportion of their capital base;
8) Facilitate the use of endorsable mortgages for housing purchases
(Note: Endorsable mortgages provide more direct credit to
borrowers, are often sold on secondary markets, and can be
securitized. End note.);
9) Promote securitization of loans to small size companies;
10) Promote tax adjustments to increase liquidity and the demand for
public tender bonds to finance companies.

REACTIONS: SOME EXPERTS APPLAUD, SOME WORRY
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7. Experts stress that one positive consequence of the crisis is it
has now motivated the authorities to take microeconomic measures
that would otherwise have been postponed. Jose Ramon Valente, a
noted economist with the opposition Alianza coalition
(center-right),is more concerned about timely implementation of the
measures than the Initiative itself. He has said these measures
arrive "ten years too late." Guillermo Tagle, a noted economist
with the Christian Democrat party (part of the ruling center-left
Concertacion coalition),feels the most notable aspect of this
announcement is that it shows a permanent and proactive effort to
mitigate the consequences of the economic crisis in Chile.


8. COMMENT: Post believes one of the most interesting effects of
the Pro-Credit Initiative could be an increase in the number and
types of participants in the credit market, which could reduce the
cost of capital in the longer term. However, it is unlikely that
Chilean banks will now take greater risks in lending practices.
Chile's financial regulatory framework will remain unchanged and
domestic banks will continue to be risk-averse (because of past
history during Chile's financial crisis in the 1980's). In
addition, the loans which the GOC hopes to encourage will be
guaranteed by the state.
SIMONS