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Country Report

Chile

January 2005

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Chile at a glance: 2005-06

OVERVIEWPresidential and congressional elections due in December 2005 are dominatingthe political scene. The race so far appears close. The ruling Concertacióncoalition's prospects will depend in part on its ability to select a presidentialcandidate without infighting, in the first half of 2005. Legislative activity willslow as legislators focus on re-election, but the Economist Intelligence Unitexpects macroeconomic management to remain essentially sound. Afterapproaching 6% in 2004 on the back of improving terms of trade, GDP growthwill slow to 4.8% in 2006 as monetary policy is tightened and as the externalenvironment deteriorates. Monetary tightening will contain inflationarypressures, keeping 12-month inflation close to the mid-point of the BancoCentral de Chile's (the Central Bank) 2-4% target range over the forecast period.The stability of the peso is set to be underpinned by high copper prices, exportearnings growth and a rise in foreign direct investment inflows. The current-account surplus will narrow in 2005-06 from the record level of 2004.

Key changes from last month

Political outlook• Wrangling for position in the campaign for Concertación's presidential

nomination continues. Among all the coalition's potential candidates, formerdefence minister, Michelle Bachelet, continues to lead opinion polls.

Economic policy outlook• In line with its aggressive pursuit of trade liberalisation, Chile has

announced the start of formal negotiations of a free-trade agreement (FTA)with China. The government hopes that the FTA will be in place by 2006.

Economic forecast• We have revised our estimate for GDP growth in 2004 up from 5.5% to 5.9%,

based on faster than expected growth in the monthly economic activityindex in October.

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ISSN 0269-5197

Symbols for tables“n/a” means not available; “–” means not applicable

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Chile 1

Country Report January 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005

Contents

Chile

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2005-067 Political outlook9 Economic policy outlook10 Economic forecast

13 The political scene

20 Economic policy

25 The domestic economy25 Output and demand26 Employment and prices28 Financial indicators30 Sectoral trends

32 Foreign trade and payments

List of tables10 International assumptions summary10 Gross domestic product by expenditure12 Forecast summary14 Municipal election results 2000, 200415 Evolution of electoral support by political party21 Budget execution, Jan-Sep 200424 Market share in Chile’s pay-TV and broadband industries25 Gross domestic product growth by demand26 Gross domestic product growth by sector27 Price and wage trends28 Employment trends29 Bank results October 200431 Meat exports32 Sales of cars and light commercial vehicles (LCVs)32 Foreign trade33 Balance of payments

2 Chile


List of figures

13 Gross domestic product13 Consumer price inflation30 Stockmarket performance

Chile 3


ChileJanuary 2005

Summary

Presidential and congressional elections in December 2005 will dominate thepolitical scene. The race so far appears close. The ruling Concertación coalition'sprospects will depend in part on its ability to select a presidential candidate,without infighting, in the first half of 2005. Legislative activity will slow aslegislators focus on re-election, but the Economist Intelligence Unit expectsmacroeconomic management to remain essentially sound. After approaching6% in 2004 on the back of improving terms of trade, GDP growth will slow to4.8% in 2006 as monetary policy is tightened and as the external environmentdeteriorates. Monetary tightening will contain inflationary pressures, keeping12-month inflation close to the mid-point of the Banco Central de Chile's (theCentral Bank) 2-4% target range over the forecast period. The stability of thepeso is set to be underpinned by high copper prices, export earnings growthand a rise in foreign direct investment (FDI) inflows. The current-accountsurplus will narrow in 2005-06 from the record level of 2004.

Concertación secured a greater number of mayorships in the municipalelections in October, but its overall share of the vote fell, as did that of theopposition Alianza. Independents made the most gains in the municipal polls.Mr Lavín's lead in opinion polls of potential presidential candidates has fallenin recent months. A report on torture under Pinochet's military regime has beenpublished, paving the way for reparations to several thousand victims. Con-stitutional reforms have progressed, and are expected to be enacted in 2005.

The Central Bank tightened monetary policy further in November, bringing theinterbank rate up to 2.25%. A fiscal surplus of 1.5% of annual GDP was registeredin the first nine months of 2004. The government has proposed a mining tax toreplace its royalty project. Negotiations towards an FTA with China have begun.

GDP growth accelerated to 6.8% in the third quarter, owing to strong growth inboth exports and domestic demand. Inflationary pressures have picked upslightly, but underlying inflation remains low. Unemployment remains high,despite the economic acceleration.

The running 12-month trade surplus was an unprecedented US$8.2bn inNovember. As a result, the current-account surplus is headed for a recordsurplus in 2004. FDI inflows rose sharply in the third quarter; full-year inflowsare set to be the highest in five years.

Editors: Fiona Mackie (editor); Robert Wood (consulting editor)Editorial closing date: January 3rd 2005

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2005-06

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 Chile


Political structure

Republic of Chile

Presidential system, based on 1980 constitution

The president, elected for a period of six years, is head of state and appoints the cabinet

Bicameral legislature (Congress): a 48-member Senate, comprising 38 elected members,nine members appointed for eight-year terms and one senator for life, Eduardo Frei; and aChamber of Deputies, with 120 members elected for four-year terms

The 21 Supreme Court judges are appointed until retirement (compulsory at 75 years) bythe president and confirmed by a two-thirds majority in the Senate; 16 regional courts ofappeal and the members of the lower courts are appointed by the Supreme Court

January 2000 (presidential), October 2000 (municipal), December 2001 (congressional);next elections due October 31st 2004 (municipal) and December 2005 (presidentialand congressional)

Ricardo Lagos, who is recognised as leader by both the PPD and the PS, heads theConcertación coalition; he took office as president on March 11th 2000

Government: Concertación de Partidos por la Democracia coalition (Concertación),comprising the Partido Demócrata Cristiano (PDC), the Partido Radical Social Demócrata(PRSD), the Partido Socialista (PS) and the Partido por la Democracia (PPD)Opposition: Alianza por Chile (APC, the Alianza), comprising Renovación Nacional (RN)and the Unión Demócrata Independiente (UDI); La Izquierda, comprising the PartidoComunista (PC) and its allies; Partido del Sur (PdS)

President Ricardo Lagos (PPD-PS)

Agriculture Jaime Campos (PRSD)Defence Jaime Ravinet (PDC)Economy & energy Jorge Rodríguez (PDC)Education Sergio Bitar (PPD)Finance Nicolás Eyzaguirre (PPD)Foreign affairs Ignacio Walker (PDC)General secretary of the government Francisco Vidal (PPD)General secretary of the presidency Eduardo Dockendorff (PDC)Health Pedro García (PDC)Housing & national property Sonia Tschorne (PS)Interior José Miguel Insulza (PS)Justice Luis Bates (independent)Labour Ricardo Solari (PS)Mining Alfonso Dulanto (PDC)National service for women Cecilia Pérez (PS)Planning & co-operation Yasna Provoste (PDC)Public works, transport & telecommunications Javier Etcheberry (PPD)

Vittorio Corbo

Official name

Form of government

The executive

Legal system

National elections

National legislature

Key ministers

Central Bank president

National government

Main political organisations

Chile 5


Economic structure

Annual indicators2000 a 2001 a 2002a 2003 a 2004 b

GDP at market prices (Ps bn) 40,575 43,441 46,411 49,819 55,348GDP (US$ bn) 75.2 68.4 67.4 72.1 90.8

Real GDP growth (%) 4.5 3.4 2.2 3.3 5.9Consumer price inflation (av; %) 3.8 3.6 2.5 2.8 1.1Population (m) 14.7 b 14.9 b 15.1 15.2 b 15.4

Exports of goods fob (US$ m) 19,210.2 18,271.8 18,177.3 21,045.9 31,572.2Imports of goods fob (US$ m) 17,091.4 16,428.3 15,921.0 18,030.8 22,928.4

Current-account balance (US$ m) -897.4 -1,100.3 -885.1 -593.8 2,592.1Foreign-exchange reserves excl gold (US$ m) 15,034.9 14,379.0 15,341.1 15,839.6 16,540.7Total external debt (US$ bn) 37.0 38.4 41.9 43.4 b 44.1

Debt-service ratio, paid (%) 24.8 27.9 32.8 28.5 b 22.4Exchange rate (av) Ps:US$ 539.6 634.9 688.9 691.4 609.4

a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2003 % of total Components of gross domestic product 2003 % of totalServices 55.1 Private consumption 62.5Industry 38.6 Exports of goods & services 36.4

Manufacturing 17.7 Gross fixed investment 21.2Agriculture 6.4 Government consumption 12.6

Change in stocks 0.6Imports of goods & services -33.3

Principal exports fob 2003 US$ m Principal imports cif 2003 US$ mCopper 7,503 Intermediate goods 10,956

Fresh fruit 1,677 Capital goods 3,668Cellulose, paper & printing 1,236 Consumer goods 3,167

Main destinations of exports 2003 % of total Main origins of imports 2003 % of totalUS 16.5 Argentina 19.4

Japan 10.7 US 13.0China 8.8 Brazil 10.4Mexico 4.8 China 6.6

6 Chile


Quarterly indicators2002 2003 20044 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

General government finance (Ps bn)Revenue n/a 2,524 2,426 2,395 3,051 2,802 3,204 2,968Expenditure n/a 2,370 2,601 2,556 2,875 2,490 2,740 2,738Balance n/a 153 -175 -161 176 312 464 230OutputGDP at constant 1996 prices (Ps bn) 9,418 9,764 9,841 9,569 9,727 10,217 10,359 10,223GDP at constant 1996 prices (% change, year on year) 3.5 3.7 3.0 3.1 3.3 4.6 5.3 6.8Industrial production index (2000=100) 108.4 106.8 110.4 108.3 109.1 114.4 118.0 117.7Industrial production index (% change, year on year) 2.7 1.8 1.5 2.9 0.7 7.1 6.9 8.7Employment, wages & pricesEmployment (end-period; '000) 5,531 5,559 5,517 5,451 5,675 5,640 5,550 5,558Employment (% change, year on year) 0.9 3.1 3.9 2.7 2.6 1.5 0.6 2.0Unemployment rate (% of the labour force) 7.8 8.2 9.1 9.4 7.4 8.1 9.6 9.7Nominal hourly wage index (Apr 1993=100) 227.5 231.3 232.2 233.8 235.7 238.4 239.1 240.4Nominal hourly wage index (% change, year on year) 4.2 4.0 3.7 3.8 3.6 3.1 3.0 2.8Consumer prices (Dec 1998=100) 113.2 114.0 114.8 114.8 114.4 114.0 115.3 116.5Consumer prices (% change, year on year) 2.9 3.8 3.7 2.7 1.1 0.0 0.5 1.5Wholesale prices (Jun 1992=100) 200.2 207.0 201.9 204.1 196.4 194.3 207.6 214Wholesale prices (% change, year on year) 10.3 15.3 8.8 5.1 -1.9 -6.1 2.8 4.9Financial indicatorsExchange rate Ps:US$ (av) 717.92 736.87 710.34 693.45 624.95 586.87 629.04 628.17Exchange rate Ps:US$ (end-period) 712.38 727.36 697.23 665.13 599.42 623.21 636.59 606.96Deposit rate (av; %) 2.8 2.6 2.7 2.9 2.7 1.8 1.7 1.8Lending rate (av; %) 6.4 5.9 6.1 6.5 6.2 5.4 5.0 5.1M2 (end-period; Ps bn) 17,695 18,230 17,970 18,195 19,120 19,475 20,245 20,381M2 (% change, year on year) -0.3 0.2 1.1 6.1 8.1 6.8 12.7 12IGPA Gen stockmarket index (Dec 1980=100; end-period) 4,997.6 5,057.1 5,967.5 6,991.6 7,336.7 7,474.3 7,518.8 8,561.9IGPA Gen stockmarket index (% change, year on year) -7.4 -5.3 19.0 48.9 46.8 47.8 26.0 22.5Sectoral trendsManufacturing production index (2002=100) 103.1 104.4 104.0 104.1 108.3 112.1 111.0 114Manufacturing production index (% change, year on year) 4.7 8.9 3.7 3.3 5.1 7.3 6.7 9.5Copper mining index (1990=100) 312.2 293.4 301.2 300.2 320.2 294.4 329.8 343.8Copper mining index (% change, year on year) 1.4 7.1 6.9 9.0 2.5 0.4 9.5 14.5Copper production (metal content; ‘000 tonnes) 1,253 1,188 1,204 1,214 1,292 1,210 1,338 1,392

