Fundamentals of the Fundamentals of the Chilean EconomyChilean Economy

Central Bank of ChileCentral Bank of ChileOctober 2002October 2002

2

Fundamentals of the Chilean Fundamentals of the Chilean EconomyEconomy

Macroeconomic Macroeconomic andand

Financial Financial StabilityStability

External External Sector Sector

StrengthStrength

Microeconomic Microeconomic & Institutional & Institutional

StrengthStrength

Financial Financial SystemSystemStrengthStrength

Monetary Monetary StrengthStrength

FiscalFiscalStrengthStrength

Monetary StrengthMonetary Strength

4

Chile: Nominal Exchange Rate (CLP/USD)

250250

350350

450450

550550

650650

750750

9090 9191 9292 9393 9494 9595 9696 9797 9898 9999 0000 0101 0202

spot

central parity

ceiling

floor

5

Chile: Monetary Policy Interest Chile: Monetary Policy Interest RateRate (%)(%)

* Before June 1995: PRBC 90 days rate

Nominal Int. RateCPI-adjusted Int. Rate

CPI-adjusted MPR

Overnight Rate *

-0,5

1,5

3,5

5,5

7,5

9,5

11,5

90 91 92 93 94 95 96 97 98 99 00 01 02 2,5

3,5

4,5

5,5

6,5

7,5

8,5

9,5

10,5

11,5

12,5

Nominal MPR

6

Chile: Real Exchange Rate (index, 1986=100)

7070

8080

9090

100100

110110

120120

8686 8787 8888 8989 9090 9191 9292 9393 9494 9595 9696 9797 9898 9999 0000 0101 0202

7

Chile: Long-Term Int. Rate: Central Chile: Long-Term Int. Rate: Central Bank Instruments Bank Instruments (%) (%) CPI-adjustedCPI-adjusted

2

3

4

5

6

7

8

9

10

Sept-02

Oct-92

Abr-93

Oct-93

Abr-94

Oct-94

Abr-95

Oct-95

Abr-96

Oct-96

Abr-97

Oct-97

Abr-98

Oct-98

Abr-99

Oct-99

Abr-00

Oct-00

Abr-01

Oct-01

Abr-02

PRC 8 years

PRC 20 years

Fiscal StrengthFiscal Strength

9

Fiscal Balance: Average 1992-2001

(% GDP)

-10-10

-8-8

-6-6

-4-4

-2-2

00

22

Argent.Argent.

BrazilBrazil

Chile

ColombiaColombia

Czech Rep.Czech Rep.

HungaryHungary

IsraelIsrael

KoreaKorea

MalaysiaMalaysia

MexicoMexico

PeruPeru

PolandPoland

ThailandThailand

Latin America CountriesLatin America Countries

Other Emerging EconomiesOther Emerging Economies

10

Public Debt 2001 (% GDP; Source: Moody´s and Ministry of Finance)

0

20

40

60

80

100

120

Argent.Brazil

ColombiaMexico

Peru

Chile

S. KoreaMalaysia

ThailandPoland

Czech Rep.

Hungary

Israel

Latin American CountriesOther Emerging Economies

11

Chile: Fiscal BalanceChile: Fiscal Balance(% GDP)(% GDP)

-2-2

-1-1

00

11

22

33

9090 9191 9292 9393 9494 9595 9696 9797 9898 9999 0000 0101 02(e)02(e)

structural

actual

Financial System Financial System StrengthStrength

13

Chile: Banking Solvency Indicators

(%)

0

2

4

6

8

10

12

14

94 95 96 97 98 99 00 01 02 (jun)

Basel IndicatorNon Performaning Loans

minimumminimumrequiredrequired

14

ArgentinaArgentinaThailandThailand

South KoreaSouth KoreaJapanJapan

MalaysiaMalaysiaMexicoMexicoBrazilBrazilChileChile

Hong KongHong KongItalyItaly

AustraliaAustraliaGermanyGermany

FranceFranceUKUKUSUS

SpainSpainNetherlandsNetherlands

(15, amount 76)(15, amount 76)

Ranking of Banking StrengthRanking of Banking Strength(Source: Moody´s, july 2002)(Source: Moody´s, july 2002)

stronger

less strong

15

Chile: Financial Savings by Institutional Investors (% GDP)

