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    Chile Forecast Chile Forecast Document Transcript

    • Country Forecast Chile August 2008 The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom
    • The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For 60 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 26 Red Lion Square The Economist Building 60/F, Central Plaza London 111 West 57th Street 18 Harbour Road WC1R 4HQ New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7576 8000 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Fax: (44.20) 7576 8500 Fax: (1.212) 586 0248 Fax: (852) 2802 7638 E-mail: london@eiu.com E-mail: newyork@eiu.com E-mail: hongkong@eiu.com Website: www.eiu.com Electronic delivery This publication can be viewed by subscribing online at www.store.eiu.com Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office Copyright © 2008 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN 0966-9310 Symbols for tables “n/a” means not available; “–” means not applicable Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.
    • Chile 1 Contents 2 Chile—highlights 2 Political outlook 2 Demographic outlook 2 Business environment outlook 3 Economic outlook 3 Market opportunities 3 Long-term outlook 4 Fact sheet 5 Political forecast 5 Political forces at a glance 5 Political stability 6 Political and institutional effectiveness 7 Election watch 8 International relations 10 Demographic assumptions 12 Policy and business outlook 13 Macroeconomic environment 17 Policy towards private enterprise and competition 17 Policy towards foreign investment 18 Foreign trade and exchange controls 19 Taxes 19 Financing 20 The labour market 21 Infrastructure 22 Economic forecast 22 International assumptions 23 Economic growth 26 Wage and price inflation 27 Exchange rates 27 External sector 29 External debt 31 Market opportunities 31 Market outlook 34 Long-term outlook 34 The long-term outlook 39 Data summary 45 Data sources and definitions 46 Guide to the business rankings model 47 Indicator scores in the business rankings model Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 2 Chile Chile—highlights Political outlook • The president, Michelle Bachelet of the centre-left Concertación de Partidos por la Democracia (Concertación) coalition, will not be eligible to stand for re- election in December 2009. At present, Sebastián Piñera of the centre-right opposition Alianza por Chile (Alianza) coalition is favourite to win the presidency, which would end 20 years of Concertación rule. Regardless of the election result, Chile will remain politically stable, with an approach to politics that is mostly pragmatic and co-operative. Although the Economist Intelligence Unit expects Chile to remain among the most stable countries in the region, tensions within, as well as between, the two dominant coalitions are increasing. There is public trust in Chile’s democratic institutions, and a smooth transition of power can be expected in 2010. In addition, with broad policy consensus we are confident that policy continuity will be maintained in the approach to, and after, the presidential and congressional elections of December 2009. Demographic outlook Population (m) 2002 2007 2012 Total 15.7 16.6 17.4 Male 7.8 8.2 8.6 Female 7.9 8.4 8.8 Period averages (%) 2003-07 2008-12 Population growth 1.1 1.0 Working-age population growth 1.6 1.2 Labour force growth 2.6 1.7 • At 16.6m Chile has a small population, which is growing at a slower rate than most of its regional neighbours. It also has an older demographic profile than most, with those aged 65 and over now accounting for 8.5% of the total population. The labour force is forecast to grow at an annual average 1.7% in 2008-12. Health indicators are comparable with those in OECD economies, and will continue to improve owing to the recent introduction of a universal healthcare system. Business environment outlook Value of indexa Global rankb Regional rank c 2003-07 2008-12 2003-07 2008-12 2003-07 2008-12 7.83 7.97 19 20 1 1 a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela. • Chile was the most attractive business location in Latin America in the historical period (2003-07) and will remain so in the forecast period (2008-12). Chile’s strengths will remain a commitment to free enterprise and competition, a very open foreign investment regime (for which it ranks third in the world in the forecast period), its strong fiscal position, sophisticated capital markets and growing network of free-trade agreements (FTAs). However, several factors will weigh on Chile’s attractiveness as a business location, principally rigidities in labour legislation and deficiencies in average education levels. Structurally, Chile’s score suffers from the small size of its domestic market. This is mitigated to an extent by its network of FTAs that means that over 85% of Chile’s trade is now conducted on a preferential basis. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 3 Economic outlook 2007 2008 2009 2010 2011 2012 Real GDP growth (%) 5.1 3.6 3.8 4.4 4.4 4.3 Consumer price inflation (av, %) 4.4 8.4 6.2 3.7 3.1 3.0 Budget balance (% of GDP) 8.8 8.7 4.9 1.8 1.2 1.1 Current-account balance (% of GDP) 4.4 -0.1 -0.7 -2.7 -2.0 -1.4 Money market rate (av; %) 6.0 7.1 6.3 5.6 5.5 5.5 Exchange rate Ps:US$ (av) 522.5 491.0 559.7 586.7 601.1 615.7 • GDP is forecast to grow at an annual average of 4.1% in 2008-12, below the rate of 5% posted in 2003-07. Domestic demand will drive growth, with strong investment growth offsetting a net negative contribution from foreign trade. Investment will be strongest in mining, infrastructure, energy, forestry, telecommunications and agro-industry. Although set to ease from the highs of 2005-08, continued high copper prices will support fiscal surpluses. After exceeding its 3% target (plus or minus 1 percentage point) in 2007-09, inflation will return to target in 2010-12. The current account will move into deficit in 2008, owing to narrowing trade surpluses and higher income deficits. Market opportunities 2007 2008 2009 2010 2011 2012 GDP (US$ bn at market exchange rates) 163.9 194.1 183.5 186.0 194.6 204.1 GDP per head (US$ at market exchange rates) 9,876 11,576 10,839 10,879 11,279 11,726 Personal disposable income (US$ bn) 77.3 89.5 78.5 77.4 79.3 81.2 Household consumption (US$ bn) 89.6 105.3 98.6 99.9 103.5 106.9 Household consumption per head (US$) 5,400 6,280 5,820 5,840 6,000 6,140 • Chile has a relatively small market, with a population of 16.6m in 2007, and GDP per head of US$9,876. It is the most stable Latin American economy, owing to decades of sound monetary and fiscal policies; together with pro- market microeconomic policies, this has turned it into the fastest-growing economy in the region in the past three decades. There remain large income inequalities among the population, but these are now starting to even out and we forecast continued improvements in poverty and equality indicators. Long-term outlook 2008-10 2011-20 2021-30 2008-30 Growth and productivity (% change; annual av) Growth of real GDP per head 2.9 3.7 3.5 3.5 Growth of real GDP 3.9 4.4 4.0 4.2 Labour productivity growth 1.6 3.7 3.7 3.4 • There is consensus on the maintenance of a liberal market economy and the need to pursue prudent monetary and fiscal policies, which will provide a basis for continued steady long-term economic growth. A wide network of bilateral FTAs has further helped Chile to attract foreign direct investment (FDI), diversify its economy and offset the small size of its own market. Structural reform, through both deregulation and more efficient regulatory regimes, will strengthen Chile’s position as one of the region’s leading investment locations. We forecast that average annual GDP growth will reach 4.4% in 2011-20, moderating to 4% in 2021-30. The capital stock will continue to grow and investment will rise as a share of GDP. As growth in the working age population slows, the increase in the amount of labour will slow and growth will become more dependent on productivity gains. Editors: Martin Pickering (editor); Robert Wood (consulting editor) Editorial closing date: August 3rd 2008 All queries: Tel: (44.20) 7576 8000 E-mail: london@eiu.com Next report: Full schedule on www.eiu.com/schedule Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 4 Chile Fact sheet Annual data 2007 a Historical averages (%) 2003-07 Population (m) 16.6 Population growth 1.1 GDP (US$ bn; market exchange rate) 163.9 b Real GDP growth 5.0 GDP (US$ bn; purchasing power parity) 230.6 b Real domestic demand growth 7.4 GDP per head (US$; market exchange rate) 9,876 Inflation 2.9 GDP per head (US$; purchasing power parity) 13,896 Current-account balance (% of GDP) 2.3 Exchange rate (av) Ps:US$ 522.5 b FDI inflows (% of GDP) 6.6 a Economist Intelligence Unit estimates. b Actual. Background: In the December 1988 referendum, mandated under the 1980 constitution, the then military ruler, Augusto Pinochet, failed to obtain the majority that would have enabled him to remain in office for a further eight years. Democratic presidential and congressional elections were held in December 1989, when the candidate of the centre-left coalition, Concertación de Partidos por la