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O 032211Z APR 09
FM AMEMBASSY SANTIAGO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4741
INFO RUEHQT/AMEMBASSY QUITO 2280
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STATE PLEASE PASS TO FEDERAL RESERVE TOM CONNORS 
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SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV ECIN PGOV PREL CI
SUBJECT: GOC LAUNCHES NEW INITIATIVE TO STIMULATE CREDIT 
 
REF:  A) SANTIAGO 23  B) SANTIAGO 75 
 
¶1.  SUMMARY: On March 29, the GOC announced a new "Pro-Credit 
Initiative" designed to stimulate bank and non-bank credit by 
generating an extra US$3.6 billion in private loans.  The Initiative 
comes in the face of worsening unemployment and industrial output 
and places an emphasis on increasing competition in the financial 
markets as a mechanism for improving access to capital for 
small-/medium-sized enterprises and individuals.  The plan is 
comprised of many new measures aimed at creating more options for 
those who need access to financing, spurring risk-averse financial 
institutions to increase lending to those hit hardest by the 
financial crisis, and providing support for micro-business 
initiatives.  Some experts have applauded the new measures while 
others are concerned about the timing of its implementation.  END 
SUMMARY. 
 
ECONOMIC NUMBERS SHOW NO SIGNS OF IMPROVEMENT 
--------------------------------------------- 
 
¶2.  The GOC launched a $4 billion economic stimulus package in 
January to cope with the international economic crisis (refs). 
However, most macroeconomic indicators have yet to show improvement 
or signs that the effects of the crisis in the Chilean economy have 
been contained.  The stimulus package was designed to create 100,000 
jobs and maintain an economic growth rate of 2-3 percent.  Recently 
released data shows an increase in unemployment and a steady 
contraction of industrial production. 
 
¶3. The unemployment rate rose to 8.5 percent during the 
December-February 2009 trimester, slightly above market estimates 
and during a traditionally robust employment season.    Industrial 
activity has declined by 10 percent during the first two months of 
the year.  According to the Federation of Chilean Industry (SOFOFA), 
industrial production registered a drop of 9.6 percent during 
February 2009, while physical sales fell by 8.8 percent.  The 
production of consumer goods fell by 5 percent. 
 
GOC RESPONDS WITH NEW MEASURES TO ENSURE CREDIT 
--------------------------------------------- -- 
 
¶4.  In light of this recent data confirming a stronger than expected 
economic contraction, the GOC announced a new supplemental package 
of measures on March 29.  This "Pro-Credit Initiative" is designed 
to stimulate bank and non-bank credit to generate an extra US$3.6 
billion in private loans.  The measures will be aimed primarily at 
boosting access to credit for small-/medium-sized enterprises (SMEs) 
as well as individuals, who have been hit hardest by the financial 
crisis. 
 
¶5.  Many economic analysts in Chile have noted that while larger 
companies have maintained access to capital, SMEs and individuals 
have had a much harder time doing so.  Minister of Finance Andres 
Velasco has said: "We are placing the emphasis on competition as a 
mechanism for getting the funds to those who need them."  He also 
believes the Pro-Credit Initiative will create the conditions 
necessary for Chile to become a platform for exporting financial 
services. 
 
PROMOTING COMPETITION IN THE FINANCIAL SECTOR 
--------------------------------------------- 
 
¶6.  The Initiative, comprised of many new measures, seeks to improve 
access to capital for those who have had difficulty maintaining 
liquidity, rolling over debt, or taking out new loans because of the 
financial crisis.  The hoped-for result will be stimulated 
production, demand, and employment.  The Initiative il create more 
options for access to financing for companies as well as 
individuals, promote greater competition in the financial system to 
improve access to capital, and provide support for SMEs and 
micro-businesses.  Measures are structured under three main 
pillars: 
 
-- Measures to Support Micro-Business Activities: 
      1) Increase resources to fund seed-capital; 
2) Increase subsidies to cover operational costs of financial 
institutions that provide credit to micro-enterprises; 
3) Extend up to 3 years the period for renegotiation of payment of 
tax liabilities. 
 
-- Measures to Facilitate Banking Credit: 
4) Increase the percent of a home's value covered under the state 
housing subsidy program; 
5) Strengthen current CORFO (Chile's Development Promotion Agency) 
programs that provide state guarantees for small companies that need 
access to credit or need to renegotiate outstanding loans; 
6) Increase coverage and availability of funds for working capital 
for SMEs and micro-enterprises. 
 
-- Measures to Facilitate Non-Banking Credit: 
7) Increase loan capacities for insurance companies, by allowing 
them to lend a larger proportion of their capital base; 
8) Facilitate the use of endorsable mortgages for housing purchases 
(Note:  Endorsable mortgages provide more direct credit to 
borrowers, are often sold on secondary markets, and can be 
securitized.  End note.); 
9) Promote securitization of loans to small size companies; 
10) Promote tax adjustments to increase liquidity and the demand for 
public tender bonds to finance companies. 
 
REACTIONS: SOME EXPERTS APPLAUD, SOME WORRY 
------------------------------------------- 
 
¶7.  Experts stress that one positive consequence of the crisis is it 
has now motivated the authorities to take microeconomic measures 
that would otherwise have been postponed.  Jose Ramon Valente, a 
noted economist with the opposition Alianza coalition 
(center-right), is more concerned about timely implementation of the 
measures than the Initiative itself.  He has said these measures 
arrive "ten years too late."  Guillermo Tagle, a noted economist 
with the Christian Democrat party (part of the ruling center-left 
Concertacion coalition), feels the most notable aspect of this 
announcement is that it shows a permanent and proactive effort to 
mitigate the consequences of the economic crisis in Chile. 
 
¶8.  COMMENT:  Post believes one of the most interesting effects of 
the Pro-Credit Initiative could be an increase in the number and 
types of participants in the credit market, which could reduce the 
cost of capital in the longer term.  However, it is unlikely that 
Chilean banks will now take greater risks in lending practices. 
Chile's financial regulatory framework will remain unchanged and 
domestic banks will continue to be risk-averse (because of past 
history during Chile's financial crisis in the 1980's).  In 
addition, the loans which the GOC hopes to encourage will be 
guaranteed by the state. 
SIMONS