Foreign trade (US$ m)Exports fob 4,560 5,276 5,271 5,067 5,433 7,410 7,944 7,950Imports cif -4,277 -4,579 -4,855 -4,922 -5,058 -5,403 -5,719 -6,591Trade balance 283 697 416 145 375 2,007 2,225 1,359Balance of payments (US$ m)Merchandise trade balance fob-fob 586 1,021 763 500 731 2,421 2,634 1,862Services balance -3 -153 -254 -188 -171 -87 -160 -159Income balance -862 -683 -781 -805 -1,011 -1,537 -1,669 -1,709Net transfer payments 100 87 104 113 134 110 350 213Current-account balance -179 271 -168 -381 -317 907 1,154 207Reserves excl gold (end-period) 15,341 16,491 15,486 15,649 15,840 15,953 15,844 15,832

Sources: Banco Central De Chile, Boletin Mensual; Ministerio de Hacienda; Instituto Nacional de Estadística; Sociedad de Fomento Fabril; IMF, International Financial Statistics; World Bureau

of Metal Statistics, World Metal Statistics; Sociedad de Fomento Fabril.

Chile 7


Outlook for 2005-06

Political outlook

Presidential and congressional elections in December 2005 will dominate thepolitical scene. Legislative activity is set to slow, as congressmen focus on re-election and ministers leave the government to focus on campaigning. A fiercelycontested campaign may also lead to occasional legislative deadlock. However,the Economist Intelligence Unit expects macroeconomic policy to remainfundamentally sound, both before and after the elections, regardless of whichcoalition wins the presidency, owing to a tradition of policy orthodoxy andconsensus. Firm economic growth, the popularity of the current president,Ricardo Lagos (who cannot stand in 2005 because of the bar on consecutive re-election), and the advantages of the incumbent will be of benefit to the rulingConcertación de Partidos por la Democracia (Concertación) coalition in thepresidential race. However, Concertación still faces the potentially divisive task ofselecting a common presidential candidate. Whereas the centre-right oppositioncoalition, the Alianza por Chile (Alianza), is now united behind its presidentialcandidate, Joaquín Lavín, Concertación has several presidential hopefuls and hasyet to agree on a formula to nominate its candidate.

The two main contenders for Concertación’s nomination are the highly popularformer defence minister, Michelle Bachelet, who will be supported by herPartido Socialista (PS) and by the Partido por la Democracia (PPD), and the lesscharismatic, but also popular, former foreign minister, Soledad Alvear, who willprobably emerge as the candidate of the Partido Demócrata Cristiano (PDC).Judging by the brinkmanship indulged in by the Concertación parties in 2004when selecting candidates for the October municipal elections, competition forthe presidential nomination and for places on the congressional candidate list inthe first half of 2005 will be bitter. The Concertación has in the past found last-minute solutions to previous internal crises, and is likely to do so again, butthere is a small risk of a division, with the PDC and the PS-PPD presentingseparate presidential candidates and separate congressional lists. Even in themuch more likely event that member parties reach a compromise, it is unlikelyto emerge before May 2005, and not without a substantial degree of bruising.

Mr Lagos, himself a member of the PS, will try to be a unifying force inConcertación; he is likely to favour Ms Alvear over the PS's Ms Bachelet, both topreserve Concertación’s unity and to improve his own prospects of running forpresident with the PS in 2009 (given that the PDC would not support apresidential candidate from the PS in three consecutive elections). However,opinion polls currently indicate that Ms Bachelet is more popular thanMs Alvear. If the gap between them were to continue to widen, Concertaciónwould rally behind Ms Bachelet. During the campaign, Ms Bachelet wouldprobably be attacked for belonging to the most radical PS faction, and the factthat, in the mid-1980s, she was an active supporter of the Frente PatrióticoManuel Rodríguez (FPMR), the armed-wing of the Partido Comunista (PC). Thiscould persuade many centrist voters to opt for Mr Lavín.

Domestic politics

8 Chile


Whichever candidate obtains the Concertación nomination, the coalition willbe boosted by recent strong economic growth under its rule, and by Mr Lagos’spopularity. Mr Lagos will be on the campaign trail for Concertación in 2005,inaugurating public works, but how much impact this will have remains to beseen: he did the same in the October municipal elections, with only limitedsuccess. Although Concertación regained many of the mayoralties that it hadlost in 2000, when it failed to present a common electoral list, the coalitioncollected just 44% of total votes, down from 52% in 2000, while Alianzacollected 39%, down from 41% in 2000. Although voting was based more onlocal than national issues, the municipal elections may provide some earlyindication of voter sentiment ahead of the 2005 polls. The narrowing gapbetween the two alliances' vote shares suggests that presidential andcongressional campaigning will be hotly contested.

To the Alianza’s benefit, Mr Lavín, the highly popular former mayor ofSantiago, has united the coalition behind his candidacy. This image of unitywill contrast with the battle for Concertación’s presidential nomination,which—depending on how long the contest is drawn out—could do lastingdamage to the eventual nominee’s campaign. Mr Lavín may also benefit frompublic perception of the Alianza as having more effective policies to confrontrising crime and unemployment, two issues consistently highlighted in opinionpolls as topping the list of voter concerns.

As in the 1999 presidential election, in which Mr Lagos defeated Mr Lavín by asmall margin, the position of the Partido Comunista (PC) could prove decisivein a second-round presidential contest. Like its main partner in the JuntosPodemos coalition, the Partido Humanista (PH), a majority in the PC leadershipintends to make clear from the outset that it will call on supporters to annultheir votes in the event of a second round. There is a substantial minoritywithin the PC that favours a negotiated deal with the Concertación, but thiswould be unacceptable to the PDC.

Chile’s foreign policy will continue to emphasise integration into the worldeconomy through bilateral and multilateral accords. In late November, at thesummit of the Asia Pacific Economic Cooperation (APEC) forum, the start ofnegotiations towards a free-trade agreement (FTA) with China were announced,as was the start of formal consultations with Japan towards an economicpartnership agreement, and an investment-protection accord with Russia. Chileis also negotiating a trade accord with India, will start negotiations towards anFTA with Peru in 2005, and will negotiate a trilateral FTA with New Zealandand Singapore, and an acceleration of the tariff-reduction schedule in thebilateral FTA with the US. Relations with neighbouring countries will improveformally, but will remain strained, owing to Argentina’s restrictions on gasexports to Chile, and the questioning of long-standing bilateral border treatisesby both Bolivia and Peru.

International relations

Chile 9


Economic policy outlook

The broad economic policy direction will remain fundamentally sound overthe forecast period. However, in 2005 legislative activity will slow as legislatorsconcentrate on re-election. Electoral pressures may also negatively influence thequality of resource-allocation this year. Following national elections at the endof the year, the country’s broad policy direction is not expected to change, andlegislative activity will pick up. The restructuring of the country’s civil service tomodel it on best-practice systems in terms of efficiency, transparency andaccountability will gather speed in 2006, as will implementation of the recentlypassed healthcare reform, an important element of Mr Lagos’s governmentprogramme. A substantial educational reform will be launched as part of apackage of policies intended to reduce poverty, and a bill to modernise the civiljustice system is expected. Also in 2006, Congress is likely to pass a long-delayed capital-market reform meant to encourage the development of the risk-capital industry in the country through tax advantages, to tighten regulatorycontrols over financial institutions, and to create specialist tax tribunals.

Irrespective of the outcome of the elections in December 2005, Chile willmaintain its established tradition of fiscal orthodoxy over the forecast period.But political pressure to use part of the windfall revenue from high copperprices to increase social spending in the run-up to the elections can beexpected, as evidenced by accelerating growth in fiscal expenditure in the firstnine months of 2004, to 5.7% year on year in inflation-adjusted terms. In theseconditions, the structural fiscal accounts (which measure fiscal revenue at thelevel it would reach if GDP growth and the price of copper were at theirmedium-term trend levels—estimated at 4.1% and US$0.88/lb respectively bytwo independent committees) will come in below the target of 1% of GDP.Nonetheless, the fiscal accounts will continue to post a surplus of above 1% ofGDP on an accrued basis in 2005-06, enabling additional reductions in thepublic-sector debt, which is already low by international standards. The centralgovernment debt fell from an estimated 13.3% of GDP to an estimated 12.5% ofGDP in the first half of 2004, according to Ministry of Finance data.

Large budget commitments to education and healthcare will be accompaniedby rising tax pressures, prompting the introduction of a sectoral tax on themining industry, designed to raise about US$150m a year, and an increase inthe tax on real estate, meant to raise about US$90m a year for themunicipalities. Both measures are likely to be in the statute books by May 2005.

Ending four and a half years of monetary loosening, the Banco Central de Chile(the Central Bank) has raised its target interbank interest rate twice sinceSeptember: by 25 basis points, to 2%, on September 7th, and by another 25 basispoints, to 2.25%, on November 11th. An unwinding of the aggressive monetarystimulus of the past year has followed a rise in global interest rates, an upwardtrend in core inflation, to 1.4% on a 12-month basis in October, and price pressuresstemming from Chile’s economic upturn. Gradual monetary tightening willcontinue in the forecast period, with the interbank rate rising to around 5% by end-2006, and inflation remaining within the Central Bank target range of 2-4%.