00

2020

4040

6060

8080

100100

19941994 19951995 19961996 19971997 19981998 19991999 20002000 20012001

pension funds

insurance companies

mutual funds

16

Chile: Domestic Corporate Bond Market (USD billions)

(total outstanding)(total outstanding) (Issuance)(Issuance)

00

11

22

33

44

55

66

77

19941994 19951995 19961996 19971997 19981998 19991999 20002000 200120010,00,0

0,50,5

1,01,0

1,51,5

2,02,0

2,52,5

3,03,0

outstanding

issuance

External Sector StrengthExternal Sector Strength

18

Chile: Total Exports VolumeChile: Total Exports Volume(index 1990=100)(index 1990=100)

00

5050

100100

150150

200200

250250

300300

6060 6565 7070 7575 8080 8585 9090 9595 0000 0202

19

Chile: Exports by SectorChile: Exports by Sector(% total exports)(% total exports)

1960196020012001

Mining

Industry

Agriculture

19801980

20

Chile: Distribution of Merchandise Chile: Distribution of Merchandise ExportsExports(January-August 2002)(January-August 2002)

USA: 20%USA: 20%

Latam: 21%Latam: 21%

EU: 20%EU: 20%

UK: 5%UK: 5%

China: 7%China: 7%

Japan: 11%Japan: 11%

Rest of Asia: 12%Rest of Asia: 12%

Others: 4%Others: 4%

21

Chile: Current Account Deficit (% GDP)

00

11

22

33

44

55

66

9090 9191 9292 9393 9494 9595 9696 9797 9898 9999 0000 0101 0202 0303 0404

forecast

22

Chile: Cumulative Investment Abroad (% GDP)

-

5

10

15

20

25

30

35

40

45

50

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Jun-02

23

Net International ReservesNet International Reserves (% Short Term Debt + Amortizations)(% Short Term Debt + Amortizations)

0

50

100

150

200

250

300

350

Arg

en

tin

a

Bra

zil

Colo

mb

ia

Mexic

o

Peru

Ch

ile

Kore

a

Mala

ysia

Th

ail

an

d

Pola

nd

Cze

ch

Rep

.

Hu

ng

ary

Latin American CountriesInvestment Grade Countries

24

Sovereign SpreadsSovereign Spreads (basis points, September 2002)(basis points, September 2002)

0

6,000

7,000

Argent.Brazil

Colom.Mexico

Peru

Chile

S. Korea

MalaysiaThailand

Poland

Hungary

Israel

500

1000

1500

Latin American CountriesInvestment Grade Countries

Microeconomic & Microeconomic & Institutional StrengthInstitutional Strength

26

ArgentinaArgentinaMexicoMexicoBrazilBrazil

ThailandThailandItalyItaly

JapanJapanCzech Rep.Czech Rep.

S.KoreaS.KoreaMalaysiaMalaysia

SpainSpainFranceFrance

ChileChileU. KingdomU. Kingdom

GermanyGermanyAustraliaAustralia

Hong KongHong KongUSAUSA

(19, amount 49)(19, amount 49)

Competitiviness Ranking 2002Competitiviness Ranking 2002(Source: International Institute for Management (Source: International Institute for Management Development)Development)

+ compet.

- compet.

27

BrazilBrazilMalaysiaMalaysia

MexicoMexicoFranceFranceSpainSpainItalyItaly

S.KoreaS.KoreaArgentinaArgentina

Czech Rep.Czech Rep.ThailandThailandGermanyGermany

ChileChileAustraliaAustralia

UKUKUSUS

Hong KongHong Kong

(9, amount 156)(9, amount 156)

Economic Freedom Index 2001 (Source: The Heritage Foundation)

+ freedom

-freedom

28

ThailandThailandArgentinaArgentina

MexicoMexicoRep. ChecaRep. Checa

BrazilBrazilKoreaKorea

MalaysiaMalaysiaItalyItaly

FranceFranceSpainSpain

GermanyGermanyChileChileUSAUSA

U. KingdomU. KingdomAustraliaAustralia

(17, amount 102)(17, amount 102)

Corruption Index Corruption Index (June 2001; Source: Transparency International)(June 2001; Source: Transparency International)

- corrupt.

+ corrupt.

