VZCZCXYZ0012
OO RUEHWEB

DE RUEHSG #1114/01 3222018
ZNR UUUUU ZZH
O R 182017Z NOV 09
FM AMEMBASSY SANTIAGO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0291
INFO RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBR/AMEMBASSY BRASILIA 0164
RUEHBU/AMEMBASSY BUENOS AIRES
RUEHSG/AMEMBASSY SANTIAGO

UNCLAS SANTIAGO 001114 
 
SENSITIVE 
SIPDIS 
STATE FOR H, WHA/BSC, EEB/IFD/ODF 
TREASURY FOR BLINDQUIST 
COMMERCE FOR KMANN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV PREL OVIP CI
SUBJECT: STAFFDEL MEACHAM - CHILE'S ECONOMY AND DEVELOPMENT 
 
REF: A) SANTIAGO 575 B) 08 SANTIAGO 812 C) 08 SANTIAGO 1139 
 
¶1. (SBU) SUMMARY:  Senior Senate Foreign Relations Committee Staff 
Member Carl Meacham traveled to Chile October 26-28 to review the 
state of the economy, the history of Chile's development, and the 
work of international financial institutions (IFIs) in country. 
The Chilean economy suffered a recession in 2009 as a result of the 
global economic crisis, but the GOC quickly implemented a fiscal 
stimulus package and many economists expect a recovery by the end 
of the year.  Chilean officials and independent NGO representatives 
told Meacham that Chile's economy has survived the worst of the 
global economic crisis as a result of its strong fundamentals and 
is well-positioned for possible growth of between 4-6% in 2010. 
Experts explained to Meacham that Chile's development history has 
been marked by a reliance on private sector investment rather than 
IFI lending.  They said that current IFI lending is focused mainly 
on projects that bring technical expertise to Chile, rather than 
those that build infrastructure.  The Ministry of Finance noted the 
GOC is working to change the role of IFIs in medium-income 
countries like Chile.  Meacham reviewed the Inter-American 
Development Bank's loan to the Transantiago public transportation 
system as a case study of IFI lending in Chile.  He heard competing 
views, some highly critical of Transantiago and the IDB loan, and 
some emphasizing the benefits of Transantiago.  END SUMMARY. 
 
 
 
¶2. (U) Meacham's visit was part of a study by Senate Foreign 
Relations Committee staff to assess the efficacy of IFI operations 
around the world in the current global economic climate, as 
requested by Senator Richard Lugar (R-IN).  During his trip to 
Chile, Meacham met with representatives from the Ministry of 
Finance, the Ministry of Transportation, the national industrial 
and business federation (SOFOFA), the U.S. Chamber of Commerce 
(AmCham Chile), the government development agency (CORFO), the 
Inter-American Development Bank (IDB), Libertad y Desarrollo (LyD - 
a think tank), and members of the Chilean Congress. 
 
 
 
Economic Background:  Effects of Crisis 
 
--------------------------------------------- ----- 
 
 
 
¶3. (U) As a result of the 2008/2009 global economic crisis, Chile 
is in a recession due principally to falling export demand and 
industrial production.  GDP growth slowed to 3.2% in 2008 and the 
economy contracted by 4.5% in the second quarter of this year.  GDP 
may shrink by between 1.5% and 2% for the whole of 2009.  However, 
growth is expected to return by the end of the year.  Experts 
surveyed in the Central Bank's November economic expectations 
survey forecast that GDP could grow by as much as 4.4% in 2010. 
The unemployment rate hit a peak of 10.8% in September and though 
it has subsequently begun to fall again, it remains a continuing 
concern for the public and the GOC.  The banking sector is stable 
and although credit growth slowed in line with the economy, there 
are signs it is beginning to recover. 
 
 
 
¶4. (U) Before the recession, Chile's counter-cyclical macroeconomic 
policies led to the accumulation of a $22 billion copper windfall 
sovereign wealth fund.  As a result, Chile had significant 
resources with which to respond to the economic slowdown.  The GOC 
first announced fiscal stimulus measures in November 2008, followed 
by the announcement of a major $4 billion package in January 2009. 
Combined with subsequent measures, the stimulus package is worth 
2.9 percent of GDP in 2009, financed in large part by asset sales 
from its copper savings fund.  Stimulus measures include 
investments in public infrastructure, labor training, increased 
social transfers, tax cuts, and increased lending to small- and 
medium-sized enterprises (SMEs). 
 