Policy trends

Fiscal policy

Monetary policy

10 Chile


Economic forecast

International assumptions summary(% unless otherwise indicated)

2003 2004 2005 2006Real GDP growthWorld 3.8 5.0 4.2 4.0OECD 2.0 3.4 2.5 2.4US 3.0 4.4 3.1 2.9

Exchange rates¥:US$ 115.9 108.2 94.8 94.0US$:€ 1.13 1.24 1.39 1.40US$:SDR 1.40 1.48 1.58 1.60Financial indicators€ 3-month interbank rate 2.33 2.13 2.10 2.25US$ 3-month Libor 1.21 1.59 3.36 4.75Commodity pricesCopper (US cents/lb) 80.3 126.8 126.3 113.8Oil (Brent; US$/b) 28.8 39.0 36.8 29.0Food, feedstuffs & beverages (% change in US$ terms) 6.6 9.0 -6.0 -1.5Industrial raw materials (% change in US$ terms) 13.0 20.5 -2.1 -4.7

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

With economic policy being tightened in a number of countries and significantdebt levels weighing on consumers, companies and governments, somemarkets are losing momentum and a global slowdown is in prospect for2005-06. The Economist Intelligence Unit currently expects global GDP growthto decelerate gradually, from 5% in 2004 to 4.2% in 2005 and to 4% in 2006.However, the global economy faces several risks that have the potential to turnthe forecast gradual slowdown into something more serious. Economicimbalances are still a problem. In particular, private-sector debt and public-sector borrowing in the US are still high, and concerns persist about how theeconomy will perform as fiscal and monetary policy become less stimulatory.There is also a risk that foreign-exchange movements will depress growthprospects in some major markets, and the US dollar, which is alreadyweakening, is at risk of a sharp decline in value. In Chile's case, there is a risk ofgreater downward pressure on copper prices in 2005-06, in the event of a morerapid than forecast slowdown in growth in China, as well as higher thanexpected international oil prices. At the same time, US interest rate rises willtighten global liquidity and increase external debt-service costs.

Gross domestic product by expenditure(Ps bn at constant 1996 prices; % change year on year in brackets unless otherwise indicated)

2003a 2004 b 2005c 2006c

Private consumption 24,653.3 25,519.1 26,658.7 27,664.8(3.7) (3.5) (4.5) (3.8)

Public consumption 4,228.3 4,482.0 4,750.9 4,846.0(2.1) (6.0) (6.0) (2.0)

Gross fixed investment 9,095.3 10,087.8 11,116.8 12,061.7(4.8) (10.9) (10.2) (8.5)

International assumptions

Economic growth

Chile 11


Gross domestic product by expenditure(Ps bn at constant 1996 prices; % change year on year in brackets unless otherwise indicated)

2003a 2004 b 2005c 2006c

Final domestic demand 37,976.9 40,088.9 42,526.5 44,572.5(3.8) (5.6) (6.1) (4.8)

Stockbuilding 310.4 350.0 150.0 100.0(-0.3)d (0.1) d (-0.5)d (-0.1)d

Total domestic demand 38,287.4 40,438.9 42,676.5 44,672.5(3.5) (5.6) (5.5) (4.7)

Exports of goods & services 13,229.9 15,146.4 16,297.8 17,741.2(7.8) (14.5) (7.6) (8.9)

Imports of goods & services -12,616.9 -14,389.7 -15,658.2 -17,023.9(8.8) (14.1) (8.8) (8.7)

Foreign balance 613.1 756.7 639.6 717.3(-0.2)d (0.4) d (-0.3)d (0.2)d

GDP 38,900 41,196 43,316 45,390(3.3) (5.9) (5.1) (4.8)

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.d Percentage contribution to GDP growth.

In the context of the most favourable external conditions in decades andextremely accommodative monetary policy, GDP growth is estimated to haveapproached 6% in 2004, spearheaded by exports of goods and services. In thethird quarter alone, GDP growth reached 6.8%, driven by strong growth in bothexports and domestic demand. In 2005-06 the external sector will continue tobe buoyed by an increase in copper output, favourable terms of trade, andChile’s improved access to the EU and US markets. At the same time, domesticdemand will be boosted by the ongoing boom in fixed investment inmachinery and equipment. Nevertheless, the dampening effects of tighteningmonetary conditions, and a forecast gradual deceleration of export and fixedinvestment growth, are likely to push GDP growth down gradually from its 2004peak, to an annual average of 5% in 2005-06.

Inflationary pressures have been rising modestly since mid-2004 to within theCentral Bank’s target range of 2-4%, driven in large part by rising energy pricesand strengthening domestic demand. In November 12-month consumer priceinflation was 2.5%. Core inflation, which ignores the more volatile prices offuels, fruit and vegetables, was still well below the target range of 2-4%, at 1.4%.We continue to expect rising domestic demand to increase inflationarypressures throughout the remainder of this year and into 2005. However,inflation should remain well within the medium-term target range, owing tomonetary tightening, a strong currency and intense retail competition, whichwill limit the transfer of production-cost increases to consumers. The 12-monthinflation rate is estimated to have ended 2004 at 2.4%, below the mid-point ofthe Central Bank's target range, and is forecast to remain around 3% in theforecast period.

The peso weakened in the first half of 2004, from Ps599:US$1 at end-2003 toapproaching Ps650:US$1 by mid-June, despite large monthly trade surpluses. Thisreflected expectations that US interest rates would start rising sooner thandomestic interest rates, and the impact of large capital outflows as the private

Inflation

Exchange rates

12 Chile


pension funds continued to diversify their portfolios abroad. From August thepeso began to strengthen again, and on the back of US dollar weakening and inthe wake of the Central Bank’s interest rate rises in September and November, toclose the year near Ps560:US$1. Chile’s fundamentals and policy direction—including the prospect of current-account surpluses throughout 2004-06 andtightening monetary conditions—suggest continued currency strength in theforecast period. However, these factors will be partly offset by the likelihood ofcontinued capital outflows as the limit on foreign AFP investments is raisedfurther from the current 30% of total investment. As a result, we expect thecurrency to weaken slightly in nominal terms over 2005-06, and to remain largelystable in real terms. Further bouts of exchange-rate volatility are not unlikely in2005-06, given concerns over weakening of the US dollar, along with the use ofthe Chilean peso as a proxy to hedge Brazilian risks.

Export earnings rose by almost 50% year on year in the first three quarters of2004, owing to high export prices and volumes, mainly of copper, but also offruit, salmon, cellulose, wood products, wine, meat and dairy products.Although import spending has also been rising, reflecting a pick-up in fixedinvestment, the trade surplus will have reached record levels in 2004. This willallow the current account to record an unprecedented surplus of almost 3% ofGDP, despite a marked rise in income debits resulting from increasing profitremittances by foreign investors. Copper prices are likely to trend gently lowerfrom 2005 as global growth decelerates. Although earnings from other exportsectors will continue to expand strongly—particularly forestry—consumption-and investment-related import growth will outpace export growth by asubstantial margin. This will narrow the trade surplus and push the current-account surplus down to 1.9% of GDP in 2006.

Forecast summary(% unless otherwise indicated)

2003a 2004 b 2005c 2006c

Real GDP growth 3.3 5.9 5.1 4.8Gross fixed investment growth 4.8 10.9 10.2 8.5Industrial production growth 1.7 9.0 8.0 7.0

Unemployment rate (av) 8.5 8.8 7.8 7.3Consumer price inflation (av) 2.8 1.1 2.6 3.1

Consumer price inflation (year-end) 1.1 2.4 3.0 3.2Short-term interbank rate 6.2 5.1 6.5 8.0Central government balance (% of GDP) -0.8 1.8 1.3 1.1

Exports of goods fob (US$ bn) 21.0 31.6 34.8 37.4Imports of goods fob (US$ bn) 18.0 22.9 27.3 29.8

Current-account balance (US$ bn) -0.6 2.6 2.1 2.1Current-account balance (% of GDP) -0.8 2.9 2.0 1.9

External debt (year-end; US$ bn) 43.4b 44.1 44.8 45.9Exchange rate Ps:US$ (av) 691.4 609.4 574.8 593.7Exchange rate Ps:US$ (year-end) 599.4 559.8 584.2 598.2

Exchange rate Ps:€ (av) 782.9 756.7 796.1 831.1Exchange rate Ps:¥ (av) 5.97 5.63 6.07 6.32

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

External sector

Chile 13


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The political scene

The municipal elections of October 31st resulted in a qualified victory for theruling coalition, the centre-left Concertación de Partidos por la Democracia. TheConcertación suffered another decline in its share of the vote, from aconsolidated total of 52.13% of the vote in the municipal elections of 2000 to44.79% in the 2004 mayoral elections and 47.91% in the councillorship elections.Nevertheless, it achieved its goals of gaining the largest number of votes overall,and increasing its number of mayorships from the 2000 poll, when failure topresent a common candidate list led to electoral disappointment.

Concertación was in part able to claim electoral victory because of therelatively poor performance of the centre-right opposition coalition, the Alianzapor Chile. Before the elections, the Alianza had predicted that its share of thevote would rise by around 4 percentage points. In the event, electoral supportfor the opposition coalition fell from 2.61m votes, representing 40.1% of the votein 2000, to 2.39m votes, accounting for 38.7% of the total in the 2004 mayorshipelections, and 2.2m votes, representing 37.7% of the total in the councillorshipelections. In addition, although the Alianza expected to lose a substantialnumber of mayorships since it was to confront a more united Concertación, theloss of 60 mayorships was greater than it had expected.

The Alianza achieved some victories by retaining most of the traditionallycentre-left densely populated municipalities that it won in 2000 fromConcertación, including Santiago. The Alianza also achieved unexpectedsuccesses by gaining another two of the largest municipalities, Viña del Marand La Reina. However, Concertación achieved a net win of 32 mayorships,including important municipalities such as Maipú, Conchalí, La Cisterna,San Bernardo, Peñalolén, San Miguel and La Serena.

Concertación secures moremayorships with fewer votes

14 Chile


Municipal election results 2000, 20042000 2004

Mayors & councillors Mayors Councillors% of votes Mayors Councillors % of votes Totala % of votes Totala

Concertación de Partidos por laDemocracia 52.1 171 1,205 44.8 203 47.9 1,120

Alianza por Chile 40.1 165 849 38.7 105 37.7 877Partido Comunista & alliesb 4.2 1 24 5.9 4 9.1 90

Humanistas y Ecologistasc 0.9 3 3 - - - -Nueva Fuerza Regional - - - 0.6 1 0.6 8Nueva Alternativa Independiente - - - 0.3 1 0.7 15

Unión de Centro Centro (UCC)d 1.2 2 28 - - - -Independents 1.4 2 15 9.7 31 3.9 20

Total 100.0 341 2,124 100.0 345 100.0 2,130

a Preliminary results provided by Ministerio del Interior modified by rulings of the Electoral Tribunal. b Contested the 2004 municipal elections asJuntos Podemos, and those of 2000 as La Izquierda. c Joined Juntos Podemos in 2004. d Dissolved and ceased to be a political party in 2001.

Source: Economist Intelligence Unit.

The Alianza achieved its most important victory in the municipal elections byretaining the mayorship of Santiago. The incumbent was Joaquín Lavín, theAlianza’s candidate for the presidential election in December 2005, andalthough he was not running for re-election, a defeat for the Alianza in Santiagowould have been perceived as a personal defeat for Mr Lavín, significantlyweakening his position in the presidential race. For this reason, Concertaciónhad presented one of its strongest candidates, the former deputy and formerpresident of one of its member parties, the Partido por la Democracia (PPD),Jorge Schaulsohn, in Santiago and given him enormous campaign support.However, the Alianza’s candidate, Raúl Alcaíno, won by nearly three percentagepoints. Mr Lavín achieved another personal triumph through the victory inSantiago by his wife, María Estela León, who was the councillor with thelargest number of votes in the country.

