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DE RUEHSG #0489/01 1421818
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O 221818Z MAY 09
FM AMEMBASSY SANTIAGO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4974
INFO RUCNMER/MERCOSUR COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHQT/AMEMBASSY QUITO 2379
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UNCLAS SANTIAGO 000489 
 
STATE PLEASE PASS TO USTR KATE DUCKWORTH 
STATE PLEASE PASS TO FEDERAL RESERVE TOM CONNORS 
TREASURY FOR SSENICH 
COMMERCE FOR KMANN 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV ECIN PGOV PREL CI
 
SUBJECT:  CHILE:  CENTRAL BANK CONFIRMS ECONOMY HIT HARDER THAN 
PREVIOUSLY PROJECTED 
 
¶1.  SUMMARY:  Chile's Central Bank announced it had sharply 
downgraded projections for economic growth in 2009, due to the 
stronger than expected impact of the international financial crisis. 
 The Central Bank predicts GDP growth in 2009 will be between 0.25% 
and negative growth of -0.75%.  In the first quarter of 2009, GDP 
contracted (-2.1%), domestic demand fell significantly (-7.6%), and 
there was a drop in domestic industrial production (-10.3%) compared 
to the same period the year before.  The first quarter also 
demonstrated evidence of a significant increase in the unemployment 
rate (9.3%) and a decline in international trade (-13.5%) compared 
to the first quarter of 2008.  Experts are debating whether Chile's 
economy has hit bottom or the worst is yet to come.  END SUMMARY 
 
A Possible Negative Growth Rate In 2009 
--------------------------------------- 
 
¶2.  The Central Bank on May 14 projected GDP growth for 2009 will be 
between 0.25% and negative growth of -0.75%.  This follows 
projections made by the Bank in January 2009 of 2-3% GDP growth for 
the year.  In the course of the second half of 2009 and throughout 
2010, the Bank sees a return to positive economic growth, in line 
with the easing in monetary policy, the fiscal stimulus packages 
recently announced by the GOC, and the solid fundamentals of the 
Chilean economy.  Many analysts in Chile and abroad are predicting 
that Chile is one of the countries best placed to rebound quickly 
after the crisis ends. 
 
Crisis Has Hit Chile Harder Than Expected 
----------------------------------------- 
 
¶3.  The Central Bank's new projections confirm a view widely held by 
most Chilean economists -- the international financial crisis has 
hit the domestic economy harder than previously expected.  Signs of 
an increasingly serious slow-down were evident in the fourth quarter 
of 2008.  There was a major reduction in output, especially in 
domestic demand, a weakening in the labor market, and a reduction in 
inflation and inflationary projections.  Since then the Central Bank 
has reacted aggressively, cutting the key national interest rate 
(monetary policy rate) by 700 basis points between January and May 
¶2009.  Indeed, the Bank has not ruled out the possibility of further 
reductions in the interest rate (currently at 1.25%). 
 
¶4.  The negative effects of fourth quarter 2008 have carried over to 
the first quarter of 2009.  According to the Central Bank, the 
Chilean economy experienced a strong contraction during the first 
quarter of 2009 compared to the same quarter the year before.  GDP 
decreased by 2.1%, marked by a strong slowdown in industrial 
production (-10.3%), including in the construction sector (-1.3%) 
and associated services.  The drop in growth can be explained mainly 
by a sharp decline in domestic demand (7.6%) compared to the first 
quarter in 2008.  Gross fixed capital formation dropped by 9.3%, 
compared to the 10.4% increase registered the previous quarter. 
These numbers are all at their lowest levels since 1999 when the 
Asian crisis hit the Chilean economy. 
 
Increasing Unemployment 
----------------------- 
 
¶5.  During the first quarter of 2009, the unemployment rate rose to 
9.3%.  Due to the current decline in national production and 
domestic demand, most economists in Chile believe labor market 
conditions will deteriorate further in the months to come.  Analysts 
expect a double digit unemployment rate for 2009.  However, measures 
announced by the GOC as part of the National Agreement for 
Employment could moderate the expected rise in unemployment. 
 
Inflation Projections Below Target 
---------------------------------- 
 
¶6.  Chile has seen a rapid decline in inflation since the last 
months of 2008, as a result of the drop in commodity prices, mainly 
in oil and derivative products.  Annualized CPI inflation dropped 
from its peak of 9.9% in October 2008 to 4.5% in April 2009.  The 
Central Bank's projections assume that year-to-year inflation will 
continue to decline in the coming months below the policy-horizon 
rate of 3%.  In fact, the Bank has postulated that annual CPI could 
be negative between the third and the fourth quarters of this year, 
to close 2009 at an annual rate of 0.6%. 
 
Trade: Surplus After Two Quarters Of Deficit 
-------------------------------------------- 
 
¶7.  Chile's trade with international partners fell significantly 
between May 2008 and May 2009, eroding national disposable income 
(-2.8%).  The Central Bank reported a current account surplus of 
US$639 million (equivalent to 1.8% of GDP) in the first quarter of 
¶2009.  This marks a drop of US$820 million compared to the first 
 
quarter of 2008.  However, it is an improvement compared to the 
current account deficits of US$2.9 billion and US$2.7 billion 
registered during the third and fourth quarters of 2008, 
respectively. 
 
¶8.  According to the General Directorate of International Economic 
Relations (DIRECON, the equivalent of USTR), Chile's trade surplus 
recorded a drop of 68.5% in the first quarter of 2009, compared to 
the same period in 2008 (totaling US$1.96 billion).  Also during the 
first quarter, exports fell by 42.8% (totaling US$11 billion). 
Copper prices (Chile's leading export sector) fell by 56% in the 
same period, averaging US$1.6 per pound.  The amount of copper 
exported during the first quarter of 2009 reached US$4.2 billion -- 
a drop of 61% compared to the same period the year before.  Imports 
in general fell by 31% in the first quarter of 2009.  In particular, 
there were significant decreases in imports from the U.S. (-30.8%), 
MERCOSUR countries (-22.2%), and China (-16.3%). 
 
Comment 
------- 
 
¶9.  Chile's analysts and economists are debating whether the 
domestic economy has already bottomed out and will now begin 
recovery, or if the worst is still to come.  The Central Bank seems 
more optimistic and expects improved figures in the second quarter 
of 2009.  However, noted economist and former Central Bank 
President, Vittorio Corbo, believes there is no evidence that the 
economy has hit its lowest level yet.  He admits there are signs 
that the velocity of its fall has moderated.  It appears the Central 
Bank is betting the current recession will be a short one based on 
the premise that the GOC's fiscal stimulus packages will be enough 
to prop up certain components of the economy in the face of the 
crisis, especially private consumption. 
SIMONS