CHILEAN STIMULUS PACKAGE DESIGNED FOR QUICK

UNCLAS SANTIAGO 000075 SENSITIVE SIPDIS STATE PLEASE PASS TO USTR KATE DUCKWORTH STATE PLEASE PASS TO FEDERAL RESERVE TOM CONNORS TREASURY FOR BLINDQUIST COMMERCE FOR KMANN E.O. 12958: N/A TAGS: ECON EFIN EINV PROG CI SUBJECT: CHILEAN STIMULUS PACKAGE DESIGNED FOR QUICK IMPACT, FINANCE MINISTER SAYS REF: SANTIAGO 23 ¶1. (SBU) Summary: Chile's recently announced stimulus plan was specifically developed to have a quick impact, Finance Minister Andres Velasco recently told the Ambassador. Half of the public infrastructure spending will be completed by July 2009 and tax incentives are structured to encourage investment over the next 18 months. This stimulus package is part of Chile's overall response to the financial crisis--including monetary policy and exchange rate depreciation--which Velasco praised. Chile is in the fortunate--and unusual--position of benefiting from an exchange rate depreciation because it is a net creditor in largely dollar-denominated loans. End Summary. ¶2. (U) Ambassador, accompanied by Poloff, met with Finance Minister and former Harvard academic Andres Velasco on January 16. Chile's Fast-Acting Stimulus Plan -------------- ¶3. (U) Velasco explained that rolling out new government spending quickly is key to Chile's stimulus plan (reftel), and that the government plans to spend at least half of the USD 750 million destined for infrastructure development in the first six months of 2009. The government intends to spend USD 370 million rehabilitating public housing, part of a popular program known as the "patrimonio familiar"; USD 120-140 million on road maintenance; USD 50-60 million on public school renovations; and an additional, unspecified smaller amount on new stadium construction. ¶4. (SBU) These programs were specifically identified because they will create employment--many are very labor intensive--and can move ahead quickly. The public housing program already has a long waiting list of recipients hoping for rehabbed housing, and standardized architectural plans allow the project to move forward more quickly. Road maintenance requires no architectural plans and can begin almost immediately. And most of these projects are exempt from Ministry of Planning approval of each expenditure, which often creates delays. Velasco warned, however, that the school renovation may take longer as the Ministry of Education has a poor track record of project management. ¶5. (U) Other stimulus measures include USD 1.4 billion in tax incentives, including an 18 month suspension of Chile's stamp tax (a document processing tax on all major financial transactions). Velasco explained that the government had already been moving in the direction of gradually eliminating the tax by lowering the rate from 1.6% to 1.2% and introducing large categorical exemptions. By setting the rate to 0 for the next 18 months, the government will push businesses to make investments now and will retain future earnings after the 18 month window ends. Proposed Codelco Reforms Emphasize Transparency, New Leadership -------------- -------------- ¶6. (SBU) Velasco described state-owned Codelco, the world's largest copper company, as a "gigantic and well-run company in some ways" but with some serious flaws. Velasco strongly supports proposed legislation that would re-organize the firm and make the organization much more professional. However, Velasco warned that efforts to reform Codelco face opposition in Congress and that any changes are likely to come only after a very lengthy government process. ¶7. (SBU) Key proposed changes include a dramatic restructuring of Codelco's board of governors, expanded transparency requirements, and changing the way that the CEO is appointed. Codelco's current board of governors is "very poor" in Velasco's view, including two government ministers, two Codelco workers, and one military official, among others. The proposed structure would eliminate the board positions for ministers and the military official, reduce the number of workers on the board from two to one, and add "outsiders" to the board. In addition, the new board would have a different term structure to allow for overlapping terms and, thus, greater continuity. In terms of transparency requirements, the proposed changes would make Codelco subject to the same public interest regulations that apply to publicly traded firms. Chile's Deft Financial Crisis Maneuvers -------------- ¶8. (U) Chile had moved quickly to "do all the macro things that you should do" to deal with the crisis, Velasco said, highlighting the country's prompt adoption of counter-cyclical fiscal and monetary policies and allowing exchange rate depreciation. The public supported the government's approach to the crisis, he said, with approval ratings for the government's handling of economic issues rising seven percent in November. ¶9. (U) Velasco also noted that Chile was unusual--and lucky--in the way that its economy was impacted by the crisis. Most countries have dollar-denominated debt, so that an exchange rate depreciation causes a painful swelling of national debt. However, because Chile is a net creditor, the peso's fall against the dollar has meant an additional half billion dollars in revenue. Comment -------------- ¶10. (SBU) Chile's pragmatic and timely stimulus package is true to form for a nation led by clear-thinking engineers and economists. The country has moved forward to confront the financial crisis with admirable speed and pragmatism, and their approach is likely to help the economy while also providing improved housing, schools, and roads to its citizens. While Velasco's summation of Chile's approach to the financial crisis is tooting his own horn, it's a horn that deserves tooting. End Comment. SIMONS