Independent candidates were the main winners in October. Their share of thevote rose from 1.4% in 2000 to a remarkable 9.7% in the 2004 mayoral electionsand 3.9% in the 2004councillorship polls, and the number of mayorships undertheir control rose from 2 to 31. This was a result of failed efforts by the partyelites within the two main coalitions to achieve internal discipline behind theirchoice of candidates. Many of those who were not selected decided to run ontheir own, challenging the chosen coalition candidates, and 25 of them went onto win mayorships. This was a sobering blow for the political establishment,indicating that centralised selection of candidates without regard to localpreferences is an increasingly risky option.

The Juntos Podemos coalition, led by the Partido Comunista (PC) also hadreasons to celebrate, since it secured 5.9% of the mayorship vote—increasing itsmayoral representation from one to four—and 9.1% of councillorship votes.These results compare with an aggregate 5.1% of the vote in 2000, whenHumanists and Greens ran in a separate list.

Alianza retains the mayorshipof Santiago

Independents perform well

Chile 15


With a 20.3% share of the vote in the councillorship elections, the PartidoDemócrata Cristiano (PDC), the largest party in Concertación, experienced a fallof over 1 percentage point compared with the 21.6% it achieved in themunicipal elections of 2000. However, the party’s president, Adolfo Zaldívar,had set the PDC the electoral goal simply of arresting the persistent decline inpopular support it has suffered in national elections in the past decade. Thiswas in fact achieved by exceeding by over 1 percentage point the 18.9% of thevote it obtained at the congressional election in December 2001. The result wasan additional bonus for the PDC, in that it enabled it to reclaim its old title asthe main party in the country, overtaking the Alianza's Unión DemócrataIndependiente (UDI). It also increased its mayoral representation from 88to 100.

The PDC's performance represented a personal victory for Mr Zaldívar, whohad re-established a separate political identity for the PDC through toughconfrontations with the government and its Concertación allies. He is nowtrying to persuade his party that, just as he stopped the PDC’s decline, he is thebest-suited to become its presidential candidate and fight for the Concertación’spresidential nomination. However, his chances of winning the PDC’snomination are low, because he is not popular in the country at large and evenless so among the Concertación establishment. Most importantly, SoledadAlvear, who served as foreign minister under Mr Lagos, minister of justiceunder Eduardo Frei, and minister for women under Patricio Aylwin, is wellahead in the polls in relation to any other PDC presidential hopeful, includingMr Zaldívar and Mr Frei. The latter’s efforts to secure the PDC’s presidentialnomination suffered a major blow in mid-October when a group of leadingformer supporters—including some of his former ministers—openly called forhim to withdraw from the race. Mr Frei ignored this call and, like Mr Zaldívar,appears determined to keep his options open until a meeting of the PDC’s toppolicymaking body, the Junta Nacional, scheduled for January 14th-16th. This iswhen the party is due to decide how its presidential nominee will be chosen.

Evolution of electoral support by political party(% of vote)

Municipal Legislative Municipal Legislative Municipal1996 1997 2000 2001 2004a

Concertación por la DemocraciaPartido Demócrata Cristiano (PDC) 26.2 23.0 21.6 18.9 20.3Partido Radical Social Demócrata (PRSD) 6.5 3.1 5.4 4.1 4.6Partido por la Democracia (PPD) 11.7 12.6 11.4 12.7 10.0Partido Socialista (PS) 11.2 11.1 11.3 10.0 10.9Alianza por ChileRenovación Nacional (RN) 18.5 16.8 15.5 13.8 15.1Unión Demócrata Independiente (UDI) 13.0 14.5 16.0 25.2 18.8Juntos PodemosPartido Comunista (PC) 5.1 6.9 3.2 5.2 4.9Partido Humanista (PH) 1.4 2.9 0.8 1.1 1.9

a Preliminary results of councillorship elections. The government did not disclose the results by party in the mayorship elections.

Source: Ministerio del Interior.

Support for the PDC hasstopped shrinking

16 Chile


The leadership of the Partido Socialista (PS), headed by Gonzalo Martner, set asits main objective for the municipal elections to raise the PS’s share of the votefrom 11.3% in 2000 to 15%. It counted on meeting this goal owing to an increasein its number of councillorship candidates from 370 to 397, the active supportof Mr Lagos and the government for official candidates, and the popularity ofits presidential candidate and former defence minister, Michelle Bachelet. Thelatter was able to participate full-time in the campaign since end-September,when she left the cabinet together with the PDC's leading presidential hopeful,Ms Alvear.

However, the PS’s share of the vote in fact fell to 10.9%, and it suffered anotherbig disappointment by failing to obtain another main objective, the recovery ofthe mayorship of La Florida from the UDI. On a positive note, the PS increasedits mayoral representation from 35 to 49, and although most of these wins werein small municipalities, it did recover the mayorship of San Miguel and alsowon La Serena and Talagante. In addition, its negotiating position for positionsin the Concertación’s December 2005 congressional list elections was reinforcedby the fact that the electoral performance of the Partido por la Democracia(PPD) was significantly worse than its own.

The PPD registered its worst electoral performance ever, with a share of thevote of only 10%, down from 11.4% in 2000. This put it for the first time belowfellow coalition member and major rival, the PS, and will have weakened itsposition in the forthcoming negotiations with the PS towards a common list ofcongressional candidates. The PPD bet heavily on winning the emblematicmayorship of Santiago, a slot in the Concertación’s list, for which its president,Víctor Barrueto, conceded a dozen other mayorship slots to the PDC. This highpolitical price was accepted by the PPD because a recovery of the municipalityof Santiago for Concertación would have been a tremendous victory for theparty and the coalition. In particular, the party would have gained a high-visibility position in the Santiago mayorship at a time when it has beenrelegated to a secondary role by its lack of a presidential candidate able tochallenge those of the PS and the PDC. But, in the event, the PPD’s candidate,Jorge Schaulsohn, was defeated by the Alianza’s Raúl Alcaíno.

The PPD did increase its number of mayorships from 29 to 40, but its gainswere mostly in small constituencies. In its weakened state, the PPD’s hopes toextract congressional concessions from the PS in exchange for its support for thePS's presidential candidate, Ms Bachelet, were abandoned, and the PPD wascompelled to announce its support for her at its general council meeting ofNovember 13th, without winning any concessions.

Like its partners in Concertación, the Partido Radical Social Demócrata (PRSD)experienced a fall in its share of the vote at the municipal elections, from 5.42%in 2000, but unlike its allies it also suffered a net loss in its number ofmayorships, from 16 to 14. Most importantly—and unexpectedly—it lost its mainmayorship, Viña del Mar, to the Alianza. However, the PRSD was satisfied withits performance, because it retained its pivotal position within theConcertación. With the PDC’s electoral support at 20.3%, and the combined

The PPD was one of the mainlosers in the elections

The PRSD offers its support tothe highest bidder

The PS failed in its goal to raiseits share of the vote to 15%

Chile 17


support for the PS-PPD at 20.9%, competition between these two factions of theConcertación to attract the PRSD to their ranks will be fierce.

The PRSD’s president, Enrique Silva Cimma, has made it clear that his partywill support whichever Concertación presidential hopeful whose factionguarantees the PRSD the largest number of places in the Concertación’slegislative electoral lists. He has indicated that the PRSD would like 12candidates on the electoral list, to raise its number of deputies from 6 to 9.Besides the six lower-house constituencies it now holds—Vallenar, San Antonio,Chillán, Los Ángeles, Villarrica and Puerto Montt—the PRSD would accept sixmore within a list that includes Calama, La Serena, Quilpué, Santiago, Angol,La Unión, Coihaique and Punta Arenas. The PRSD also wants three slots in theConcertación’s Senate list, and has indicated that offers would be bestpresented before January 16th, when the party is due to elect its newleadership. This position is shared by the three candidates fighting for theparty’s presidency: former justice minister, José Antonio Gómez, the party’scurrent secretary-general, Ricardo Navarrete, and a former candidate for theSenate, Sergio Carrasco.

Following the lead of its presidential candidate, Joaquín Lavín, the UniónDemócrata Independiente (UDI) did not try to hide its disappointment with itsmunicipal elections results and those of the Alianza. Only two hours after thepreliminary official results were released, Mr Lavín said that “the Alianza mustaccept with deep humility that it did not achieve the vote expected at anational level”, and called on it to “hear the voice of the people”. The UDI’spresident, Jovino Novoa, noted that the party increased its share of the vote—from 16% at the municipal elections of 2000 to 18.8% this time—and that the gapin popular support between the Concertación and the Alianza was halved.However, he also admitted that the UDI’s expectations were not fulfilled andstated that the party will examine in depth what went wrong.

The leadership of Renovación Nacional (RN) downplayed the party’s heavylosses at the mayoral elections—it lost 40 mayors—preferring to focus on therebound in its share of the vote. This reached 15.1%, not far down from its 15.5%of October 2000 and well above the 13.8% it achieved at the congressional pollsof December 2001. According to the RN president, Sergio Diez, this makes theRN and the UDI similar in size again. However, the RN’s former president,Andrés Allamand—who was one of RN’s founders in 1987 and remains highlypopular within the party’s liberal wing—said the party has lost its politicalprofile and issued a public call for a relaunch. This prompted an angryresponse from Mr Diez, who interpreted this as a challenge to his leadership,despite Mr Allamand’s clarification that he expected Mr Diez to lead hisproposed party relaunch.

On November 16th the central committee of the Partido Comunista (PC)nominated a sociologist and PC sympathiser, Tomás Moulia, as its candidate forthe presidential nomination of the Juntos Podemos far-left coalition, whichincludes over a dozen small groups. The Partido Humanista (PH) is likely tonominate its former president, Tomás Hirsch, as its candidate for the Juntos

The UDI doesn't hide itsdisappointment

RN’s electoral results reigniteits internal conflicts

The far left is divided on howto play its cards in 2005

18 Chile


Podemos presidential nomination. So far, the coalition is divided on electoralstrategy. The PH opposes any compromise with those supporting capitalism andneo-liberalism, and has insisted that, since Juntos Podemos regards bothConcertación and the Alianza as neo-liberal, in the likely event of a second-round presidential election, the coalition must call on its supporters to annultheir votes.

A faction within the PC that includes its secretary-general, Guillermo Tellier, hassome affinity with this view, but the faction headed by Jorge Insunza is infavour of dialogue with Concertación on political and economic reforms, toinclude the introduction of proportional representation to replace the bi-nominal electoral system. Mr Moulian is also in favour of an electoralagreement with the Concertación. Within the government, the interior minister,José Miguel Insulza, has called for the building of channels of communicationwith Juntos Podemos.

