Chile Business Forecast Report Q1 2009

New Year, New Challenges
As Chile enters 2009, many changes can be expected. While the country's economy is leaving behind a handful of economic troubles faced in early 2008, a whole set of new challenges are waiting. Indeed, it seems that global financial market meltdown, unstable credit markets and slowing economic activity will have their fair share of negative impact on the Chilean economy. In addition, the country seems to be carrying a precarious inflationary outlook into the new year. Although we do not believe that this problem will persist all the way through to 2010, headline inflation of almost 10% yearonyear in early Q408 implies that there will be limited room for policy responses to deal with the looming economic crisis. In the Chile Business Forecast Report Q109, we examine to what extent the Chilean economy is prepared to withstand the oncoming economic headwinds and what the likely longterm impact of the current crisis will be on the country. Similarly, we hold to our view that political change may be on the horizon following the local elections in October.

Despite winning council seat majority in Chile's municipal elections on October 26, the ruling Concertacin de Partidos por la Democracia (CPD, Concertacin) coalition failed to avert our growing belief that the centreleft bloc, which has been at the helm of Chilean politics since the Augusto Pinochet era 18 years ago, will be replaced by a centreright government next year. Concertacin garnered 45% of the vote for councillorships against the centreright opposition Alianza por Chile (APC)'s 36%. However, APC secured a slight majority in the race for mayoral posts in the poll (around 40% including the borough of Santiago, against 38% for Concertacin with some 95% of votes counted), suggesting that the opposition will enter the 2009 presidential election on the front foot.

The Chilean economy continues to face troubling times, with worries about lower output levels as a result of power shortages and record high global energy prices being replaced with concerns about financial stability, dwindling investor confidence and deteriorating terms of trade. On top of the growing number of risks facing the economy, such as more restrictive credit conditions for businesses and consumers and falling external demand for Chile's commodity exports, high inflation levels continue to haunt the economy. Although we expect slowing economic activity and tighter lending to see inflation levels decline by early 2009, monetary policymakers have restricted room to ease credit conditions and stimulate demand by lowering interest rates, in light of 14year high headline inflation of 9.9% yoy in October.

Chile's potential to generate renewable power has been highlighted by a number of large companies investing in the country. In October, Pacific Hydro, an Australian renewable energy provider, announced that it was looking to invest US$1.5bn in wind and hydropower in Chile and Brazil, adding up to 300MW of wind power in Chile. The CEO of Mainstream Renewable Power, an Irish renewable energy company, stated that the company had chosen Chile as its key emerging market as policymakers have acknowledged renewable power's potential. Chile ranks 17 out of 167 countries in BMI's business environment rankings.