Democracia (Concertación), Patricio Aylwin, was elected president for four years. Concertación candidates have won the three subsequent presidential elections, the latest being Michelle Bachelet of the Partido Socialista (PS), who took office in March 2006 for a four-year term. Political structure: The political system is presidential, with a bicameral legislature that comprises a 38-seat Senate (the upper house) and a 120-seat Chamber of Deputies (the lower house). The constitutional presidential term is four years and immediate re-election is not allowed. The judiciary is nominally independent, but in practice the executive exerts influence through the nomination of temporary judges and the control of promotions to the Supreme Court. Monetary policy is in the hands of an autonomous Central Bank. Chile has 13 regions, 51 provinces, and 343 municipalities. Policy issues: There is strong consensus on the desire to deepen integration into the world economy and maintain a liberal market economy and prudent fiscal and monetary policies. Policy differences between the two major coalitions tend to be a matter of degree rather than substance. The most heated differences centre on the labour regime and the electoral system. A major reform is under way to improve the transparency and efficiency of the civil service. The public healthcare and education systems have received substantial additional resources since 1990, with good improvement in healthcare but only modest improvements in education. Taxation: Corporate income tax is paid in two stages. Declared profit is subject to a 17% first-category income tax (FCIT). When profit is distributed to shareholders or partners, companies pay 35%, minus the FCIT credit. Tax on dividends and interest payments to non-banks is levied at 35%. Royalties and fees transferred abroad are subject to a withholding tax of 20%. The value-added tax (VAT) rate is 19%. Foreign trade: Chile!s general import tariff rate is 6%, but its trade-weighted effective average tariff rate is below 2%, owing to tariff preferences granted through trade accords, most importantly free-trade agreements (FTAs) with the EU, the US, Canada, Mexico, South Korea, China and Japan. In 2007 exports reached US$68bn and imports US$44bn in fob terms. Major exports 2007 % of total Major imports 2007 % of total Copper 55.5 Intermediate goods 57.4 Cellulose 4.5 Consumer goods 19.2 Fresh fruit 4.1 Capital goods 15.3 Leading markets 2007 % of total Leading suppliers 2007 % of total China 14.8 US 15.5 US 12.4 China 10.4 Japan 10.5 Brazil 9.6 Netherlands 5.8 Argentina 9.2 Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 5 Political forecast Political forces at a glance Government: Michelle Bachelet, of the Partido Socialista (PS), one of four parties in the ruling centre-left coalition, the Concertación Democrática (Concertación), was elected president in a second-round run-off on January 15th 2006 and started a four-year term of office on March 11th 2006. The Concertación achieved a twin congressional majority at elections in December 2005, which it has since lost, owing to defections to independent benches in both the Senate and the Chamber of Deputies. Next elections: Nationwide municipal elections on October 25th 2008; presidential and congressional elections on December 12th 2009. Parliamentary forces, July 2008 (no. of seats) Senate Chamber of Deputies Concertación Democrática 18 57 Partido Demócrata Cristiano (PDC) 5 16 Partido por la Democracia (PPD) 2 19 Partido Socialista (PS) 8 15 Partido Radical Social Demócrata (PRSD) 3 7 Alianza por Chile 16 53 Unión Demócrata Independiente (UDI) 9 33 Renovación Nacional (RN) 7 20 Independents 4 10 Total 38 120 Political stability Threats to political stability in Chile will remain low compared with most other countries in the region, although a period of party political change appears to be under way, which will make the political environment less stable in the outlook period than in 2003-07. Since its return to democracy in 1990 Chile has been very stable politically, helped by a collective will to form a mature and effective democracy, and by a stable two-coalition structure that has fostered a pragmatic and co-operative approach to politics. Ample common ground on policy issues between the Concertación and the opposition centre-right Alianza por Chile (Alianza) coalition has also been beneficial. Although the Economist Intelligence Unit expects Chile to remain among the most stable countries in the region, the two dominant coalitions are losing public support, and a third coalition is being formed by disaffected members of the Concertación, which might also be able to draw support from centrist forces within the Alianza. The outlook period is likely to see a changing party political environment, and although we remain confident that political stability will endure and that any transfers of power would be orderly, inter-party relations are likely to be more fraught than in the historic period. The risk to policy predictability will remain low, as there remains broad consensus on economic policy. A new coalition will gradually take form Since the end of 2006 divisions within the Concertación have widened and are leading to a shift in the party political structure that will be fluid at least until the 2009 elections. Since late 2006, following expulsions from two of the four partiesquot;the Partido por la Democracia (PPD) and the Partido Demócrata Cristiano (PDC)quot;that make up the Concertación, disaffected deputies have Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 6 Chile moved to independent benches and a new coalition comprising these independents is being formed. The PPD members have formed a new political movement, ChilePrimero (CH1), which is loosely taking on board the PDC departees, along with the small Partido Regionalista de los Independientes (PRI). The ultimate composition of an eventual third coalition remains unclear: CH1 is strongly in favour of a market-oriented economic policy and the former PDC members (dubbed the colorines) favour more populist solutions. They coexisted fairly well within the Concertación, and might also do so in a new coalition, but in the long term the new coalition!s stability is not assured. Election years of 2008 and 2009 bring The Concertación will come under more strain during the municipal elections increased risk of political instability of 2008 and the presidential and congressional elections of 2009 as its various parties vie for places on candidate lists and to provide the coalition!s choice of presidential candidate. The PDC is unhappy at having its presidential candi- dates overlooked by the other Concertación parties since 1994, when Eduardo Frei became president, and if it is overlooked again for the 2009 election, a split within the Concertación cannot be discounted. Such disquiet in the ruling coalition would not be new and has been weathered before with scant effect on stability. However, potential intra-coalition tensions, combined with the public’s perception that the government has been poor at handling violent stu- dent demonstrations in 2006-08 and a public transport debacle in 2007, have already exacted a political cost. Although Ms Bachelet retains approval ratings of around the 50% mark (down from 60% following her inauguration, but up from under 40% in 2007), public identification with both main political coalitions is low, at 23% for the Concertación and 14% for the Alianza in mid- 2008. With public disillusionment at party politics on the rise, the election years of 2008 and 2009 are likely to bring increased political uncertainty. Despite these potential difficulties and the likelihood of further political demonstrations that have the capacity to turn violent, there is public trust in Chile’s democratic institutions, and a smooth transition of power can be expected in 2010. Sebastián Piñera of Renovación Nacional (RN, one of the two Alianza parties) is currently favourite to win the presidency in 2010-14, which would mean the first change in government for 20 years. However, given the broad policy consensus in Chile, we are confident that policy continuity will be maintained in the approach to, and after, the presidential and congressional elections of December 2009. Political and institutional Chile will continue to have a technically competent government able to effectiveness formulate and implement coherent policies, and Chile’s political framework will strengthen in the forecast period as the implementation of the civil service reform approved by Congress in 2003 gathers pace. The reform is gradually increasing meritocracy in the civil service, with civil servants accountable to an independent civil service directorate. The reform, which aims to model the civil service on international best practices, proceeded slowly under the previous government and has remained on the slow track under Ms Bachelet, but it is likely to accelerate in the coming years and be completed on schedule in 2010. The Concertación no longer enjoys a majority in either house, meaning that laws requiring a simple majority, such as changes in the tax and labour regimes, Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 7 