A poll conducted in December 2004 by a polling agency close to thegovernment, CERC, found that the Alianza’s presidential candidate, Mr Lavín,has been overtaken by the PS hopeful, Ms Bachelet, as the politician consideredto have the brightest future. Ms Bachelet was included among the politicians inthat group by 51% of those polled (up from 48% in CERC’s September poll), and42% included Mr Lavín (a remarkable fall from 58% in September). Another 39%included the PSC's Ms Alvear, 11% included the former president of the RN,Mr Piñera, and 10% included the interior minister, Mr Insulza.

When asked who they would want to be the next president, 35% ofrespondents mentioned Mr Lavín (down from 39% in September), 30%Ms Bachelet (up from 25%), and 10% Ms Alvear (up from 7%); 11% mentionedother presidential hopefuls (down from 14%), 4% said none (down from 5%) and10% did not answer or did not know (unchanged from September).

Asked who they believe will be the next president, 35% chose Mr Lavín (downfrom 44% in September), 30% mentioned Ms Bachelet (up from 17%), and 8%Ms Alvear (up from 7%); 7% mentioned other candidates (unchanged fromSeptember), 1% said none (down from 4%) and 22% did not answer or did notknow (up from 21%).

The poll also found that the government’s approval rate reached a record 62%in December, up from 56% in September, and its disapproval rate dropped from32% to 27%; 12% of those polled did not answer or did not know.

An investigation into the use of torture under the military regime of the formerdictator, Augusto Pinochet, was concluded in November. A year earlier,Mr Lagos had nominated an eight-member commission, the ComisiónNacional sobre Prisión Política y Tortura (known as the Valech Commission),headed by a Catholic bishop, Sergio Valech. The Valech Commission invitedthose who suffered imprisonment and torture by agents of the state for politicalreasons under the military regime to bear witness. The commission would thenselect those who, in their view, deserved reparations (neither the amount to begiven in reparations nor the criteria that were to be applied to distribute themwas specified). Around 35,000 people claimed to have been victims of torture,

Report on torture undermilitary regime published

Mr Lavín’s popularity falls

Chile 19


almost all in 1973-74, and the Valech Commission selected around 28,000 ofthem as credible and eligible for reparations.

The final report of the Valech Commission was presented to Mr Lagos onNovember 10th; the government sent an urgent reparations bill to Congress onDecember 14th, which was approved by both the Chamber of Deputies and theSenate in less than 48 hours. It gives education and healthcare benefits to the28,000 people in the list as well as a pension for life of Ps1.55m (US$3,045) ayear for those of over 75 years of age; Ps1.48m for those aged between 70 and75; and Ps1.35m for those aged under 70. People on the list who already receivebenefits, totalling about US$700m per year—a sum due to rise by 50% from2005—for being relatives of disappeared prisoners or having lost their jobs afterthe 1973 coup for political reasons, will receive a single payment of Ps3m. Thetotal annual cost of the reparations bill is officially put at US$70m. Thegovernment rejected a UDI amendment proposing to exclude from thesebenefits left-wing militants, and inserted a provision establishing that thecomplete witness accounts used to prepare the commission's report will remainsecret for 50 years.

With the presidential election set for the end of 2005, response to thecommission's report has taken on political undertones. In the wake of thereport, both the PS and the PPD issued public calls to Alianza leaders to “admittheir responsibilities”, in a bid to portray the current centre-right alliance aslinked to the military dictatorship, and possibly to win sympathy amongsupporters of the radical left—many of whose members were included in theValech Commission’s list of recipients of reparations, and whose votes couldprove decisive in a second-round presidential election.

Meanwhile, attempts to put Mr Pinochet on trial for human rights violationscontinue. In August the Supreme Court confirmed the rescindment ofMr Pinochet's life immunity from prosecution, previously enjoyed as a retiredsenator and former president, in a reversal of its July 2002 decision declaringMr Pinochet physically unable to stand a fair trial owing to mental illness. Thisopened the way for investigations into his alleged responsibility for thedisappearance of 18 Chileans in Argentina, Bolivia and Paraguay under the so-called Operación Cóndor in 1975-77, along with allegations of illegalenrichment, based on deposits of between US$4m and US$8m held byMr Pinochet and his family at the Riggs Bank (US) between 1994 and 2002. OnDecember 13th Mr Pinochet was indicted by the judge investigatingMr Pinochet's links to Operación Cóndor; pending appeal to the SupremeCourt, Mr Pinochet has been placed under house arrest.

After over a decade of failed attempts to reform the constitution to eliminateinstitutions and powers designed under the military regime to create a“protected democracy”, the government and the senators of both theConcertación and the Alianza signed a historic constitutional agreement onNovember 6th that was immediately approved by the Senate, to be followedby approval by the Chamber of Deputies. The main changes include an end tothe institution of unelected senators from March 2006 (which include fourretired senior officers representing the three branches of the armed forces and

A major constitutional reformto be enacted in 2005

20 Chile


the police); the elimination of the residual participation of the military inpolitical decisions by redefining the powers and composition of the Consejo deSeguridad Nacional (Cosena), the National Security Council; tight restrictionson the conditions, powers and duration of a state of emergency; and therestoration of the presidential power to remove commanders-in-chief of thearmed forces. The Senate also approved a cut in the presidential period fromsix years to four from 2006, maintaining the ban on immediate re-election.

Other constitutional changes include tighter regulations on probity, account-ability and transparency; a new chapter designed to protect the rights ofminorities against discrimination on the basis of sex, age, ethnicity or religion; astrengthening of the Constitutional Tribunal through greater powers andresources; and measures to increase the powers of the Chamber of Deputies tosupervise executive decisions and to limit the president’s power to determinethe congressional agenda. These reforms are likely to be enacted well beforeMay 21st 2005, when Mr Lagos intends to include them among hisgovernment’s institutional achievements in his final annual addressto Congress.

Economic policy

After raising its target interbank rate by 0.25 percentage points, to 2.25%, onNovember 11th, the board of the Banco Central de Chile (the Central Bank)voted by four to one in favour of keeping its target interbank interest rateunchanged at 2.25% at its policy meeting of December 9th. The dissentingdirector wanted to raise the rate by 0.25 percentage points, in line with marketexpectations. The board reaffirmed that, under the most likely scenario, it willcontinue with its slow reduction of the marked monetary stimulus stillprevailing in order to keep inflationary expectations around an annual rate of3% in the normal policy horizon of 12-24 months.

The non-financial public sector (NFPS) achieved a surplus of US$1.35bn in thefirst three quarters of 2004, or 1.5% of annual GDP, compared with an initialbudget projection of a deficit of 0.1% of GDP. This good performance was aresult of a 330% real rise in the government’s copper revenue, owing toexceptionally high prices, and an economic recovery that raised tax revenue by13.6% in real year-on-year terms in the period. Spending rose by 5.7% ininflation-adjusted terms in January-September. Interest payments actually fellby 8.1% in real terms, but extra-budgetary spending pushed current spending ongoods and services up by 21% in inflation-adjusted terms. The budget director,Mario Marcel, has maintained his forecast of a fiscal surplus of 1.6% of GDP for2004 as a whole.

According to the Ministry of Finance, central government revenue from Codelcorose almost fivefold in real year-on-year terms in the third quarter of 2004. Amajority of this revenue was deposited in the Copper Stabilisation Fund (basedon the portion of copper revenue above the budget reference price), to be usedselectively to pre-pay public-sector debt. According to the ministry, in the firstnine months of 2004, US$495m from the fund was used to pre-pay official

Central Bank tightensmonetary policy, but slowly

Fiscal surplus of1.5% of GDP inthe first nine months of 2004

Chile 21


external debt, helping to bring the total public-sector debt (domestic andexternal) down from 13.3% of GDP in December 2003, according to Ministry ofFinance data, to 12.5% of GDP. After debt prepayments, the fund balance wasUS$199m at end-September, up from US$75m at end-2003.

Budget execution, Jan-Sep 2004

Ps bnReal % change,

year on year % of GDPTotal revenue 9,203 22.1 16.7 Current revenue 9,189 22.0 16.7 Net tax revenue 6,706 13.6 12.2 Net revenue from copper 1,054 329.5 1.9 Capital revenue 14 77.6 0.0Total expenditure 8,351 5.7 15.2 Current spending 7,130 5.1 13.0 Interest payments 425 -8.1 0.8 Capital spending 1,221 10.2 2.2

Overall balance 852 - 1.5

Source: Dirección de Presupuestos, Ministerio de Hacienda.

On December 13th the government presented a bill to create a tax of 5% on theoperating profits of mining companies with sales in excess of US$5m a yearand with an operating margin in excess of 8%. Mining companies that havesigned foreign investment contracts with the state that include a taxinvariability clause setting the corporate tax rate at 42%—rather than the normal35%—are invited to renounce the tax invariability clause and pass to the normalcorporate tax rate in exchange for accepting a reduced mining tax rate of 4%,which would be immediately followed by the signature of a new taxinvariability contract for the next 15 years. The new mining tax—which wouldserve as a credit for the corporate tax—would apply from 2006 with an initialexemption of 50% in the first two years. The finance ministry estimated thatsuch a tax would yield about US$93m per year in 2006 and 2007, rising toabout US$145m from 2008.

The initial reaction was mixed. A majority of legislators in the rulingConcertación coalition protested that the bill was too lenient towards themining companies. There were immediate suggestions that the bill be amendedwith a view to an annual tax-collection target of around US$300m, and that theidea of a 50% tax exemption in the first two years be dropped. Some legislatorsalso announced their opposition to granting a new tax invariability contract for15 years. The mining companies, meanwhile, condemned the idea of adiscriminatory sectoral tax, although some of them admitted that the newproposal to increase their tax contributions was less damaging than thegovernment's royalty bill, which was defeated in Congress on August 10th, andfar less damaging than the royalty bill presented in March 2004 by a group often deputies—which is still sitting in the mining commission of the Chamber ofDeputies among the dozens of non-government bills waiting to be debated—which proposes a simple 3% tax on mining sales.

Following a six-month joint feasibility study that found that a bilateral free-trade agreement (FTA) would yield substantial benefits for both parties, the

Government proposes miningtax to replace royalty project

Negotiations towards an FTAwith China get started

22 Chile


Chilean president, Ricardo Lagos, and his Chinese counterpart, Hu Jintao,announced on November 18th the launch of formal negotiations towards abilateral FTA. A deal is expected to be reached in the course of 2005. Thisagreement is regarded as “historic” in Chile, given the trade-generating potentialinvolved. China is already Chile’s third-largest trading partner. Chilean exportsto China rose by 60%, to US$1.6bn, in the first ten months of 2004, accountingfor 9% of total exports, and imports from China rose by 19%, to 6.6% of the total,at US$990m. Most of the growth in exports to China has so far come fromcopper; in the first ten months of 2004, copper exports rose by 74%, to accountfor 77% of total exports to China.

The announcement of the FTA negotiations was accompanied by Chile’sformal acknowledgement of China as a market economy, and by China’sdesignation of Chile as an accepted tourist destination for Chinese groups. Thetwo presidents also signed several other co-operation agreements coveringphyto- and zoo-sanitary norms, healthcare, medical sciences and sport.

