VZCZCXYZ0008
OO RUEHWEB

DE RUEHSG #1061/01 3401217
ZNR UUUUU ZZH
O 051217Z DEC 08
FM AMEMBASSY SANTIAGO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4029
INFO RUCNMER/MERCOSUR COLLECTIVE

UNCLAS SANTIAGO 001061 
 
STATE FOR H - JULIE BULGRIN 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PREL PGOV ECON ENRG CI
 
SUBJECT:  SCENESETTER FOR CODEL MEEKS 
 
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 six weeks 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 
(with a possible fourth in the works), 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 the 
center-right opposition coalition, Alianza, as well as the ruling 
group. 
 
¶3.  (U) Nationwide elections for municipal offices, which were held 
on October 26, were 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.  She has repeated the latter 
charge in other public fora as well. 
 
¶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.  In the past week, tensions with Peru have dominated 
local headlines.  Recently unearthed remarks by the Peruvian Army 
Commander-in-Chief promising to return any Chileans who enter Peru 
in a "coffin or plastic bag" led Chile to demand his resignation and 
disinvite the Peruvian Defense Minister from a high-profile naval 
exposition in Valparaiso.  However, no one expects this flap to 
permanently damage relations. 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 its own 
candidate.  The Concertacion seems to have narrowed its field of 
candidates to two: Jose Miguel Insulza, the Secretary-General of the 
Organization of American States and a member of the Socialist Party; 
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 $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 2-3% 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 hit its lowest point in three years 
last month.  The financial crisis has affected liquidity in the 
Chilean banking system, making it harder for some companies to 
maintain access to capital.  Demand for Chilean exports is 
decreasing, as demonstrated by a drop of 6% in exports in October 
2008 when compared with the same period in 2007.  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 (8.9% in November), 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. have  been resolved 
with the acceptance of producers in both countries. 
 
The U.S. and Chile: Partners Across the Board 
--------------------------------------------- 
 
¶12. (U) The U.S. and Chile continue to partner on a broad set of 
initiatives, including education, scientific research, and 
military-military cooperation. In May 2008, President Bachelet 
announced government plans to significantly increase scholarships 
for Chileans to study abroad.  The new GOC scholarship program is 
currently being launched with plans to send over 1,000 
students/scholars overseas this year and 2,500 in 2009.  Program 
leaders estimate that approximately one third may choose to study in 
the U.S.  These exchanges build on the success of the U.S.-Chile 
Equal Opportunities Scholarship Program, inaugurated in 2007, to 
sponsor English and academic studies for Chilean PhD students who 
come from disadvantaged and rural areas that have not traditionally 
had access to English language schools or study abroad 
opportunities. 
 
¶13. (U) In June 2008, President Bachelet and Gov. Arnold 
Schwarzenegger launched the Chile-California Partnership for the 
21st Century.  The partnership will foster collaboration between 
individuals, government, and the private sector in areas such as 
agriculture, energy efficiency, environmental resource management, 
and education. A similar program existed from 1963-1970 and this 
renewed effort will seek to leverage the numerous economic and 
geographic similarities between Chile and California. 
 
¶14. (SBU) The U.S. and Chile also enjoy a strong military-military 
relationship.  The capability and professionalism of the Chilean 
Armed Forces, along with our continuing, positive bilateral 
engagement, make Chile an ideal training partner especially when 
compared with the other militaries in the region.  There are regular 
exchanges between the U.S. and Chilean military, to include 
operational forces, academy students and technical experts, as well 
as reciprocal visits between military leaders from both countries. 
Chile actively participates in joint exercises and is pursuing a 
military modernization program that will rely heavily on U.S. 
equipment, thus increasing interoperability.  Already Chile boasts 
the largest Foreign Military Sales program in SOUTHCOM, and more 
purchases are pending.  A State Partnership Program, which links a 
U.S. State National Guard with the Chilean Armed Forces, was 
recently approved with the State of Texas by the National Guard 
Bureau and the SOUTHCOM Commander.  This program will further 
strengthen military ties and open new avenues for military to 
military cooperation. 
 
 
Facing a Serious Energy Crisis 
------------------------------ 
 
¶15.  (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 underway. The National Energy Commission 
is currently studying the issue and presidential candidates Insulza, 
Frei, and Pinera have indicated a willingness to explore nuclear 
power options. 
 
¶16.  (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.