 
 
GOC Steps to Mitigate Crisis 
 
------------------------------------ 
 
¶5. (SBU) Carl Meacham met with Igal Magendzo, Macroeconomic 
Coordinator at the Ministry of Finance, October 28.  Magendzo told 
Meacham Chile's strong economic institutions and fundamentals had 
helped shield the economy from the worst of the global economic 
crisis.  He explained that Chile's open economy had nevertheless 
been hit hard (e.g., 40% losses in export revenue due to price 
drops resulting from decreases in global demand).  Magendzo posited 
that Chile had nonetheless been able to take advantage of the 
crisis to position itself for a rapid recovery.  He cited Ministry 
forecasts for potential growth of up to 5% in 2010. 
 
 
 
¶6. (SBU) Magendzo explained that unemployment, though still high, 
had not breached 11%.  Many in Chile had feared unemployment in 
high double digits as a result of the crisis.  He also noted that 
although the economy was currently experiencing deflation, the 
plethora of indexed instruments helped lessen the effects on the 
Chilean consumer (e.g., the major unit of account, "unidad de 
fomento," used in mortgages and most consumer loans, is indexed to 
inflation). 
 
 
 
¶7. (SBU) Magendzo said Chile had been one of the first countries to 
implement a large fiscal stimulus package in response to the 
crisis.  As a result, he claimed the shock of the economic slowdown 
(the fall from the peak of growth to the nadir of recession) would 
be one of the "softest" in the region.  Magendzo told Meacham the 
GOC's stimulus had effectively created a social protection network 
to minimize the worst of the downturn.  The stimulus measures were 
varied including:  some $200 million in shovel-ready public works 
projects, about $400 million in one-time cash transfer payments, 
temporary tax breaks, employment incentive plans (including special 
programs targeted at youth unemployment), a pro-credit initiative 
to improve competition in financial markets, and improved access to 
capital for SMEs.  Magendzo underlined that the Ministry believed 
the ultimate end to the crisis would be when the U.S. economy 
recovered. 
 
 
 
Possible Signs of Recovery 
 
---------------------------------- 
 
 
 
¶8. (SBU) Andres Concha, president of the Chile's influential 
business and industrial federation (SOFOFA), met with Meacham 
October 26.  Concha reviewed the key sectors in the Chilean 
economy, noting he thought the worst of the recession had passed. 
He said that although industrial activity had fallen by almost 9% 
in the last quarter, there are positive signs in the economy, 
leading to speculation that Chile could grow by 5-6% next year. 
[Note:  This is on the high end for 2010 growth forecasts.  End 
note.] 
 
 
 
¶9. (SBU) Concha explained that copper accounted for roughly 60% of 
Chile's exports and its price recovered from a low of $1.30 in 2008 
to a high of almost $3.00 at the end of October.  He emphasized 
this could help spark a recovery in the Chilean economy.  Concha 
credited demand from China for contributing to the resurgence in 
copper's price.  He said the housing and banking sectors are sound, 
though construction slowed significantly and banks suffered strains 
on credit lines during the height of the crisis.  Concha claimed 
Chilean borrowers suffered but were better off than those in the 
U.S.   He noted other sectors are recovering more slowly, like 
agriculture, which is dependent on the U.S. market.  Forestry 
products have been hit equally hard, leading Concha to estimate 
that forestry exports will remain flat until 2011.  He also cited 
the significant damage to the salmon industry caused by a virus 
infecting the fish. 
 
 
 
¶10.  (SBU) Concha told Meacham he was more optimistic about Chile's 
 
economic situation now than in previous months; however U.S. growth 
would be a key contributor to Chile's own recovery.  Concha also 
explained that a cheap dollar might be helpful for U.S. industry, 
but it complicated the picture for Chilean exporters.  Concha 
predicted the global economy is entering a period of fluctuation. 
 
 
 
 
Chile's Development - Private Sector Takes Lead 
 
--------------------------------------------- ---------------- 
 
¶11. (SBU) In a meeting with AmCham Chile October 26, President 
Ricardo Garcia and General Manager Jaime Bazan told Meacham that 
since the military government, much of Chile's development has been 
led by private sector investment.  Garcia explained that most of 
Chile's infrastructure, from ports to highways, had been built 
through concessions and public-private partnerships.  He noted that 
this innovative model relied on stable investment conditions. 
Garcia said, however, that the global economic crisis had affected 
that investment climate in Chile.  He pointed out that many 
companies, especially in the U.S., had experienced capital 
restrictions from losses or debts that could not be rolled over, 
forcing them to delay or withdraw investments in Chile.  Garcia 
cited the example of Citibank, which prior to the crisis had a 10% 
stake in Banco de Chile.  He explained that Citibank had been 
widely expected to purchase a majority share in Banco de Chile, but 
it had not done so because of the effects of the crisis. 
 