In a parallel move, China's giant state company, Minmetals, and Chile’s statecopper corporation, Codelco, agreed to complete the negotiations within fourmonths of a comprehensive deal involving long-term contracts for Codelco’scopper and Minmetals’s funding for Codelco's new copper mining projects,most immediately the construction of the Gaby mine, which is scheduled to bestarted in 2005 at a cost of US$550m. This is a project in which South Korea hasalso expressed an interest.

The government continues to make progress on boosting economic ties withother countries. On November 17th the Chilean Senate ratified the FTA reachedwith the countries of the European Free Trade Association (EFTA), whichincludes Iceland, Liechtenstein, Norway and Switzerland. The FTA, operationalfrom December 1st, granted immediate zero-tariff access to the EFTA market toover 90% of Chilean exports. Also in late November, Chile and Japan agreed toform a joint study group comprising government officials, academics andbusiness representatives, to assess the feasibility of a bilateral FTA. TheJapanese prime minister, Junichiro Koizumi, has said he is in favour ofsubscribing such an FTA as soon as possible. Finally, over 50 Chileanbusinessmen will accompany the president, Ricardo Lagos, on his state visit toIndia in late January. Besides signing agreements to facilitate bilateral trade,Chile hopes to persuade large Indian holdings to set up operations in Chile as agateway to Latin America.

On December 1st, nearly five years after it was meant to reach the statutebooks, according to the commitments made by Chile to the WTO under theagreement on Trade-Related aspects of Intellectual Property (TRIPs) of 1994,Congress approved a law that increases the protection of registered trademarks,patents, utility models and industrial designs against piracy. The new law,which will become operational once it is approved by the constitutionaltribunal, increases the minimum fine for violations of intellectual propertyrights from the equivalent of about US$310 to US$1,300 (25 monthly tax units,an inflation-indexed unit of account); it doubles the maximum first fine toUS$52,000; and it determines that violators should suffer the loss of the

Initiatives to boost economicties elsewhere are under way

Protection of intellectualproperty rights is tightened

Chile 23


equipment used for piracy in addition to the counterfeited goods. For thosecaught a second time engaging in piracy, the new law establishes a fine of notless than twice the initial fine, to a maximum of 2,000 monthly tax units(about US$104,000 at present). The protection period for industrial patents israised to 20 years, counted from the presentation of the patent inscriptionrequest, up from the current 15 years counted from the date of patentregistration, and the institutions in charge of enforcing this protection arestrengthened through the creation of a Tribunal of Industrial Property formedby three specialist judges and their replacements.

The new law also modernises dispute-settlement procedures for trademarksand patents along the lines of the TRIPs model legislation; provides for theexpiration of trademarks that are not effectively used in the country; protectsintegrated circuit designs and molecule designs; and simplifies procedures toregister, oppose, renovate and annul industrial property rights to reduce theamount of time and money required to exercise them. Nevertheless, criticsclaim that, with the government under pressure from local pharmaceuticallaboratories, the new regulations represent the bare minimum required underthe WTO commitment.

In late September the government published new public procurementregulations (Reglamento de la Ley de Bases sobre Contratos Administrativos deSuministro y Prestación de Servicios), requiring all public purchases in excess ofthree monthly tax units (an inflation-indexed unit of account)—about US$150—tobe carried out through www.chilecompra.cl, the government’s procurementportal, from late October. Chilecompra already had over 84,000 registeredsuppliers serving the 655 government services, including 123 municipalauthorities. The laggard government services, including 220 small municipalities,have now joined the system, which will further increase transparency.

Law 19,759 of September 2001 established a reduction in the statutory workingweek from 48 to 45 hours from January 1st 2005. The deadline will not haveaffected most medium-sized and large companies, which had already cut theirworking week. In the mining industry, these companies have had a workingweek of 44 hours since 1998. Most banks have introduced 45-hour weeks in thecourse of the past three years, as have the larger forestry companies and somemanufacturers. The change will largely have complicated operations of thosecompanies that have continuous production processes, operating 24 hours aday and 365 days per year; it will also increase harvest costs significantly forfruit producers. According to the figures from the Instituto Nacional deEstadística (INE), the effective average working week has been trending slowlylower for many years, reaching 46.9 hours/week in 1996 (44.8 for women and47.9 for men), and 45.8 hours/week in 2003 (44.1 for women and 46.9 for men).The National Chamber of Commerce has estimated that the cut in workinghours will lower the value added of the retail sector by 0.2 to 0.3percentage points.

In a controversial ruling, the Tribunal for the Defence of Free Competition hasapproved by three votes to two the merger of the two leading cable-TV

The working week is cut to45 hours

A pay-TV virtual monopoly isaccepted, conditionally

Public procurement movesfully online

24 Chile


companies in Chile, VTR and Metrópolis, both of which are controlled by a USconglomerate, Liberty Media. Liberty Media owns 100% of VTR (which has 60%of the local pay-TV market) and controls Metrópolis (which controls 28.7% of themarket) through a 50:50 partnership with the local Claro group. Together, VTRand Metrópolis also control nearly half of the booming broadband Internetmarket. The tribunal ruled that the merger could be implemented from the startof 2005, provided the company agrees to a tough set of conditions.

In particular, the new company will be banned from having an interest insatellite TV, which will require the sale of its minority stake in Sky TV; it willnot be allowed to raise its prices or to lower the quality of the range ofchannels offered in the next four years; it will have to have the same pricesthroughout the country; it will be unable to have any participation in thedominant telecoms company, Telefónica CTC Chile (CTC), which is controlledby Spain’s Telefónica; and it will have to open its grid to other broadbandservice providers at non-discriminatory market rates. These conditions wereamong those suggested by the anti-monopolies prosecutor, Fiscal NacionalEconómico (FNE), but the tribunal omitted the one FNE condition that LibertyMedia had declared unacceptable: that the new company manage its cable TV,fixed-line telephony, and broadband businesses through threeseparate subsidiaries.

Following a government warning about the high prices of broadband servicesin the country, Telefónica CTC Chile has doubled free of charge the contractedconnection speeds of its broadband access plans, a move immediatelyreplicated by its competitors, Entel, VTR, Metrópolis and Manquehue. However,their tariffs remain high by international standards. The most typicalconnection, of 256/128 kbps—now 512/128 kbps—costs about US$41/month.According to International Data Corporation (IDC), there are 347,000broadband connections at present in Chile (2.3 per 100 population).

Market share in Chile’s pay-TV and broadband industries(% of total subscribers)

Pay-TV BroadbandVTR 60.0 VTR 37.0Metrópolis 28.7 Metrópolis 9.5

Sky 8.0 Telefónica 39.2Other 3.3 Other 14.3

Source: Tribunal de Defensa de la Libre Competencia.

In a boost to the factoring industry, in October Congress approved a lawgranting invoices executive title. This enables the endorsement of invoices andgreatly reduces their risk of non-payment, as a defaulter on invoices may nowbe taken straight to bankruptcy court to order liquidation under a simplifiedprocedure. The law aims to reduce factoring rates by reducing the risks andattracting new players into the industry. More reasonably priced factoringservices are seen as ideal financial solutions for the growth of small businesses.

In a renewed attempt to turn Santiago into a regional financial centre, in earlyDecember the superintendency of banks and financial institutions issuedcircular 3,294, exempting all forms of foreign lending by Chilean financial institu-

Invoices get executive title,which will boost factoring

Lending abroad is exemptedfrom financial transactions tax

Chile 25


tions from the 1.6% Impuesto de Timbres y Estampillas, a tax on certain financialtransactions. This includes acquisitions of credits owed by debtorsdomiciled abroad.

The domestic economy

Output and demand

GDP growth reached 6.8% year on year in the third quarter of 2004, the fastestrate of growth in seven years. This was mainly the result of 15.3% growth inexports of goods and services and an unexpectedly strong 8.6% growth indomestic demand. The latter was led by a 14% growth in gross investment infixed capital, which was in turn driven by a 25.1% increase in machinery andequipment and a surprisingly strong 6.9% growth in the other domesticdemand components (consumption and stockbuilding). The latter hadaccelerated from 4.8% in the first quarter and 4.7% in the second. Growth inimports of goods and services was 20.5%, double the pace of the previous twoquarters, reflecting the acceleration of domestic demand growth and growingconsumer and investor confidence.

Gross domestic product growth by demand(% real change, year on year; 1996 prices)

2003 20041 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Domestic demand 2.8 5.2 0.6 5.5 4.8 5.4 8.6 Gross investment in fixed capital 2.9 8.7 2.2 5.5 4.7 7.7 14.0 Machinery & equipment 6.2 17.6 -2.8 6.5 9.3 13.6 25.1 Construction & other works 1.0 2.5 6.0 4.8 1.8 3.0 6.2 Other domestic demand 2.8 4.1 0.1 5.6 4.8 4.7 6.9Exports of goods & services 9.4 2.2 13.9 6.3 10.0 9.8 15.3

Imports of goods & services 7.5 9.1 5.0 13.9 11.1 10.3 20.5GDP growth 3.7 3.0 3.1 3.3 4.6 5.3 6.8

Source: Banco Central de Chile.

Fishing remained the most dynamic sector on the supply side, helped by arelatively low base of comparison. But output growth slowed to 14.8% year onyear in the third quarter, from 32.1% in the first quarter and 24.8% in the second.Fishing was followed by mining, which grew by 9.1%, stimulated by the highestmetal prices in nearly a decade. Manufacturing followed, with output growthof 8.8%, and particularly strong performances by the cellulose and wood-processing industries following the inauguration of the giant Valdivia plant. Theretail and catering sector continued its strong recovery, with growth of 8.1%, andthe agricultural and forestry sector achieved growth of 6.8%. The constructionsector grew by 6.5%, despite a high base of comparison, and growth in financialservices reached 5.7%. Transport and communications and the utilities(electricity, gas and water) were the laggards, with growth rates of 4.1% and 4%respectively, owing to continued conflict over regulatory regimes.

GDP growth accelerated to6.8% in the third quarter

26 Chile


Gross domestic product growth by sector(% real change, year on year; 1996 prices)

2003 20041 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Fishing -16.4 8.2 -3.1 -16.8 32.1 24.8 14.8

Mining 4.5 5.5 8.1 3.7 -0.2 6.4 9.1Manufacturing 6.4 1.2 0.4 2.0 6.0 6.1 8.8

Retailing & catering 3.2 3.9 4.1 5.2 6.0 7.8 8.1Agriculture & forestry 6.5 4.0 0.9 1.7 7.7 5.3 6.8Construction 1.1 2.5 6.2 5.0 1.7 3.0 6.5

Financial services 3.6 2.7 2.9 2.9 4.3 4.8 5.7Bank charges 3.7 2.7 2.7 2.0 4.6 4.8 5.5

Transport & communications 3.5 3.4 3.1 3.6 4.2 4.0 4.1Electricity, gas & water 8.0 3.8 3.1 1.7 1.2 2.3 4.0

Personal servicesa 2.2 2.4 2.8 3.0 3.2 3.5 3.7House ownership 2.1 2.0 1.8 2.1 2.2 2.3 2.3Public administration 1.9 1.9 1.7 1.8 1.9 2.0 2.0

GDP at factor cost 3.5 2.9 3.0 2.8 4.4 5.0 6.2Value-added tax 3.7 3.3 4.2 5.1 5.1 5.7 8.0

Import duties 9.0 6.8 3.1 16.5 13.5 12.7 27.0GDP at market prices 3.7 3.0 3.1 3.3 4.6 5.3 6.8a Includes education, health and other services.