and laws requiring organic constitutional laws (which require a four-sevenths majorityquot;at least 66 deputies and 22 senators), or laws interpreting or modifying the constitution (which require either a three-fifths or two-thirds majority) will need to be agreed by consensus. Chile’s recent history of constructive politics has led to consensus being reached on issues that require special majorities, and we expect this good level of political effectiveness to be maintained over the forecast period. Government efficiencies will improve The replacement of political nominees by qualified technocrats at the head of from an already good position all the agencies executing government programmesquot;and their accountability to an independent civil service directoratequot;will yield a gradual rationalisation of government procedures and greater efficiency. It will also reduce fraudulent use of public funds, which have been an increasing problem under Concertación governments. The transparency and efficiency of government operations will also be increased by the unification since 2005 of the procurement methods of all government institutions (which used to be agency-specific), and the publica- tion of all tender conditions and results through an official procurement website. Election watch Municipal elections are due in October 2008 and presidential and congressional elections in December 2009. The Concertación was unable to agree on a common list of candidates for councillors for this year!s municipal elections and will fight this election with two separate candidate lists. The contest between the two lists will be bitter, which will make it hard for them to agree on a common congressional list for the 2009 elections. The Concertación’s electoral chances will be further damaged by the competition of the centrist factions that have left the PDC and the PPD since the end of 2007. These factions have regrouped as the Partido Regionalista Independiente (PRI) and Chile Primero (CH1) respectively, and the two will present a common list for the municipal elections. In addition, although an electoral alliance between the Concertación and the extreme left might help to mitigate potential losses in the municipal elections, it represents a leftward drift that will facilitate the capture of the centre-ground in the 2009 elections by the Alianza. These factors, allied with increased public disillusion with the coalition, currently point to a victory for the opposition Alianza in the presidential vote. There is a risk of a split in the ruling coalition as the PDC considers the next presidential candidate should come from its ranks, while the PS and PPD argue that they should choose whomever is most able to win the presidency. Polls point to a victory for the Alianza in Although the Alianza has failed to take advantage of the divisions within the the 2009 presidential election Concertación and its falling public standing, it is showing greater unity than the Concertación and in Mr Piñera has a presidential candidate that opinion polls now suggest would beat any of the main Concertación presidential hopefuls in an eventual run-off second-round election. Given Chile!s presidential system, a second-round run-off vote is likely. To win in the first round of votes a candidate would need 50% plus one vote, which is unlikely, particularly given the probable entrant of a candidate from the new centrist coalition. The congressional result is likely to lead to close parity between the Concertación and Alianza in both the Chamber of Deputies (the lower house) and the Senate (the upper house), as has been the case since 1990. Chile!s “binominal” (two- seat) electoral system for congressional elections requires more than two-thirds Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 8 Chile of the vote in any constituency to gain both seats, making it difficult for a coalition to win a large congressional majority. Key players to watch Michelle Bachelet A member of the Partido Socialista (PS) and a former minister for health (2000-01) and defence (2004-05), Ms Bachelet is Chile’s first female president. She was inaugurated in March 2006 for a four-year term. Although she has the common touch and proved immensely popular in her election campaign, she had a troublesome first two years in power, facing criticism for her perceived weakness in office. Ms Bachelet has honoured her campaign pledges to maintain sustainable fiscal policies and eschew populism. She chose a technocratic cabinet with a strongly pro-market flavour, and has been pursuing a pragmatic programme with an emphasis on energy security, furthering equal opportunities and raising Chile’s levels of social protection. Sebastián Piñera After overtaking the presidential candidate of the Unión Demócrata Independiente (UDI), Joaquín Lavín, in the first round of the presidential election in December 2005, Mr Piñera was defeated by Ms Bachelet in the presidential run-off election. Although he lost, he won a creditable 46.5% of the vote, leaving him well placed to mount a strong challenge in 2009. A hugely successful entrepreneur, Mr Piñera has strong political ambition. There is little love lost between him and the UDI, but he has full control of his centre-right Renovación Nacional (RN). Soledad Alvear Having been defeated by Ms Bachelet in 2005 for the presidential nomination of the centre-left coalition, Concertación Democrática, Ms Alvear was elected as senator for the capital, Santiago, and went on to win the presidency of the Partido Demócrata Cristiano (PDC) in 2006, positioning herself as her party’s likely candidate to vie for the Concertación’s nomination for the 2009 presidential election. A lawyer by training, Ms Alvear was an effective minister of justice in the late 1990s, shepherding through the legislature a major reform of the country’s penal justice system. She served as minister of foreign affairs under Ricardo Lagos, completing negotiations for free-trade agreements (FTAs) with the EU, the US, South Korea and the European Free-Trade Association (EFTA). Ricardo Lagos Helped by record copper prices and the completion of major improvements in transport infrastructure, Mr Lagos ended his presidential term in 2006 with his popularity at high levels. However, Mr Lagos was held responsible by many for the poor planning behind the botched launch of Transantiago, an integrated public transport scheme for the capital, and his stock has also fallen following the disclosure of corruption scandals under his government. Previously a favourite to regain the presidency in 2010-14, he is not now assured of winning the Concertación’s nomination, but would prove a heavyweight candidate were he to be selected. International relations Relations with many of Chile’s regional neighbours will remain difficult. Although efforts will be made to improve them by furthering economic co- operation and facilitating crossborder trade and investment flows, tensions will remain. Chile and Bolivia signed a peace treaty in 1904 settling all bilateral border issues, but since 1978 Bolivia has disputed that treaty, demanding sovereign access to the sea. Chile has expressed its willingness to grant Bolivia access to the sea and strengthen bilateral co-operation without reopening sovereignty issues that it considers were settled a century ago. Relations with Peru have warmed since the election of a social democrat, Alan García, as president in that country in 2006. Crossborder trade and investment flows have increased strongly since an economic co-operation agreement came into force in 1998. Mr García is seeking to ease a simmering Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 9 maritime border row with Chile by taking the dispute to the International Court of Justice (ICJ) in The Hague. Relations with Argentina have been damaged since 2004 when it started to cut natural gas exports to Chile in violation of guarantees in a bilateral gas treaty signed in 1995. But bilateral relations have remained reasonably amicable and the two countries have continued to negotiate rather than resort to international tribunals. However, Argentina continued to cut gas supplies (to less than 5% of contracted supply in the first half of 2008), undermining Chile’s energy security, making this a policy priority for the government. Although Chile is accelerating investment in alternative energy sources, it might still face an energy crisis in the early half of the outlook period. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 10 Chile Demographic assumptions Demographic profile 2002 2007 2012 Population (m) Total 15.7 16.6 17.4 Male 7.8 8.2 8.6 Female 7.9 8.4 8.8 Age profile (% of total population) 0-14 26.9 24.1 22.0 15-64 65.6 67.4 68.2 65+ 7.5 8.5 9.8 Young-age dependency ratio 0.41 0.36 0.32 Old-age dependency ratio 0.11 0.13 0.14 Working-age population (m) 10.3 11.2 11.9 Urbanisation (% of total) 86.6 88.2 89.6 Labour force (m) 6.3 7.2 7.8 Period averages 2003-07 2008-12 Population growth (%) 1.1 1.0 Working-age population growth (%) 1.6 1.2 Labour force growth (%) 2.6 1.7 Crude birth rate (per 1,000) 15.5 14.5 Crude death rate (per 1,000) 5.8 6.1 Infant mortality rate (per 1,000 live births) 8.8 7.8 Life expectancy at birth (years) Male 73.3 74.3 Female 80.0 81.0 Average 76.6 77.5 Sources: International Labour Organisation (ILO), labour force projections; Economist Intelligence Unit estimates and forecasts; national statistics. Population growth will continue to slow Chilean population growth averaged 1.1% per year between 2003 and 2007, increasing the total population to 16.6m, according to the Instituto Nacional de Estadísticas (INE, the national statistics institute). According to INE!s projections, the rate of population growth will continue to decline, to 1% in 2008-12, when the population is forecast to reach 17.4m. The rise in the old-age dependency ratioquot;the proportion of the population above working agequot;will be more than offset by a decline in the young-age dependency ratio in 2008-12, meaning that the proportion of people of working age will rise, from 67.8% in 2007 to 68.7% in 2012. The growth rate of the population is falling partly as a result of changing lifestyles. The birth rate has been falling steadily since 1989 (from 23.6 per 1,000 people to 15.6 in 2003), and is not forecast to rise in the outlook period. With life expectancy estimated at 78.3 years in 2005 (81.3 years for women and 75.3 for men) and infant mortality down to 8 per 1,000 live births in 2005, Chile’s basic health indicators are similar to those of OECD countries. This is mostly a result of well-focused maternity care and high nutrition and sanitary standards. By the end of 2003 coverage of drinkable water reached 99.6% of urban households, and 94.7% were served by the sewerage network. The water utilities have a statutory obligation to purify at least 98.4% of all liquid waste in their areas of responsibility from 2010. Cholera and measles have long been Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 11 eradicated, and fewer than 2% of all deaths are associated with enteric, transmittable diseases owing to regular vaccination campaigns and good sanitation and environmental protection standards. Health indicators are good and Similarly, only 2.9% of children up to six years of age suffered from malnutrition improving in 2006 according to figures from the Ministry of Health, but 22.8% were overweight. Public healthcare policies will maintain their emphasis on disease prevention, including information campaigns focused on sectors at risk. This has helped to keep recent global epidemics under control. HIV-AIDS mortality rose from 0.5 per 100,000 inhabitants in 1990 to 2.1 in 1995 and 2.4 in 2005; transmission is mostly sexual (93%). To stem this rising HIV- AIDS mortality rate and prevent the spread of this disease, the authorities carry out regular information campaigns in schools and the media, and organise occasional distributions of free condoms. Since 2003 all AIDS sufferers have been provided with three-drug therapy free of charge within the public healthcare system, and HIV-AIDS was included among the 25 illnesses initially covered by a system of universal healthcare access, Acceso Universal con Garantías Explícitas (AUGE, universal access with explicit guarantees) from its formal launch in 2005. The AUGE aimed initially to cover 80-100% of the costs of healthcare services for 56 medical conditions, including many of the most expensive illnesses to treat. The insurance policy is sold at a fixed price, regardless of age or gender, and guarantees a maximum waiting time for medical attention for each condition. By 2007 all of the 56 identified illnesses were covered by AUGE guarantees, and by mid-2008 over 5m patients had made use of the AUGE guarantees since the launch of the system. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 12 Chile Policy and business outlook Business environment rankingsa Value of indexb Global rank c Regional rankd 2003-07 2008-12 2003-07 2008-12 2003-07 2008-12 Overall position 7.83 7.97 19 20 1 1 Political environment 7.8 7.8 19 20 1 1 Political stability 8.5 8.1 16 18 1 2 Political effectiveness 7.1 7.4 20 19 1 1 Macroeconomic environment 8.9 8.6 7 10 1 1 Market opportunities 6.0 5.9 50 51 6 4 Policy towards private enterprise & competition 8.8 8.8 7 9 1 1 Policy towards foreign investment 9.1 9.6 6 3 1 1 Foreign trade & exchange controls 9.1 9.6 9 4 1 1 Taxes 7.4 6.9 13 24 1 1 Financing 8.5 8.5 19 22 1 1 The labour market 6.7 6.9 30 32 3 4 Infrastructure 6.1 7.3 41 32 1 1 a See Guide to the business rankings model at the end of this report. b Out of 10. c Out of 82 countries. d Out of 12 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela. Chile will remain the top-ranked country According to the Economist Intelligence Unit’s business environment rankings, in the region Chile will remain the most attractive business location in Latin America in the forecast period (2008-12). Chile’s overall score rises slightly between the historic period (2003-07) and the outlook period, owing mainly to improvements in the country’s political effectiveness as a result of ongoing reforms in the civil service, as well as in its information and communications infrastructure and continued progress in trade liberalisation. However, this is not sufficient to prevent Chile’s global ranking from falling from 19th to 20th as other countries make more rapid progress. In addition, the improvements will be partly offset by a deteriorating macroeconomic environment (mainly the result of higher inflation) although Chile will still remain highly ranked in this category, and a deterioration in political stability owing to increased tensions within the government and between the government and opposition. Chile’s major strengths as a business location will remain a favourable attitude to free enterprise and competition, a very open foreign investment regime (for which it ranks third in the world in the forecast period), a strong fiscal position, sophisticated capital markets and an extensive and growing network of free- trade agreements (FTAs). Chile!s energy and transport infrastructure will improve over the outlook period, raising the country from 42nd to 31st place in our global rankings for this category. However, several factors will weigh on Chile’s attractiveness as a business location over the next five years, principally rigidities in labour legislation, deficiencies in average education levels and its dependence on copper as an export product. Structurally, Chile’s score suffers from the modest size of its domestic market (its population is just 16.6m). This is mitigated to an extent by the country’s network of FTAs that means that over 85% of Chile’s trade is now conducted on a preferential basis. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 13 Chile's business environment at a glance Policy towards private enterprise and competition 2008-09: Concessions, rather than outright privatisations, remain the norm and include hospitals, prisons, urban drainage, irrigation, dams and highways. Reform of the civil service picks up speed. 2010-12: Strengthening of transparency in public procurement and regulatory proceedings. Civil service reform starts to yield results in terms of efficiency. Policy towards foreign investment 2008-09: Liberal regime enhanced by further bilateral investment protection and double-taxation treaties. 2010-12: Network of double-taxation and investment protection accords widens further. Foreign trade and exchange controls 2008-09: Further expansion of comprehensive network of free-trade agreements (FTAs). Liberal trade regime and free capital flows. 2010-12: Negotiations on new FTAs continue. Taxes 2008-09: Cut in tax on financial transactions. 2010-12: Possible elimination of the stamp tax on credit. Strong fiscal management continues to protect against ad hoc tax measures. Financing 2008-09: Relatively deep and liquid financial markets, good access to long-term finance. Additional tax incentives foster the risk capital industry. Reform of the pensions system. 2010-12: Further measures to facilitate financing to small businesses, particularly new ventures. The labour market 2008-09: The government looks into labour reform, possibly in line with the successful Danish model, which provides both flexibility and strong social support. 2010-12: Liberalisation of working arrangements. Gradual introduction of performance-related pay and bonuses in the public sector. Infrastructure 2008-09: Accelerated investment in electricity generation and in Chile!s highway network. Wastewater treatment to reach over 90% of all liquid waste by end-2009, up from 75% in mid-2006. 