Chile Business Forecast Report Q2 2009

Publication Date	March 2009
Publisher	Business Monitor
Product Type	Report
Pages	74
ISBN Number	1745-0500
Product Code	BMI03517

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Summary

Ample Room To Prevent A Recession

These are turbulent days for Chile, as economic activity is coming to a virtual standstill in the light of a sharply deteriorating external climate, and with the government fast heading towards the presidential election at the end of the year, where we currently envision a change of government.

The Chilean authorities have made it clear that they will seek to avoid a recession at any cost.

The good news, in our view, is that policymakers have ample resources at their disposal to meet their promise. Indeed, we believe that Chile is probably among the best positioned economies in Latin America to avoid negative growth this year, and we feel that aggressively lowering interest rates, and injecting capital into the economy will play a vital role. That being said, however, in the Q209 Chile Business Forecast Report we also examine the general vulnerabilities of the economy, such as its high reliance on copper exports, and the shortcomings of the proposed fiscal stimulus package. To be sure, we maintain that there are significant downside risks to our outlook, and that a full-year recession cannot be completely ruled out.

The ruling centre-left Concertacin de Partidos por la Democraca (CPD) coalition appears to have chosen its nominee for the presidential election in December. The coalition's major parties, the Partido Socialista (PS) and the Partido por la Democracia (PPD), have endorsed Partido Demcrata Cristiano (PDC) candidate and former Chilean president (1994-2000) Eduardo Frei. One party in the CPD coalition, however, has refused to jump on the bandwagon and throw its weight behind the more moderate Frei. The smallest and most left-wing party in the Concertacin coalition, the Partido Radical Social Demcrata (PRSD), continues to push for its own candidate, Senator Jos Antonio Gmez. This means that as matters currently stand, Eduardo Frei will not be able to avoid the CPD primaries scheduled to begin in early April.

We believe that the proposed US$4bn stimulus will help businesses deal with refinancing obligations, reduce tax burdens and improve labour market flexibility, on top of providing long-term structural incentives to improve the average skills of employees. These developments are likely to play an important role in enhancing productivity and helping economic activity to remain in positive growth territory. Nevertheless, we are slightly more apprehensive in the potential to create 60mn new jobs in the near term, not to mention the ability of the plan to ensure 2-3% real GDP growth this year.

Moreover, given the heavy focus on public spending on infrastructure, long-term job creation is hardly guaranteed, as many of the jobs required for road works, irrigation and housing projects, may become obsolete at the time of completion.

Chile maintains one of the most attractive investment climates in Latin America We have seen an increase in foreign portfolio investment flows into Chile towards the latter stages of 2008, which in the current economic environment reflects the country's solid financial and economic fundamentals.

Moreover, BMI maintains a cautiously optimistic medium-term view on the Chilean peso, as we are seeing a shift in investor sentiment towards perceiving Latin America's fifth-largest economy as a relative save haven of the region. Chile's 5-Year Credit Default Swap contract continues to trade comfortably inside all of its peers, reflecting the low perception of credit risk, and the country's business environment score of 71.2 is still at the top of Latin America's league table.

Content

Executive Summary
- Ample Room To Prevent A Recession
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- New Leftist Bloc Spells Trouble For CPD
- Although the endorsement of former Chilean president, Eduardo Frei, by most major Concertacin coalition parties
- means the nominee can focus on December's presidential election, we believe that mounting divisions within the
- Partido Socialista and the formation of a new left-wing bloc may cost the ruling alliance the presidency.
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Fiscal Stimulus To Keep Economy Afloat
- The sharp deterioration in economic activity has prompted us to revise our 2009 real GDP growth forecast to 0.9%
- from 1.8%.
- Fiscal Policy
- Stimulus Package: The Silver Lining
- Chile's impressive public finances in recent years has enabled the government to put particular emphasis on
- countercyclical fiscal policy to stimulate economic growth and stabilise the labour market.
- Monetary Policy
- BCC To Take No Chances
- A sharper-than-expected decline in economic activity and the rapid slowdown in inflation in recent months have seen
- the Chilean central bank aggressively loosen its monetary policy to counter the deteriorating macroeconomic outlook.
- Balance Of Payments
- Financial Account To The Rescue
- Despite our sharply deteriorating current account outlook in Chile this year, we are not becoming alarmist as a result
- of a generally upbeat view on the country's financial account dynamics.
- Sovereign Risk Ratings
Chapter 3: 10-Year Forecast
- The Chilean Economy To 2018
- A Strong Case For Steady Progress
- A stable political outlook and sound economic fundamentals position Chile for steady economic progress, and underpin
- our view that Chile's economy will head towards developed state status by 2018.
Chapter 4: Special Report
- China
- A Seismic Upheaval In 2009?
- One of the biggest - and least discussed - 'wild cards' that could rear its head in 2009 is dramatic political upheaval
- in China.
- United States
- Europe
- Big Trouble For European Banks In 2009
- The deteriorating global macroeconomic outlook, high levels of leverage, and a broken business model will combine to
- spell trouble for the financial services sector in 2009.
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 6: Key Sectors
- IT
- Food & Drink
- Global
- Economic Activity
- Monetary Policy
- Commodities
List of Tables
- Table: Political Overview
- Table: ECONOMIC ACTIVITY
- Table: FISCAL POLICY
- Table: MONETARY POLICY
- Table: BALANCE OF PAYMENTS
- Table: Lon g-Term Macro economic Forecasts
- Table: Banks' Leverage Ratios
- Table: Assets As % of Home Country GDP
- Table: Assets As % of Home Country GDP When Euro zone Is Considered 'Home Country'
- Table: Exposure As % of Total Exposure To Region
- Table: Banks' Foreign Exposure (US$ mn)
- Table: Exposure As % of National GDP
- Table: BMI BUSINESS AND OPERATIONAL RISK RATINGS
- Table: BMI LEGAL FRAMEWORK RATINGS
- Table: Lat in America Annual FDI Inflows
- Table: BMI TRADE RATINGS
- Table: TOP EXPORT DESTINATIONS
- Table: Chile's IT Industry, 2006-2013 (US$mn unless otherwise stat ed)
- Table: Chile Food Consumption Indicators - Historical Data & Forecasts
- Table: Global Assumptions
- Table: GLOBAL AND REGIONAL REAL GDP GROWTH, % chg y-o-y
- Table: Developed States, Real GDP Growth Forecasts
- Table: Emerging Markets, Real GDP Growth Forecasts
- Table: DEVELOPED MARKET EXCH ANGE RATES
- Table: EMERGING MARKET EXCH ANGE RATES