 
 
¶12. (SBU) Meacham met with representatives from the government 
development agency (CORFO), led by program manager Stephen Ruddell, 
October 27.  CORFO reaffirmed Chile's development model relied on 
private resources, rather than lending from IFIs.  CORFO said it 
works with IFIs only on a few select projects (e.g., fostering 
innovation, for which the GOC has received a $30 million World Bank 
loan).  The CORFO representatives emphasized that their 
organization is one of the few GOC agencies that is 
self-sufficient, receiving dedicated funds from mining royalties, 
as assigned by the GOC.  They noted that CORFO's projects are 
almost exclusively with the private sector, particularly with SMEs, 
where the agency usually assumes 50% of the risk in a given 
project. 
 
 
 
IFI Lending to Chile - Focus on Technical Expertise 
 
--------------------------------------------- ------------------- 
 
 
 
¶13. (SBU) On October 28, Meacham met with Eddy Linares, acting IDB 
representative in Chile.  Linares emphasized that the IDB had been 
working in Chile for a long time, during which it had seen a marked 
shift in the types of projects approved and implemented in country. 
He underlined that the IDB's lending portfolio is the biggest among 
IFIs working in Chile (including the World Bank).  Linares also 
noted that the number of public works projects has dropped to a 
very small percentage.  He explained that the majority of current 
projects are focused on bringing technical expertise to Chile, such 
as:  energy diversification, improving education, forestry 
conservation, fostering tourism, and working with Chilean 
think-tanks to promote government decentralization.  Linares also 
noted Chile is now a net creditor to the IDB. 
 
 
 
¶14. (SBU) In his meeting with the Ministry of Finance (paras 5-7), 
Igal Magendzo told Meacham the GOC has asked the World Bank to 
reexamine its role in medium-income countries, like Chile. 
Magendzo reported that the GOC believes the World Bank no longer 
needs to provide capital in these countries, but should focus more 
on providing technical expertise.  He also noted Chile wants a more 
active role in the World Bank and has become more of lender and 
contributor than a net borrower.  Magendzo said Chile will look to 
make the same transition in the IDB in the near future. 
 
Recent IFI Case Study - Transantiago Background 
 
--------------------------------------------- ----------------- 
 
 
 
¶15. (SBU) Meacham reviewed the Transantiago public transportation 
system as a case study for recent IFI lending in Chile.  In 
February 2006, the city of Santiago replaced its previous 
transportation network of competing, privately-owned buses with 
what was proclaimed as a new state-of-the-art public transportation 
system, Transantiago.  It was designed by the Lagos Administration 
and implemented by the Bachelet Administration.  After 
Transantiago's inauguration, the public heavily criticized flaws in 
the system including:  overcrowding, increased wait and transit 
times, and general lack of functionality.  However, there have been 
recent improvements (see paras 21-22).  Transantiago has been 
running an operating deficit due to fixed fares, significant fare 
evasion, expensive technology, and high fuel prices. 
 
 
 
¶16. (SBU) The GOC tried to cover the system's deficit, by 
requesting and guaranteeing two loans to Transantiago in 2008:  $10 
million from the state-owned Banco Estado and $400 million from the 
IDB.  The Controller General (which assesses the legality of 
government policies) approved the loans.  However, in September 
2008, the Constitutional Tribunal ruled the loans unconstitutional, 
and Chile entered a period of technical default on the IDB loan. 
For almost a year, the GOC attempted to negotiate a solution to 
Transantiago's funding, as well as its outstanding IDB debt, with 
the Chilean Congress.  In August 2009, the Congress approved a 
subsidy for public transport throughout Chile worth about $3.5 
billion until 2014, which would also cover Transantiago's operating 
deficit,.  The Congress also approved repayment of the IDB loan ( 
$448 million) by the first half of 2010.  [Note.  See refs B+C for 
further background on Transantiago.  End note.] 
 
