Chile Business Forecast Report Q4 2007

Chile Starts To Heat Up

In line with the view we have been promoting for some time now, the Chilean economy has continued to re-accelerate, after experiencing a weak performance towards the end of 2006. We expect real GDP growth to come in at 5.9% this year, which is considerably above the 4.0% registered in 2006. Beyond this, we still expect to see a slight moderation in economic activity over the forecast period. Chile's political backdrop continues to be very stable, despite a continued decline in President Michelle Bachelet's popularity. Indeed, the transportation problems in the country's capital, combined with protests over wages and general discontent with the levels of income inequalities will continue to weigh on the government. On a more positive note, Chile continues to set the example for Latin American countries when it comes to our business environment ratings and has recently made efforts to forge stronger trade ties with Asia and the rest of Latin America. That said, a cold winter and an energy squeeze from Argentina could weigh on the business environment.

While the Transantiago transport issue continues to be a central theme in the political sphere, and has thus weighed on President Michelle Bachelet's popularity, other political developments have also come to the forefront of the political debate. According to a July poll conducted by CERC, the government's approval rating remained stable from the month before at 51%. However its disapproval rating did rise to a record high of 41%. President Bachelet's falling popularity is largely the result of the popular dissatisfaction with Transantiago, however, growing discontent amongst workers regarding the high levels of income inequality could prove to be Bachelet's next major political challenge. Furthermore, a rise in political tensions with neighbouring Peru may also be another obstacle for the Bachelet government.

The Chilean economy continued to perform well in Q207, with a stronger-than expected estimated growth rate of 5.9% y-o-y. This outturn was not only a substantial improvement from the 4.3% yo- y registered in Q406, when the economy looked as if it was on a downward trajectory, but also well above the 4.0% y-o-y recorded in Q206. However, while we have remained quite upbeat in regard to real GDP growth, we are concerned whether economic activity is sufficiently robust to withstand the impact of various interest rate hikes over the remainder of the year. Indeed, while monetary policy was supportive of higher growth rates at the start of 2007, when the BCC cut rates from 5.25% to 5.00% in January, the interest rate bias has now changed quite significantly to the upside.

The Chilean government has continued to push forward with its efforts to improve its business environment and has recently taken part in various international meetings with its Latin neighbours.

Peru and Chile have recently discussed forming an alliance between the two countries' businesses sectors in order to help tap into Asian markets. Although success on this front could be clouded by the rise in political tensions between both countries. Energy shortages from Argentina, may also adversely effect Chile's industrial sector, although in the long run it will force the government to diversify its energy suppliers, a task it has already embarked on, with talks with Brazil and Bolivia already underway.