VZCZCXYZ0010
PP RUEHWEB

DE RUEHSG #0075/01 0222022
ZNR UUUUU ZZH
P 222022Z JAN 09
FM AMEMBASSY SANTIAGO
TO RUEHC/SECSTATE WASHDC PRIORITY 4321
INFO RUCNMER/MERCOSUR COLLECTIVE PRIORITY
RUEHQT/AMEMBASSY QUITO PRIORITY 2104
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEKJCS/SECDEF WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

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