The Banco Central de Chile (Central Bank) monthly index of economic activity,Indicador Mensual de Actividad Económica (Imacec), rose by 5.3% year on yearin October, the highest October result since 1997, despite the fact that there werethree fewer working days than in October 2003. This follows Imacec growthrates of 7.7% in August and 7.5% in September. Trend growth—discountingdifferences in working days—was 7.1% in October—only marginally lower thanin previous months. The Central Bank’s monthly survey on economicexpectations of three-dozen local economists found in early December thatGDP growth was expected to reach 5.7% in 2004 before slowing to 5.3% in 2005and 5% in 2006.

Employment and prices

Retail price inflation reached 2.5% in the 12 months to November, the highest 12-month rate since August 2003 and a marked change from the brief period offalling prices early in 2004. Inflation is heading firmly towards the middle ofthe Central Bank’s target range of 2-4%, but this is mostly a result of the rise in2004 of international oil prices. Underlying inflation, which ignores the pricesof fuels, fruit and vegetables, is trending upwards more slowly, having reached1.4% in the 12 months to November after touching a low of –0.1% in the 12months to April. Producer price inflation has been volatile, owing in part to fuelprices and currency movements. It reached 9.7% in the 12 months to Novemberafter being deep in negative territory in the first four months of the year.

The yield spread between the Central Bank's ten-year bonds denominated inpesos and those denominated in UFs (indexed to inflation) has been

Monthly output growthremained strong in October

Underlying inflation remainsat low levels

The market expects long-terminflation of around 3%

Chile 27


remarkably stable at around 300 basis points since the monetary authoritystarted issuing such long-term nominal bonds in July 2004. This spread reached298 basis points at the end of November, virtually identical to the 3% long-termtrend inflation that the Central Bank is committed to maintain. This investorconfidence in the monetary authority will continue to facilitate policy.

Price and wage trends(% change)

Retail prices Wholesale prices NominalMonthly Annual Monthly Annual hourly wages

2003Jul -0.1 3.1 0.6 6.4 3.8Aug 0.2 2.9 1.2 6.4 3.9Sep 0.2 2.2 -1.0 2.7 3.7Oct -0.2 1.2 -2.1 -2.9 3.6Nov -0.3 1.0 -1.5 -1.7 3.5Dec -0.3 1.1 -1.2 -1.0 3.4

2004Jan -0.2 0.8 -1.1 -4.9 3.3Feb 0.0 0.0 0.9 -6.7 3.3Mar 0.4 -0.7 2.2 -6.7 3.2Apr 0.4 -0.3 2.2 -0.8 3.2May 0.5 0.6 3.3 4.2 3.0Jun 0.4 1.1 1.8 5.2 3.2Jul 0.2 1.4 0.3 4.8 3.2Aug 0.4 1.6 1.4 5.0 3.2Sep 0.1 1.5 -1.2 10.0 3.3Oct 0.3 1.9 1.7 11.9 3.1Nov 0.3 2.5 -0.8 9.7 -

Source: Instituto Nacional de Estadísticas.

The year-on-year rise in real hourly wages was 1.1% in October, continuing adownward trend that reflects the recovery in 12-month inflation fromabnormally low levels. Real wage growth reached a peak of 4% in March—itsstrongest rise in years—as a result of a brief period of falling prices early in theyear. The average wage of the 1.41m workers at 33,241 companies affiliated toAsociación Chilena de Seguridad (ACHS), the largest insurance company forlabour-related health risks, reached Ps358,513 (US$591) in September, whichrepresented a 1.1% year-on-year, inflation-adjusted rise. Growth in nominalwages has been trending gradually lower since 2002, to 3.1% year on yearin October.

The unemployment rate reached 9.4% in the August-October 2004 runningquarter, up from 8.8% in the same period of 2003. This maintained the trend ofyear-on-year rises in the unemployment rate that began in the February-Aprilrunning quarter. The pace of job creation is actually picking up speed—thenumber of people in employment rose by 2.7% year on year in August-October,up from a low of just 0.3% in March-May—but the labour force is growing faster:it grew by 3.4% year on year in August-October, up from a low of 1.1% in March-May, as the rising number of job offers prompts more people to actively lookfor employment. This is keeping the unemployment rate on the rise on aseasonally adjusted basis.

The growth in real wagesweakens as inflation picks up

Unemployment remains highdespite economic rebound

28 Chile


The economy is generating substantially fewer jobs than a decade ago for eachpercentage-point increase in the country’s annual aggregate output. This ispartly a result of the labour reforms introduced since the mid-1990s, whichhave made labour arrangements more rigid and have raised both employmentcosts and the statutory risks involved in offering employment. The Lagosgovernment has acknowledged that there is a need for greater flexibility inlabour regulations. However, perhaps to build bridges with leftist sectors thatmight play a decisive role in the presidential and congressional elections ofDecember 2005, the government is currently pushing through Congress a bill toreform the labour code and labour tribunals introducing stiffer penalties andfurther grounds for penalising employers.

Employment trends('000 unless otherwise indicated)

Labour force UnemployedUnemployment

rate (%)2002 2003 2004 2002 2003 2004 2002 2003 2004

Nov-Jan 5,947 6,003 6,132 476 459 453 8 7.6 7.4

Dec-Feb 5,910 6,025 6,121 492 474 455 8.3 7.9 7.4Jan-Mar 5,913 6,054 6,139 519 495 500 8.8 8.2 8.1Feb-Apr 5,904 6,072 6,161 521 518 538 8.8 8.5 8.7

Mar-May 5,880 6,094 6,159 536 534 581 9.1 8.8 9.4Apr-Jun 5,866 6,066 6140 556 549 590 9.5 9.1 9.6

May-Jul 5,859 6,033 6,097 552 548 589 9.4 9.1 9.7Jun-Aug 5,853 6,021 6,136 563 564 605 9.6 9.4 9.9Jul-Sep 5,877 6,015 6,157 572 563 600 9.7 9.4 9.7

Aug-Oct 5,933 6,036 6,239 569 533 589 9.6 8.8 9.4Sep-Nov 5,976 6,084 - 527 491 - 8.8 8.2 -

Oct-Dec 6,000 6,128 - 469 453 - 7.8 7.4 -

Source: Instituto Nacional de Estadística.

Financial indicators

The banking system was managing the equivalent of US$61bn in assets inOctober 2004, equivalent to 67.2% of GDP. Bank asset growth reached 11.79%year on year and 1.98% month on month (26.5% on an annualised basis) in theperiod. Although it still accounts for only 0.5% of total bank assets, factoring isbooming: it grew by 198% year on year in October. Foreign trade loans rose by27% year on year, to reach 10.1% of bank assets, leasing expanded by 21%, toreach 4.2% of total bank assets, and housing loans rose by 17.6%, to 19.4% ofbank assets, as customers took advantage of record-low interest rates torefinance their mortgages or make new purchases. Growth in commerciallending, which accounts for slightly over half of total bank assets, has beenaccelerating strongly since the second quarter, to 1.84% month on month and7.25% year on year in October. Interbank loans contracted by 17.5% year on year,owing to massive liquidity. The private money measurement M1A, whichincludes money in circulation and sight deposits, increased by 30.5% year onyear in October.

Bank assets and profits arerising strongly

Chile 29


Bank results October 2004a

Total assets(US$ m)

Annual assetgrowth (%)

Market share(% of total

assets)

Capital &reserves(US$ m)

Net earnings(US$ m)

Return oncapital (%)

Banco Santander-Chile (Spain)b 14,245 14.2 23.3 1,354 261.5 23.1Banco de Chilec 10,763 8.7 17.6 849 216.3 31.5Banco del Estado 8,011 10.8 13.1 596 45.1 9.6

Banco de Crédito e Inversionesd 7,228 22.6 11.8 546 126.1 28.1BBVA-Chile (Spain)e 4,667 20.1 7.6 419 45.4 12.8

Corpbanca 3,893 18.9 6.4 528 68.4 16.1Banco del Desarrollof 2,246 6.4 3.7 210 23.4 12.9Scotiabank Sud Americano (Canada) 2,000 27.8 3.3 178 17.7

Banco Securityg 1,908 -0.3 3.1 195 16.2 10.7Banco Bice 1,611 13.0 2.6 169 18.4 13.4

Citibank NA (US) 1,417 -9.4 2.3 407 16.8BankBoston (US) 1,344 5.4 2.2 165 8.2 9.0

Banco Falabella 424 44.4 0.7 62 14.2 27.0ABN Amro Bank-Chile (Netherlands) 272 -32.5 0.4 146 7.3 8.3Dresdner Bank Lateinamerika (Germany) 219 24.8 0.4 77 0.8 -13.2

Total banking system incl other 61,013 11.8 100.0 6,368 935.2 18.2

a All peso figures converted into US dollars at the end-2003 exchange rate of Ps593:US$1. b A subsidiary of Banco Santander Central Hispano;merged with Banco Santiago in August 2002. c Merged with Banco de A. Edwards at the start of 2002. d Merged with Banco Consosur at the startof 2004. e A subsidiary of Banco Bilbao Vizcaya Argentaria; before March 2003 known as BBVA Banco Bhif. f Merged with Banco Sudamerica inOctober 2003. g Acquired the local assets of Dresdner Bank in September 2004.

Source: Superintendencia de Bancos e Instituciones Financieras (SBIF).

The quality of bank portfolios is improving substantially as the economicrecovery strengthens the payments chain. Overdue loans fell to 1.4% of bankassets on aggregate in September 2004, down from 1.8% in September 2003. Atthe same time, bank capitalisation remains steadily on the rise, helped byrapidly rising net profits; at US$935m in the first ten months of 2004, thesepromise to exceed an unprecedented US$1.1bn in 2004 as a whole. The banks’capital and reserves increased by 2.8% year on year in October in real pesoterms, reaching the equivalent of US$6.4bn.

Owing to firm and sustained growth since June, the Indice General de Preciosde Acciones (IGPA), the general share price index of the Bolsa de Comercio deSantiago (BCS), the Santiago Stock Exchange, rose by 22.7% in the first 11 monthsof 2004, to a new historic peak of 156.8. Stockmarket capitalisation reachedUS$110.3bn at the end of November, according to the BCS. The liquidity of thelocal stockmarkets is increasing strongly. Stock trading totalled US$10.4bn in thefirst 11 months of 2004, a rise of 48.3% year on year. The stockmarket’s appetitefor new issues is also unprecedented. The initial public offering by aconstruction group, SalfaCorp, on October 17th was 26 times oversubscribed—anew record—with a demand in excess of US$600m.