2010-12: Continued upgrading of transport and social infrastructure through concessions. Macroeconomic environment Value of indexa Global rankb Regional rank c 2003-07 2008-12 2003-07 2008-12 2003-07 2008-12 8.9 8.6 7 10 1 1 a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela. Policy consensus provides a good base In a region characterised in the past by high levels of macroeconomic for continued stable economic growth instability, Chile stands out as a stable and resilient economy, a trend that will continue in the forecast period. This was reflected in 2003-07 in an average inflation rate of 2.9%, an average central government surplus of 4.6%, and average annual GDP growth of 5%. This macroeconomic stability has resulted from strong domestic consensus on the need for prudent monetary and fiscal policies, as well as from 30-year continuity in an economic development model based on free markets and deepening the country’s integration into the world economy. The strength in the macroeconomic data since 2004 has also been Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 14 Chile underpinned by strong global demand and record high copper prices, which have strengthened Chile!s public finances and brought the current account into surplus. Although Chile will remain in the top ten countries in the world in terms of macroeconomic stability, and first in Latin America, its score in this regard is set to deteriorate in the forecast period, owing in part to a high rate of inflation in 2008-09. Nevertheless, Chile will continue to benefit from windfall government revenue as copper prices are projected to remain historically high. Most of the windfall will be saved, much in sovereign wealth funds, strengthening the ability to run countercyclical fiscal policies and bolstering the macroeconomic environment. Chile!s very low level of public-sector debt (the central government is a net creditor and gross public-sector debt is forecast to average just 5.9% of GDP in 2008-12) further enhances Chile!s macroeconomic stability. Although an inflation-targeting regime was successful in bringing inflation down to OECD levels in 1999-2006, since the third quarter of 2007 inflation has risen very strongly (to 9.5% in July 2008), owing to high fuel and food prices, and it is not expected to return to its target (of 3%, with one percentage point of tolerance either way) before 2010, reducing growth potential through constraining private demand and lessening macroeconomic stability. Real interest rates are expected to rise gradually from their current negative levels, as policy tightens and infla- tion starts to ease, but are forecast to remain low, helping debt financing costs. Exchange-rate volatility has fallen as a result of strong foreign-exchange inflows, but given strong appreciation in 2005-08 and a period of rapid readjustment likely in 2008-09, exchange rate volatility will continue to present a risk. The Concertación Democrática (Concertación) government, which will stay in office until at least 2010, will continue to err towards populism in some of its microeconomic policies, such as the labour regime, but fiscal management will remain among the most prudent in the world. If the centre-right Alianza por Chile (Alianza) opposition wins the 2009 presidential election and forms the government in 2010-14, we are confident that there would be policy continuity and would not expect a change in government to lead to a deterioration in Chile!s economic outlook. The handling of public funds will be made more transparent as a result of a gradual replacement of political appointees, with technocrats selected on the basis of merit in the upper tiers of the civil service, in a process that is scheduled to be completed by 2010. This institutional modernisation will also strengthen protection of property rights. Monetary policy will remain in the hands of the independent Banco Central de Chile (BCC, the Central Bank) and financial regulations will continue to follow best practice, keeping the local banking system the most solid in the region. Fiscal indicators (% of GDP) 2007 2008 2009 2010 2011 2012 Central government expenditure 18.6 19.5 19.2 19.6 19.7 19.5 Central government revenue 27.4 28.2 24.1 21.4 21.0 20.7 Central government balance 8.8 8.7 4.9 1.8 1.2 1.1 Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 15 Fiscal policy will remain among the best Fiscal policy: Chile has a long track record of strong public finances, owing to in the world low public debt levels and a fiscal rule, adopted in 2000, which commits the government to achieving a structural fiscal surplus. This has kept fiscal policy among the best in the world, and there is strong consensus over the need to maintain the current fiscal regime. In 2000-07 the structural surplus was set at the equivalent of 1% of GDP annually, but the target was relaxed to 0.5% of GDP in 2008. The structural fiscal accounts measure fiscal revenue at the level it would reach if GDP growth and copper prices were at their medium-term trend levels. Given the extraordinarily high copper prices prevailing since 2004, this policy yielded a record central government surplus of Ps7.6trn (US$14.5bn; 8.8% of GDP) in 2007. This was a result of central government revenue increasing by 17.3% to a record 27.4% of GDP, propelled by an 5.5% rise in the average price of copper to US$3.22/lb (up from US$1.30/lb in 2004). The fiscal rule will allow spending to remain high in the outlook period (to an annual average of 19.5% of GDP), since the independent committee that determines the medium-term price assumption for copper continues to forecast a medium-term price of US$1.37/lb, which substantially underestimates the forecast price of copper in 2008 (we are forecasting an average price of US$3.52/lb). Following a central government surplus of 8.7% of GDP in 2008, the surplus is forecast to ease to 1.1% of GDP by the end of the forecast period as copper prices ease. The fiscal rule will continue to provide The fiscal rule has served Chile well. By allowing the government to pursue stability countercyclical measures, it has helped reduce GDP growth volatility. In 1991-95, annual GDP growth fluctuated between 5.9% and 12.3%; from 1996 to 2000 it ranged from -0.8% to 7.8%; and in 2001-06 it was between 2.2% and 6%. The range of fluctuation is expected to shrink further in future years, to a narrow band around a mid-point of 4.3%. In addition, under this policy fluctuations in copper prices now have a much less cyclical effect on both the exchange rate Copper price and fiscal and economic growth than in the past. balance Fiscal balance; % of GDP; left The rules governing Chile’s fiscal policy were tightened in 2006 to make the scale management of the financial resources resulting from these surpluses more International copper price; US$/lb; right scale transparent. Part of these surpluses are being invested in a fund to cover the 12.0 400 government’s minimum pension liabilities, part will gradually recapitalise the 10.0 350 8.0 300 BCC, and the rest is being saved in a Fund for Economic and Social Stabilisation 6.0 250 (FESS) which is investing the savings, mostly abroad, to help prevent excessive 4.0 200 2.0 150 appreciation of the peso. The FESS is forecast to hold US$21bn by the end of 0.0 100 2008 (13% of GDP), and another 1.5% of GDP is held in a pension reserve fund. -2.0 50 The interest yields of these sovereign wealth funds will constitute a significant 2003 04 05 06 07 08 09 10 11 12 source of additional revenue for the government. FESS income from asset Sources: Ministerio de Hacienda; Economist Intelligence Unit. returns is projected to reach 1.5% of GDP (from 0.75% currently) by the end of the forecast period. Interest rates (%) 2007 2008 2009 2010 2011 2012 30-89-day lending rate (av) 8.7 12.1 10.1 8.1 8.1 8.1 Long-term interest rate (av) 5.3 6.5 5.8 5.1 5.1 5.1 Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 16 Chile Monetary policy: The Central Bank will remain a fully autonomous institution, and will maintain its long-term policy objective of keeping inflation close to its target of 3% plus or minus 1 percentage point. However, its credibility has been damaged in 2008 by a sharp rise in inflation (to 9.5% by July), caused mainly by supply-side factors, following an annual average rate of 2.9% in 2003- 07. Long-term inflationary expectations remain anchored by the monetary framework, with the rate forecast to return to the 3% target in 2010. Policy will be tighter in 2008-12 than in Monetary policy will be tighter in the forecast period than in 2003-07, when the 2003-07 international inflation environment was more favourable. The unexpectedly sharp rise in inflation in the first half of 2008 led the BCC to tighten monetary conditions sharply in June and July, by 50 basis points each month, to 7.25%. The BCC had increased its monetary policy rate four times in the second half of 2007 (by 25 basis points each time) to 6% at year-end, and after a 25-point increase in January it announced that it was adopting a neutral stance. However, with inflation continuing its firm rise, which had started in the third quarter of 2007, further increases totalling 75 basis points can be expected in the second half of 2008. The policy stance is likely to remain hawkish until into 2009, when the BCC is expected to start easing gradually on the assumption that second-round effects do not materialise and inflationary pressures abate. Central Bank intervention in 2008 In April 2008 the Central Bank reacted to concern over the costs for the real weakens the peso economy from the sharp appreciation of the peso since early 2007 and the resultant loss in export competitiveness. Currency appreciation had accelerated owing to continued strong foreign currency inflows from the copper windfall, but also as a result of capital inflows attracted by the widening interest-rate differential between Chile and the US. The trade-weighted