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