Stockmarket indices are at all-time highs

30 Chile


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Sectoral trends

Boosted by free-trade agreements (FTAs) already in operation—most importantlywith the EU and the US—and those likely to come into force in 2005-07 withChina, India and Japan, Chile’s food producers grouped in ChileAlimentosexpect to increase their export revenue from slightly over US$7bn in 2004 toover US$17bn by 2010. This would place Chile among the top ten foodexporting countries. ChileAlimentos is counting on government support topromote the country’s image as a secure source of food items by advertising itsachievements in environmental protection and sanitary conditions, andupgrading regulations and institutional arrangements to help meet the growingdemand for traceability. It estimates that food production accounts for about10.3% of Chile’s GDP at present, and predicts that, in view of the magnitude ofplanned investments, its weight in the economy will rise significantly in thenext decade.

The largest Chilean agroindustrial company, Agrosuper, with a turnover ofUS$830m in 2004, gave a measure of credibility to this ambitious forecast inmid-December by announcing that it will invest US$500m in 2005-09 todevelop a state-of-the-art agricultural and agroindustrial complex in the Huascovalley. It will employ 3,000 people and will double its capacity in fruit, porkand poultry as well as enabling Agrosuper’s diversification into new areas suchas olive oil. Agrosuper is the largest Chilean producer of both pork and poultryand its output—as with other meat producers—is already experiencing stronggrowth. Total meat export increased by 69% year on year in value terms in thefirst ten months of 2004, to US$310m, and by 45.6% in volume terms, to 125,655tonnes. Prospects for 2005 also appear good.

Strong medium-term growthin food exports projected

Chile 31


Meat exports(Jan-Oct 2004)

Volume % change Value % change(tonnes) year on year (US$ m) year on year

Beef 5,822 1.3 14.9 13.3

Poultry 41,197 120.8 75.6 165.7Lamb 5,114 2.2 19.5 20.8

Pork 63,009 27.0 188.2 55.9Other meats & subproducts 10,513 44.0 11.9 129.5Total meat exports 125,655 45.6 310.1 68.9

Source: Oficina de Estudios y Políticas Agrarias.

Exports of salmon and trout rose by 27% year on year in the first ten months of2004, to 276,285 tonnes, yielding export revenue of US$1.1bn, a rise of 26%. Thislooks set to have put Chile at the top of the salmon-producing league in 2004,with a global market share of about 35%, overtaking Norway. Japan absorbed41.6% of the volumes exported, the US 37.1%, the EU 6.9%, Latin America 6.3%,and others 8.1%. The industry association, SalmonChile, expects export revenueto exceed US$1.35bn in the full year, and is counting on an average annualexport growth of about 10% in volume terms in the rest of this decade. Thiswould keep Chile’s share of the world salmon market at around 35%, based onSalmonChile's estimates for trend global demand for salmon and trout, andwould raise annual export revenue to about US$2.5bn by 2010.

Chilean wine export revenue increased by 23% year on year in the first tenmonths of 2004, to US$681m. This was a result of an 18.3% increase in exportvolumes, to 383.4m litres, and a 4.1% increase in the average price, toUS$1.75/litre. The industry—which has increased its exports 15-fold since 1990—expects a rise in export volumes of about 10% in 2005. The 2003 nationalvineyards survey found a rise of 1.4% year on year in the total vineyardsurfaces in the country, to 172,635 ha, of which 110,097 ha was destined forwine, 52,685 ha for table grapes, and 9,853 ha for pisco.

Imports of cars and light commercial vehicles (LCVs) are accelerating strongly.They totalled 18,621 units in October with a cif value of US$143m, representinga 45.9% increase year on year in volume terms and a 51% rise in value terms.Imports volumes rose by 21% year on year, to 122,255 units, in the first tenmonths of 2004; they were up by 30.1% in value terms, at US$994m. Japanremains the main source of automotive imports, and the most dynamic, despitebeing the only significant supplying country that does not enjoy import tariffadvantages, being subject to the full 6% general import tariff rate. Imports ofJapanese cars increased by 80% year on year in October, to 6,139 units, followedby imports from Brazil (up by 64%, to 4,000 units) and from South Korea (up by11.6%, to 3,050).

Sales of new cars and LCVs increased by 22.9% year on year in January-October2004, to 120,234 units, a figure that exceeded sales in any of the previous fivefull years. Sales of new cars and LCVs reached 141,919 units in the 12 months toOctober, and the figure for 2004 will exceed 145,000 units, which will be thehighest since the all-time high of 175,475 units sold in 1997.

Chile overtakes Norway asleading salmon producer

Wine exports should exceedUS$800m in 2004

Automotive sales are booming

32 Chile


Sales of cars and light commercial vehicles (LCVs)Cars LCVs Total

2000 71,499 37,256 108,7552001 64,269 34,062 98,331

2002 71,204 31,312 102,5162003 88,014 31,512 119,526

2004a 90,483 29,751 120,234a January-October.

Source: Asociación Nacional Automotriz de Chile.

Foreign trade and payments

Goods exports rose by 49% in the first 11 months of 2004, to reach US$28.6bn(US$30.5bn in the 12 months to November), and imports rose by 25%, toUS$20.8bn (US$22.3bn in the 12-month period). This yielded an unprecedentedtrade surplus of US$8.2bn in the 12 months to November, nearly triple theUS$2.8bn achieved in the year-earlier period. The boom in export revenue wasspearheaded by copper, export earnings from which rose by 90% year on yearin the first ten months of 2004, to US$11.7bn, helped by strong volume growthand a sharp rise in global copper prices. In the same period, manufacturedexports rose by 24% year on year, to US$9.6bn, and exports of agricultural,forestry and fishing products rose by 14% year on year, to US$2bn.

The country’s export markets remained well diversified, with the Americas andAsia each absorbing 34.4% of total Chilean exports, and Europe and the rest ofthe world absorbing the rest. Within the Americas, Canada and the USaccounted for 17.3% of Chilean exports; in Asia, Japan was the leading market,accounting for 11.4%, followed by China (9.6%), South Korea (5.8%) and Taiwan(3.1%). The EU accounted for 25.3% of the total.

Foreign trade(US$ m; fob)

Exports Imports12-month

trade balance2003 2004 2003 2004 2003 2004

Jan 1,893 2,124 1,628 1,682 2,287 3,191Feb 1,577 2,206 1,300 1,436 2,168 3,684

Mar 1,806 3,003 1,328 1,871 2,352 4,338Apr 1,851 2,775 1,588 1,744 2,183 5,105May 1,787 2,866 1,498 1,845 2,262 5,837

Jun 1,632 2,303 1,422 1,720 2,237 6,209Jul 1,784 2,713 1,595 2,014 2,254 6,719

Aug 1,688 2,783 1,517 1,996 2,690 7,336Sep 1,596 2,454 1,455 2,095 2,869 7,555Oct 1,839 2,770 1,667 2,234 2,714 7,919

Nov 1,711 2,611 1,528 2,127 2,824 8,221Dec 1,883 - 1,505 - 3,015 -


The current-account surplus has swung from a deficit of US$277m in the firstnine months of 2003 to a surplus of US$2.3bn in the first nine months of 2004.

Trade surplus reachesUS$8.2bn

Current account headedtowards record surplus in 2004

Chile 33


The improvement resulted mostly from the trade surplus of US$6.9bn, triple theUS$2.3bn recorded in the first nine months of 2003. At the same time, Chile'sservices deficit fell to US$406m, from US$595m in the first nine months of2003, and its traditional surplus in unilateral transfers rose to US$673m, fromUS$304m. This amply offset the sharp widening of the country’s incomedeficit, which moved from US$2.3bn in the first nine months of 2003 toUS$4.9bn. Profit repatriations by foreign investors from US$2bn to US$4.8bn, inline with rapidly increasing commodity prices and export revenue.

The current-account surplus was accompanied by a large capital-account deficit,keeping net international reserves broadly stable over the period. The portfolioinvestment account showed a net outflow of US$3bn in the first nine monthsof 2004. This is down moderately from US$3.4bn in the year-earlier period, butstill large by historical standards, reflecting the continued portfoliodiversification abroad by the Administracion de Fondos de Pensiones (AFPs),private pension funds. Foreign direct investment (FDI) inflows reached US$3bnin the third quarter of 2004, owing mostly to a US$2.5bn investment by Spain’sEndesa in electricity generation. This yielded a total of US$4.9bn in net inwardFDI in the first nine months of 2004, which included US$3.4bn in reinvestedprofits and was the highest level of FDI inflows since 1999. Net FDI outflows byChilean entities reached US$579m in the first nine months of 2004, down fromUS$892m in the year-earlier period.

Balance of payments(US$ m)

2003 20043 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Current account -380.5 -316.8 784.2 1,138.8 206.9 Trade balance 499.6 731.3 2,343.8 2,633.9 1,861.80 Merchandise exports 5,067.0 5,432.5 7,332.3 7,943.9 7,950.00 Merchandise imports -4,567.4 -4,701.2 -4,988.5 -5,310.0 -6,088.10 Services balance -187.9 -171.4 -132.9 -171.5 -159 Credits 1,227.4 1,228.1 1,450.1 1,360.3 1,481.50 Debits -1,415.3 -1,399.5 -1,583.0 -1,531.7 -1,640.50 Income balance -805.3 -1,010.6 -1,536.6 -1,674.7 -1,709.30 Net transfers 113.0 133.9 110.0 351.1 213.4Capital & financial account 273.8 536.6 -662.7 -1,212.8 282.6 Direct investment 326.4 240.0 1,408.2 161.9 2,795.50 Outflows -420.3 -503.6 -231.9 -250.9 -199.5 Inflows 746.6 743.6 1,640.1 412.8 2,995.00 Portfolio investment -1,513.7 -1,244.4 -586.7 -1,722.3 -1,232.90 Outflows -1,601.0 -1,911.4 -1,523.8 -1,485.7 -721.8 Inflows 87.3 667.0 937.1 -286.6 -511.1 Financial derivatives 70.3 92.9 140.7 -48.7 -109.7 Other investments 1,446.0 1,333.6 -1,538.7 470.8 -1,306.40 Reserve assets -56.2 114.5 -91.3 -24.5 136.2

Errors & omissions 106.7 -219.8 -121.5 74.0 -489.5Overall balance of payments 56.2 -114.5 91.3 24.5 -136.2


FDI inflows in 2004 set to behighest since 1999

34 Chile


According to the Banco Central de Chile (the Central Bank), Chile’s foreign debtrose by 3.2%—well below the rate of economic growth—between end-2003 andOctober 2004, to US$44.8bn. The public sector’s foreign debt increased by 5.2%,to US$9.8bn, while the private sector’s rose by 2.7%, to US$35bn. In terms ofmaturity distribution, the medium- and long-term debt contracted by 0.4%, toUS$35.8bn, whereas the short-term debt, measured by residual maturity,increased by 20%, to US$9bn. The latter is mostly a reflection of the substantialamount of medium- and long-term loans contracted by the private sector sincethe mid-1990s that are coming to maturity in 2005. The private sector’s short-term foreign debt rose by US$2.2bn, or 36%, in the first ten months of 2004, toreach US$8.2bn by end-October, whereas its medium- and long-term debt fellby US$1.3bn in the same period. The public sector’s short-term debt fell byUS$651m, to US$785m.

Foreign debt growth wasmoderate in Jan-Oct 2004

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