real exchange rate appreciated by around 10% in the 12 months to March 2008, leading the BCC to intervene directly in the foreign currency market for the first time in five years. It announced that by the end of the year it would purchase US$8bn in foreign exchange through competitive tenders of US$50m a day. To prevent the resulting monetary emission from fuelling inflation, the operations are being sterilised through issuing Central Bank paper, a move that is expected to cost in excess of US$320m. By the end of July the peso had weakened by around 8% in real terms against the dollar, to Ps494:US$1. After 2008 the BCC is likely to return to a stance of intervening only to smooth out occasional bouts of volatility. The current president of the Central Bank is José de Gregorio, who started a four-year term in December 2007. Mr de Gregorio had served as the vice- president of the Central Bank since December 2003 and has been on its board since June 2001. There had been some speculation that he would be more “dovish” than his predecessor, Vittorio Corbo, since he was in a minority voting for a larger cut in the intervention rate in March 2007, but the strong action taken in mid-2008 should help to dispel this and burnish his inflation-fighting credentials. Although he is a member of the Partido Demócrata Cristiano (PDC), political allegiances have not played a significant role in monetary policy in the recent past and are unlikely to do so in future. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 17 Policy towards private Value of indexa Global rankb Regional rank c enterprise and competition 2003-07 2008-12 2003-07 2008-12 2003-07 2008-12 8.8 8.8 7 9 1 1 a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela. Policy will focus on raising the Chile has long provided one of the emerging world’s most favourable economy’s overall level of productivity environments for private enterprise, having maintained a subsidiary role for the state and a market-oriented economic system for three decades. Following a large-scale privatisation programme in the 1970s and 1980s, and a more hesitant one since 1990, Chile has only a small number of companies left in state hands, including a copper corporation that is the largest company in the country, the Corporación del Cobre (Codelco). With less scope for improvement than other Latin American countries, government policy over the forecast period will focus on raising the economy’s overall level of productivity and providing an environment in which small businesses can compete more effectively. • The government will prioritise attracting private investment to infrastructure projects through build-operate-transfer (BOT) concessions, which have been used effectively for development of most of Chile’s commercially viable transport infrastructure. The focus will turn in 2008-12 to upgrades and maintenance of Chile!s secondary road infrastructure, to the development of agricultural irrigation systems, and to increase the capacity of the country’s jail infrastructure. The government will also use BOT concessions to upgrade three public hospitals in the metropolitan region of the capital, Santiago, by 2009. • Competition policy will remain stronger than elsewhere in the region. The independent Tribunal de Defensa de la Libre Competencia (TDLC, competition tribunal), established in 2004, will accelerate the resolution of competition disputes and make jurisprudence more consistent and transparent by producing detailed reasoning explaining its decisions. Policy towards foreign Value of indexa Global rankb Regional rank c investment 2003-07 2008-12 2003-07 2008-12 2003-07 2008-12 9.1 9.6 6 3 1 1 a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela. Chile's foreign investment regime will Chile’s liberal foreign investment regime is based on the principle of non- rank third in the world in 2008-12 discrimination between local and foreign investors, which is enshrined in the constitution. Foreign investors benefit from additional protection owing to the fact that the country is a signatory of the Washington Convention of 1965 that created the International Centre for Settlement of Investment Disputes (ICSID). This reduces the insurance premiums charged for non-commercial risks by both multilateral insurers, including another World Bank subsidiary, the Multilateral Investment Guarantee Agency, and official insurers such as the US government’s Overseas Private Investment Corporation. To increase its attractiveness as an investment platform, Chile passed a law in 2002 that grants foreign investors tax-free status on earnings from their foreign operations, and authorises the government to offer practical support for the Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 18 Chile transfer of their regional headquarters to Chile. The country will also continue to widen its network of double taxation treaties. • The establishment of a copper mining tax in 2006 will not significantly impair Chile’s attractiveness as an investment location. Even with the tax, Chile will remain the world’s top destination for copper mining investment. This is because most other mining countries have more stringent tax regimes, and few of them will offer a comparable political and economic stability or such a vast mineral wealth in close proximity to the sea. • The government is planning to send to Congress a third capital market reform before the end of 2008. Known as MK3, it will include administrative and legislative measures designed to facilitate foreign investment in the local financial market and position Chile as an exporter of some financial services. Foreign trade and exchange Value of indexa Global rankb Regional rank c controls 2003-07 2008-12 2003-07 2008-12 2003-07 2008-12 9.1 9.6 9 4 1 1 a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela. Trade policy will continue to focus on Chile’s trade regime is among the most liberal in the world, with a trade- expanding the network of FTAs weighted average effective import tariff rate below 1% (from 2008) as a result of Chile’s large and expanding network of FTAs. The country’s most important existing FTAs are those signed with the EU (which became operational in 2003), one with the US (2004), one with China (2006) and one with Japan (2007). Chile also has FTAs with South Korea; the countries of the European Free-Trade Association (Iceland, Liechtenstein, Norway and Switzerland); Canada; Central America and Mexico. It has less comprehensive trade agreements with most other countries in Latin America, as well as with India, New Zealand, Singapore and Brunei. These agreements give Chile a potential market of 4bn people, with over 85% of its trade now conducted on a preferential basis. Chile also offers an unusually narrow import tariff dispersion, ranging from 0% to 6%, with only three products benefiting from special regimesquot;sugar, wheat and oilseedsquot;that will be phased out gradually in a process scheduled to be completed in 2015. The Chilean peso has been floating freely since September 1999, and the few remaining exchange restrictions affecting capital or trade flows were eliminated in 2001. • Chile has one of the world’s largest networks of bilateral and multilateral trade agreements, and trade policy will continue to focus on deepening its integration into the global economy. It is likely to conclude FTAs with Australia, Ecuador, Malaysia, Thailand and Vietnam in the forecast period and might also reach an FTA with Turkey. Taxes Value of indexa Global rankb Regional rank c 2003-07 2008-12 2003-07 2008-12 2003-07 2008-12 7.4 6.9 13 24 1 1 a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela. The tax regime will remain relatively Chile’s tax regime is relatively simple and stable. Inflation adjustments have simple and stable been part of the tax code since 1975, and reporting rules are regularly updated Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 19 in the interest of transparency. There are no particular tax advantages to organising through a corporation rather than a branch. But there are advantages to investing through a corporation rather than as an individual, since the tax burden is lower for the former. In an effort to encourage private savings and investment, corporate income is assessed in two stages. When the income is accrued, it is liable for a first-category tax of 17%. In a second stage, that part of the profits distributed to shareholders or partners, or repatriated to a parent company abroad, is subject to a 35% additional tax for which the first-category tax serves as a tax credit. • The country’s tax take will continue to rise in the forecast period. This will be mainly as a result of continued economic growth and a reduction in tax evasion as efficiencies increase following the replacement of printed invoices by electronic ones, a process that has been ongoing for several years, and is now almost complete. This is ending tax-evasion schemes based on false invoicing, since they are increasingly easy to detect by the Servicio de Impuestos Internos (SII, the tax authority), through computerised cross-checking. The SII automatically receives copies of all digital invoices issued, enabling the detection of irregular