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RUEHLP/AMEMBASSY LA PAZ OCT 6009
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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