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DE RUEHSG #0989/01 3122121
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O 072121Z NOV 08
FM AMEMBASSY SANTIAGO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3935
INFO RUCNMER/MERCOSUR COLLECTIVE
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UNCLAS SANTIAGO 000989 
 
STATE PLEASE PASS TO USTR KATE DUCKWORTH 
STATE PLEASE PASS TO FEDERAL RESERVE TOM CONNORS 
TREASURY FOR SSENICH 
COMMERCE FOR KMANN 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV ECIN PGOV PREL CI
 
SUBJECT:  CHILE:  ECONOMIC HIGHLIGHTS WEEK OF NOVEMBER 3 
 
REFS:  SANTIAGO 975 AND PREVIOUS 
 
¶1. (SBU) SUMMARY:  This continues a series of regular updates on 
major developments in Chile's economy since the acceleration of 
global financial turmoil.  By week's end, November 7, there was a 
decrease in copper prices, some appreciation in the exchange rate, 
and losses/gains in the stock market.  There was an unexpected 
increase in economic activity in September and inflation in October. 
 The GOC announced a $1.5 billion package to assist small- and 
medium-sized enterprises and home buyers.  Experts at a seminar on 
the impact of the global financial crisis in Chile predicted a 
decrease in growth and Foreign Direct Investment.  Banco de Chile 
contacts reported the financial crisis has impacted the construction 
industry, cut some international credit lines, and although 
liquidity is currently adequate, the GOC needs to switch to 
longer-term measures.  END SUMMARY. 
 
Copper Prices Decrease 
---------------------- 
 
¶2. (U) Copper prices on the London Metals Exchange decreased three 
days in a row to close the week at about $1.71/pound on November 7, 
a loss of approximately 16% from its close on October 30. 
Antofagasta PLC, one of Chile's largest private copper consortiums, 
announced it was moving ahead with planned investments of $3 billion 
despite the recent decline in copper prices.  The group believes 
prices will rise again in the medium-term, though it is unlikely 
they will return to the highs at the beginning of 2008. 
 
Chilean Peso Appreciates Against U.S. Dollar 
-------------------------------------------- 
 
¶3. (U) The exchange rate closed higher for the week on November 7, 
at 638.3 Chilean Pesos to 1 U.S. Dollar (appreciating almost 6% from 
its close on October 30). 
 
An Up Week For The Stock Market 
------------------------------- 
 
¶4. (U) The IPSA closed at 2575.12 points on November 7, gaining 
about 3% on the close of October 30. 
 
Economic Activity Up, GDP Growth Will Probably Fall 
--------------------------------------------- ------ 
 
¶5. (U) Chile's monthly indicator of economic activity (IMACEC) 
jumped to an unexpected 5.5% in September.  However, a Central Bank 
survey of economic expectations (based on the opinions of national 
experts) forecast 4% growth in 2008 and 2.5% in 2009 (downward 
revisions for both figures from previous months). 
 
An Unexpected Jump In Inflation 
------------------------------- 
 
¶6. (U) The Consumer Price Index (CPI) rose unexpectedly by 0.9% in 
October (it's highest rate for the month of October since 2002), 
bringing the annual inflation rate to 9.9%, its highest level in 
fourteen years.  The increase was driven by continuing high food and 
fuel prices (e.g., the largest increase in the CPI was for tomatoes 
which registered a 45% increase in price). 
 
¶7. (U) The latest CPI calculations do not include the recent, 
significant decline in oil prices.  In fact, the inflation rate is 
expected to decrease in the medium-term due to falling commodity 
prices, and may drop to 4.5% in 2009.  However, the annual inflation 
estimate for 2008 remains at over 8.5%.  October's inflation rate 
increases the likelihood the Central Bank will raise or at least 
maintain the current interest rate (8.25%). 
 
Government Announces Package for SMEs 
------------------------------------- 
 
¶8. (U) On November 4, the GOC announced a $1.5 billion plan to 
assist small- to medium-size enterprises (SMEs) and homebuyers.  The 
plan will provide temporary subsidies to those in the market for a 
new home (primarily middle-income families) as well as guarantees 
for certain mortgages.  The measure is designed to spur new 
construction and employment.  The Small Business Guarantee Fund 
(FOGAPE) and the Chilean Economic Development Agency (CORFO) will 
have more funds and guarantees to make available to SMEs.  The GOC 
also will inject $500 million into Banco Estado (state-owned).  This 
step is intended to increase lending as private banks compete with 
Banco Estado's new rates/loans.  Preliminary reaction from Chilean 
opposition parties to the plan was positive. 
 
Seminar On Impact Of Financial Crisis 
------------------------------------- 
 
¶9. (U) At a November 6 seminar sponsored by Chile's major financial 
periodical, "Diario Financiero," Alberto Ramos, Goldman Sachs of 
Latin America, predicted the global growth rate will slow as a 
result of the financial crisis.  Latin American economic growth will 
probably average 2.7%.  Ramos predicted Chile's GDP growth will fall 
from 3.6% in 2008 to 2.6% in 2009 as a correction to commodity 
prices.  He also projected a 30% decrease in Foreign Direct 
Investment (FDI) globally. 
 
¶10. (U) Martin Wolf, "London Financial Times," predicted a deep, 
global recession, which would take 3-4 years to return to 2007 GDP 
levels.  Sebastian Edwards, an economist and professor at UCLA, 
projected a 16-24 month recession.  He was optimistic about Chile's 
economic future, foreseeing a deceleration in growth, but not a 
collapse of the financial system. 
 
Bank Reports Impact on Real Economy 
----------------------------------- 
 
¶11. (SBU) Embassy contacts at Banco de Chile described how the 
financial crisis has impacted Chile.  The construction sector has 
been hit hard.  Most construction projects, in  which the Bank is 
invested, have been suspended.  At the beginning of the financial 
crisis, some international lines of credit to Chilean banks had been 
severed, in particular by one German bank.  During the uncertainty 
surrounding Wells Fargo's purchase of Wachovia (which has a large 
presence in Chile's banking sector), many experts worried about that 
more lines of credit would be cut.  However, to date, those lines of 
credit reportedly remain intact. 
 
¶12. (SBU) An Embassy contact at Banco de Chile reiterated that the 
Central Bank and Ministry of Finance have moved with alacrity to 
maintain liquidity in financial markets, which was currently 
adequate.  However, he noted these were short-term measures, and the 
GOC needed to start thinking about long-term steps.  In particular, 
he thought the tax burden in Chile was quite high, especially for 
small- to medium-sized enterprises.  He recommended the GOC should 
consider, for example, repealing the stamp tax, paid on each new 
loan. 
SIMONS