Macroeconomic StabilityMacroeconomic Stability

30

Chile: GDP, 1960-2002Chile: GDP, 1960-2002(billions of 1996 Chilean pesos)(billions of 1996 Chilean pesos)

50005000

1000010000

1500015000

2000020000

2500025000

3000030000

3500035000

4000040000

19601960 19701970 19801980 19901990 2002(e)2002(e)

31

Chile: GDP GrowthChile: GDP Growth(Annual %)(Annual %)

-2-2

00

22

44

66

88

1010

1212

1414

8585 8989 9393 9797 0101

average 1985-2001

32

Chile: Inflation and TargetsChile: Inflation and Targets(annual %)(annual %)

00

55

1010

1515

2020

2525

3030

3535

90 90 91 91 92 92 93 93 94 94 95 95 96 96 97 97 98 98 99 99 0000 0101 0202

Recent Structural Recent Structural ReformsReforms

34

Bilateral and Multilateral Negotiations:

Further Trade IntegrationFurther Trade Integration

General Import Tariff (%)

0

2

4

6

8

10

12

14

16

90 91 92 93 94 95 96 97 98 99 00 01 02 03

• Free trade agreement with EU

• Currently negotiation Free Trade agreements with the US, EFTA, Korea

• WTO, FTAA

35

Capital Markets Reforms: Central Capital Markets Reforms: Central BankBank• Elimination of all remaning foreign exhange restrictions

• Substitution of nominal MPR for CPI-adjusted MPR

• Streamlining of debt issued by the Central Bank

36

Capital Markets Reforms: legal Capital Markets Reforms: legal changeschanges• New corporate governance and tender offer regulation

• Elimination of capital gains tax on liquid stocks and reduction of withholding tax on interest from 35 to 4% on local bonds for foreign investors

• Increased flexibility for allocation of personal savings

How to Reduce Growth How to Reduce Growth Volatility?Volatility?

38

GDP GrowthGDP Growth(Annual %)(Annual %)

-30-30

-20-20

-10-10

00

1010

2020

3030

19001900 19201920 19401940 19601960 19801980 20012001

39

Terms of TradeTerms of Trade(index 1990=100)(index 1990=100)

7070

8080

9090

100100

110110

120120

8080 8282 8484 8686 8888 9090 9292 9494 9696 9898 0000 0202 0404

40

Chile: Exports by SectorChile: Exports by Sector(% total exports)(% total exports)

1960196020012001

Mining

Industry

Agriculture

19801980

41

How to Reduce Growth Volatility?How to Reduce Growth Volatility?

• Fiscal policy based on rules.

• Inflation-targeting monetary policy (nominal anchor)

• Flexible exchange rate policy (interest rate stabilization)

42

Inflation and TargetsInflation and Targets(annual %)(annual %)

00

55

1010

1515

2020

2525

3030

3535

90 90 91 91 92 92 93 93 94 94 95 95 96 96 97 97 98 98 99 99 0000 0101 0202

43

How to Reduce Growth Volatility?How to Reduce Growth Volatility?

• Copper and oil compesatory funds

• Saving guaranteed by Pension Funds

• Banking and no banking finance

Other Factors:

44

Chile: Financial Savings by Institutional Investors (% GDP)

00

2020

4040

6060

8080

100100

19941994 19951995 19961996 19971997 19981998 19991999 20002000 20012001

pension funds

insurance companies

mutual funds

45

Chile: Domestic Corporate Bond Market (USD billions)

(total outstanding)(total outstanding) (Issuance)(Issuance)

00

11

22

33

44

55

66

77

19941994 19951995 19961996 19971997 19981998 19991999 20002000 200120010,00,0

0,50,5

1,01,0

1,51,5

2,02,0

2,52,5

3,03,0

outstanding

issuance

46

Fundamentals of the Chilean Fundamentals of the Chilean EconomyEconomy

Macroeconomic Macroeconomic andand

Financial Financial StabilityStability

External External Sector Sector

StrengthStrength

Microeconomic Microeconomic & Institutional & Institutional

StrengthStrength

Financial Financial SystemSystemStrengthStrength

Monetary Monetary StrengthStrength

FiscalFiscalStrengthStrength

Fundamentals of the Fundamentals of the Chilean EconomyChilean Economy

Central Bank of ChileCentral Bank of ChileOctober 2002October 2002