 
 
Competing Views on Transantiago - A Complete Mess 
 
--------------------------------------------- ---------------------- 
- 
 
 
 
¶17. (SBU) Axel Buchheister, director of judicial studies at the 
think tank Libertad y Desarrollo (right-of-center), met with 
Meacham October 26.  Buchheister was the lawyer who successfully 
led the case in the Constitutional Tribunal challenging the IDB 
loan to Transantiago.  He said the premise of the case was that the 
GOC did not have the authority to request and guarantee a loan 
between two private entities (the IDB and the Transantiago 
Financial Administrator - AFT) without appropriate legislation. 
Buchheister characterized the GOC and AFT efforts to solve 
Transantiago's operating deficit as a complete mess.  He alleged a 
murky relationship existed between the GOC and AFT when they set up 
a Special Account for Reimbursement to pay for Transantiago.  The 
Account was neither fish nor fowl in that it received public and 
private funds and the AFT reportedly administered it but according 
to instructions from the GOC. 
 
 
 
¶18. (SBU) Buchheister told Meacham that the IDB's loan to 
Transantiago was not only poorly conceived and executed, but it 
represented an attempt to "intervene" in local Chilean politics (to 
rescue Chile's ruling left-of-center Concertacion coalition from a 
potential embarrassment).  [Note:  Libertad y Desarrollo is 
associated with the opposition, right-of-center Alianza coalition. 
End note.]  Buchheister accused the IDB of failing to study the 
problem adequately, failing to require necessary reforms, and 
lending at unreasonable risk to a poorly identified entity (the 
Special Account for Reimbursement).  Buchheister further alleged 
the GOC had pursued this loan because it though it would not 
require legislation in Congress, something that would have been 
necessary if the GOC wanted to tap Chile's copper savings to pay 
for Transantiago. 
 
¶19. (SBU) Meacham met October 27 with Deputy Carlos Olivares 
(independent), former head of the Congressional Transantiago 
Investigatory Commission.  Olivares called Transantiago a "public 
policy that failed."  He went on to allege that the issue of 
Transantiago had forced a split in the Concertacion coalition, 
forcing some members (such as Olivares himself) to leave the 
grouping.  Olivares explained that after the September 2008 ruling 
of the Constitutional Tribunal, the Congress had established the 
Investigatory Commission.  He said the facts uncovered by the 
Commission were "strange" in that it was hard to understand why the 
IDB had loaned money to a "broken system."  Although Olivares 
credited the IDB with coming to testify voluntarily before his 
Commission, he felt many details remained unresolved (including the 
exact nature of the Special Account for Reimbursement).  Olivares 
vowed to take up the issue again in March 2010, if he were 
re-elected in December. 
 
 
 
Competing Views on Transantiago - Errors Made but Fixed 
 
--------------------------------------------- ---------------------- 
------ 
 
 
 
¶20. (SBU) During Meacham's meeting at the IDB (see para 13), Eddy 
Linares countered Axel Buchheister's assertions.  Linares explained 
that feasibility and environmental impact studies, as well as 
certain criteria, are standard procedure for the few infrastructure 
projects with which the IDB is involved in Chile.  He claimed the 
loan to Transantiago had been no exception; those studies and 
criteria were applied.  Linares pointed out that the IDB had even 
predicted the possibility of non-repayment by the GOC.  Linares 
said the IDB had documentation on all this, which it had shown to 
the Congressional Investigatory Commission, and which could also be 
shared with Meacham.  Linares noted the IDB loan had not yet been 
repaid, but according to the legislation, the GOC had until the end 
of February 2010. 
 
 
 
¶21. (SBU) On October 28, Andres Gomez-Lobo, chief advisor to the 
Minister of Transportation, met with Meacham.  In a frank 
assessment of Transantiago, Gomez-Lobo noted the system had been an 
ambitious reform implemented practically overnight, leading to its 
three main problems:  lack of necessary technology, lack of 
required infrastructure, and lack of incentives.  Gomez-Lobo called 
the GOC's subsequent efforts to fix Transantiago "surgery without 
anesthesia." 
 
 
 
¶22. (SBU) Gomez-Lobo claimed Transantiago was finally showing 
marked signs of improvement.  He cited a series of indicators: 
accidents were down significantly, average wait times for buses had 
recently begun to fall,  pollution was also showing a reduction, 
numbers for those using the system had increased, and bus drivers 
were now part of the formal labor market (unlike the previous 
system).  Gomez-Lobo said the World Bank had called Transantiago 
the most modern transportation system in Latin America.  He 
maintained that Transantiago would continue to have high costs, but 
that the new subsidy law passed by Congress and a plan to start 
phasing in fee increases would help sustain the system in the long 
run. 
 
 
 
¶23. (U) This cable has been cleared by Carl Meacham. 
SIMONS