transactions. • A stamp tax on most documents, contracts, promissory notes, invoices and receipts applying to both foreign and domestic credits will continue to be reduced. It was levied until end-2006 at 1.608% per year, falling to 1.5% in 2007 and 1.35% in 2008. It will fall to 1.2% in 2009, the rate at which it was levied in 1998, and the government might then look to remove it completely. Financing Value of indexa Global rankb Regional rank c 2003-07 2008-12 2003-07 2008-12 2003-07 2008-12 8.5 8.5 19 22 1 1 a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela. Conditions will tighten, but companies Chile’s financial sector is among the most liquid and sophisticated in emerging will retain access to financing markets. There is ample access to short-term funding through overdrafts, supplier credit, bank loans, discounting of trade bills, factoring and commercial paper. In addition the Chilean banking system had zero exposure to the US sub- prime crisis, which has weakened many other countries! banking systems. Nevertheless, with international and domestic credit conditions in 2008-12 set to be tighter than in recent years, financing conditions will not be as favourable as in 2003-07. Nonetheless, the growth potential of Chilean banks is good, given the strength of their balance sheets. The banks’ average ratio of capital and reserves to risk-weighted assets was 12.6% at the end of February 2008, well above the minimum of 8% established by banking regulations and recommended by the Basel accord. All banks in the Chilean system had Basel ratios in excess of 10% at the end of 2007. • Chilean companies with solid credit ratings will continue to have ample access to long-term finance through leasing and large companies will retain access to a variety of other options, such as stock issues, bonds and bank loans. Blue-chip businesses will continue to have access to long-term funding locallyquot; through bank loans with maturities of up to seven years, or local bond issues Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 20 Chile with maturities of up to 30 yearsquot;owing to the use of an inflation-indexed unit of account, the Unidad de Fomento (UF), which eliminates inflation risk. • Medium- and long-term financing will become a more realistic option for creditworthy small companies, owing to the growing participation of the state- owned Banco del Estado in this market, and the help provided by the government’s investment promotion agency, the Corporación de Fomento de la Producción (Corfo), through subsidised credit insurance access to loans and credit lines obtained from bilateral and multilateral sources. Nevertheless, the majority of small companies will struggle to get bank credits, and most of those considered eligible have to rely for their medium-term financing needs on 30- day bank credits that are automatically renewed every month, a precarious arrangement in the event of an economic downturn. The labour market Value of indexa Global rankb Regional rank c 2003-07 2008-12 2003-07 2008-12 2003-07 2008-12 6.7 6.9 30 32 3 4 a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela. The labour regime will remain a Chile’s labour regime offers fairly strong worker protection and will continue to weakness be criticised by business for being too rigid. The labour market has become more rigid since 1997, owing to higher regulations and a faster rise in the minimum wage than in productivity growth or general wage levels. The minimum wage in 2006 was equivalent to 59% of the median wage, compared with about 35% in the US and just under 50% in the EU. In addition, a 2001 labour reform further raised Chile’s already-high costs for dismissing employees. An unemployment-insurance system raised payroll costs by 2.4% in 2002. The system is voluntary for workers employed at the time the system became operational, but mandatory for new employment contracts. • Despite some increased rigidity in the labour regime under the current president, Michelle Bacheletquot;in 2006 the government introduced a law that restricts indirect employment through sub-contractors by making the sub- contracting company responsible for the sub-contractor’s obligationsquot;there are signs that some liberalising steps might be taken. Ms Bachelet has spoken of the need for more flexible working arrangements to enable unemployed mothers to work, and she has also expressed concern about the high levels of youth unemployment, which have contributed to rising crime. This is likely to lead to a law creating a more liberal regime for part-time employment. High levels of industrial action in the forecast period, particularly from Chile’s strongly unionised education employees and mining workers, both groups of which have staged disruptive and prolonged strikes in recent years. Infrastructure Value of indexa Global rankb Regional rank c 2003-07 2008-12 2003-07 2008-12 2003-07 2008-12 6.1 7.3 41 32 1 1 a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela. Energy and public transport will be Chile’s telecommunications and technological infrastructure is generally very priorities in 2008-12 good, particularly by regional standards. Chile’s regulatory system for telecoms Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 21 encourages competition and the early adoption of new technology, which has produced the most developed telecoms infrastructure in Latin America for mobile phones and broadband Internet access. The number of mobile phones in use rose by 12.1% in 2007 to 14m, or 83.7 per 100 population. Its transport infrastructure has greatly improved in recent years, following port and airport privatisations, and BOT concessions schemes for Chile’s network of highways. The focus in the forecast period will be on improving secondary roads and addressing capacity constraints in Chile’s energy infrastructure, which will continue to bring risks of energy cuts or rationing in 2008-11. Cuts in gas exports from Argentina since 2004 exposed Chile!s dependence on imported natural gas, together with a drought which lasted from 2007 until mid-2008 reduced hydroelectric capacity (which accounts for around 38% of total capacity) tightened the energy balance, leading to rationing measures. Moreover, Chile was forced to import fuel for alternative diesel-powered plants at a time of soaring oil prices, heightening energy costs for business. • Following a drive for new projects in 2005-06, 2,559.6mw of new power capacity is due to be installed by 2011, which will ease Chile’s long-term energy security fears. Nevertheless, there remain concerns over the medium term, particularly in the event of another period of low rainfall. • Concessions of the main highways to the private sector has enabled the government to increase public investment in the secondary-road network and to pave former dirt-roads (“tertiary roads”). By 2010 it will have completed the construction of a coastal highway that will run parallel to the Pan-American highway between Valparaíso and Puerto Montt, and will have increased the paved-road network to 25,000 km, up from 18,000 km in 1995. • Port-handling capacity is rising at a firm pace, and is scheduled to reach 77m tonnes/year by 2015 from 28m t/y in 2002, at a cost of US$1.5bn. This should ensure that capacity remains ahead of the increase in demand. The capacity of the main commercial airports has trebled and their facilities have been modernised as a result of the BOT concessions of the mid-1990s. A new airport (mostly for cargo and private jets) for the capital will be built in Buin by 2010. • The number of mobile phones in use is forecast to reach 95 per 100 by the end of 2010. The number of internet connections in the country increased by 22% in 2007 to 1.3m. This expansion will continue, helped by rising incomes and falling connection costs as competition intensifies. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 22 Chile Economic forecast International assumptions 2007 2008 2009 2010 2011 2012 Economic growth (%) US GDP 2.2 1.2 1.1 2.4 2.5 2.5 OECD GDP 2.7 1.7 1.5 2.4 2.5 2.5 World GDP 3.8 2.8 2.6 3.2 3.3 3.2 World trade 7.3 6.1 6.3 7.3 7.6 7.7 Inflation indicators (%) US CPI 2.9 4.1 2.8 2.5 2.5 2.4 OECD CPI 2.1 3.3 2.3 2.1 2.0 1.9 Manufactures (measured in US$) 5.0 8.9 0.5 0.5 0.6 0.7 Oil (Brent; US$/b) 72.7 120.2 110.0 113.0 115.0 120.0 Non-oil commodities (measured in US$) 20.8 21.0 -4.8 -2.3 -1.5 -0.3 Copper (US cents/lb) 322.3 351.8 310.0 250.0 230.0 225.0 Financial variables US$ 3-month commercial paper rate (av; %) 5.1 2.8 2.8 4.2 4.8 4.8 Ps:US$ (av) 522.46 490.98 559.72 586.71 601.13 615.74 • The Economist Intelligence Unit expects external conditions to be much less favourable for Chile in 2008-12 than in 2003-07, with world GDP growth slowing to an annual average 3% at market exchange rates (from 3.6%) and average annual world trade growth slowing to 7% (from 8.2%). In 2008-09 the US, the EU and Japan will all underperform, bringing global GDP growth down to an annual 2.7%. Growth is forecast to recover to 3.2% per year in 2010-12. • The risks to the world economic outlook are substantial. This reflects not just continued problems in the US and European financial sectors, but also rising global inflationary pressures, which are squeezing consumers! spending power and casting a shadow over growth prospects in many countries. The benign impact of China on global prices is now also on the wane. The acceleration in inflation poses a dilemma for policymakers globally, with many countries already being forced to keep monetary policy tighter than they would prefer against a background of slowing GDP growth. • Although we expect prices of many commodities to stabilise or ease in 2009, there is a risk that recent rises will lead to second-round inflationary pressures globally, which could further restrain world and Chilean GDP growth. Increased trade protectionism and geopolitical risks could also hit our baseline forecast, although Chile!s wide range of free-trade agreements (FTAs) will ensure that access to its major markets remains stable. Having fallen to 6.1% in 2008, we expect global trade growth to recover gradually to a peak of 7.7% in 2012 (still below the heady pace of the recent past). Even so, world trade growth will recover more strongly than US GDP growth, reflecting the growing weight in the global economy of emerging economies, especially in Asia, which accounts for around 40% of Chilean exports. • We expect oil prices to fall only moderately in 2009, to US$110/barrel, and to remain close to this level in 2010-12. Global supply remains tight, with only about 2.5m b/d of spare production capacity, most of it with Saudi Arabia. However, an unexpected shock, stemming, for instance, from geopolitical Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 23 tensions, remains a considerable upside risk to our oil price forecast. The forecast continued high price of oil will maintain inflationary pressures within Chile, an oil importer, impairing domestic economic growth prospects. • We expect that the Federal Reserve (Fed, the US central bank) to hold the Fed funds target rate at 2% over the remainder of 2008 and into next year, before beginning a tightening trend again in the third quarter of 2009, taking the Fed funds rate to 2.5% by year-end. However, an intensification of inflationary pressures could force the Fed to tighten policy despite the travails of the domestic economy. Economic growth % 2007 2008 2009 2010 2011 2012 GDP 5.1 3.6 3.8 4.4 4.4 4.3 Private consumption 7.7 4.2 2.7 3.2 3.8 3.5 Government consumption 5.8 6.5 4.7 3.4 4.0 4.0 Gross fixed investment 11.9 10.7 7.2 8.0 6.0 6.0 Exports of goods & services 7.8 3.0 4.6 8.9 7.9 7.9 Imports of goods & services 14.3 8.7 5.0 8.3 7.3 7.1 Stockbuilding (% contribution to GDP growth) -0.6 0.0 0.0 0.0 0.0 0.0 Total domestic demand 7.8 6.0 4.1 4.5 4.4 4.2 Agriculture 3.0 4.0 3.8 3.8 4.0 4.0 Industry 11.1 3.2 3.4 4.0 4.0 3.9 Services 5.5 3.9 4.2 5.0 5.0 4.8 Annual average growth will fall to 4.1% GDP is forecast to grow at an annual average of 4.1% in 2008-12, below the rate in 2008-12 of 5% posted in 2003-07. Political stability and policy continuity will continue to support economic growth, although Chile!s medium-term potential GDP growth (which we currently consider to be around 4.5%) will continue to be held back by rigidities in the labour market. Gross fixed investment will be the most important contributor to growth in 2008-12, owing to firm investment growth in energy, mining and transport infrastructure. The government is putting to tender US$1.3bn in public works projects this year, and will continue GDP per head to target investment projects in infrastructure. This will see gross fixed (US$) investment increase as a percentage of GDP from 20.6% in 2007 to 27.1% by 12,000 2012. Private consumption growth, which was the principal contributor to 10,000 growth in 2003-07, will be weaker in 2008-12 (averaging 3.5% per year), owing to the impact of inflation on real disposable incomes and a tighter monetary 8,000 policy stance, particularly in the first half of the forecast period. 6,000 Growth of private consumption, which accounted for 55% of GDP in 2007, 4,000 will slow from an annual average of 6.6% in 2003-07 as the impact of high 2,000 inflation in 2008-09 and a tighter monetary stance over the forecast period are 0 felt. Consumer debt has risen in recent years, and there will be a period of 2003 04 05 06 07 08 09 10 11 12 retrenchment in the early part of the forecast period. Before substantial new Sources: Banco Central de Chile; energy capacity starts to come on stream in 2010, Chilean industry will face Economist Intelligence Unit. high energy costs because it uses expensive imported diesel in place of the imported Argentinian natural gas, supply of which has been cut by the Argentinian government in recent years. Although the supply situation has eased owing to the end of a drought in mid-2008, Chile will still rely on imports of expensive diesel to fire its thermal plants, adding to costs for business and keeping electricity tariffs high, providing a further constraint to Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 24 Chile private consumption. In the event of another dry year, Chile would face energy capacity constraints, and we would revise our forecast for consumption down. Investment growth will be firm Both private and public investment are forecast to grow strongly throughout throughout the forecast period the forecast period. Investment in fixed assets will be the most important contributor to growth in 2008-12, attracted by Chile’s investment regime and strong potential in mining, forestry, telecommunications and agro-industry in particular. Continued high global minerals prices are prompting a fresh wave of investment in new copper capacity. Fresh investment in electricity generation will remain strong throughout the forecast period, as a new generation of power plants comes on-stream following a decade of underinvestment in capacity in 1994-2004, partly owing to an adverse regulatory environment. This includes 2,000 mw of additional coal-based generating capacity, 1,905 mw in new liquefied natural gas (LNG)-fired plants, 798 mw in additional hydroelectric capacity and 300 mw in geothermal plants due to come on-stream by 2015, most of it by 2011. The prospects for domestic corporate investment appear solid. Although the cost of borrowing is rising, continued strong demand in Asia (which accounts for 40% of export earnings) and Chile!s large network of FTAs will encourage exporters to boost productive capacity. Public investment growth will be supported by Chile’s extraordinarily strong fiscal surpluses, particularly in the first half of the forecast period. This will enable substantial new investments in healthcare, education and transport infrastructure. After slipping to 3% in 2008, growth in exports of goods and services volumes will recover, in line with new capacity now coming on stream in the various export sectors, including the Gaby copper mine owned by the Corporación Nacional del Cobre (Codelco, the state mining company), which will produce the equivalent of 100,000 tonnes/year of copper cathode this year, rising to 150,000 t/y in 2009 and, once at full capacity, expand to 165,000 t/y. Exports will also be helped by Chile’s FTAs with its main trading partners and, although they are set to ease, continued high copper prices resulting from strong Asian demand will provide a further boost. Import growth will be led by continued strong levels of inward investment, as well as by falling import prices as a consequence of Chile’s network of FTAs, particularly those with China (which came into operation in 2006) and Japan (2007). As a result, the net contribution of trade to GDP growth will be negative, albeit declining, towards the end of the forecast period as import growth slows. On the supply side, new copper capacity will ensure continued firm growth in the important mining sector. Agriculture will record average annual growth of just under 4% in 2008-12, supported by solid export demand for Chile’s export crops, and by strong demand from the domestic agro-industry business. Fruits, forestry and fisheries will remain the fastest-growing non-mining primary indus- tries, owing to technological innovations and an increasing production frontier. Growth in manufacturing will be led by agro-industry and by cellulose; con- struction growth will also remain firm, particularly over the first half of the fore- cast period, owing to strong growth in public and private infrastructure invest- ment. At an annual average 4.6%, growth in the services sector will be support- ed by the well-established and advanced retail, shipping and transport sectors. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 25 The major risks to our growth forecast are a stronger and longer than expected economic slowdown in the US and the entrenchment of high domestic inflation. A harsher or longer slowdown in the OECD than is currently forecast, apart from reducing the demand for Chile!s agricultural and manufactured goods, would also reduce foreign investment inflows. A failure to bring inflation back down to target would bring a sharper slowdown in private consumption than we envisage. Copper sector 2007 2008 2009 2010 2011 2012 Copper production ('000 tonnes) 5,557.0 5,658.4 5,913.0 6,179.1 6,457.2 6,747.8 Average price (cents/lb) 322.3 351.8 310.0 250.0 230.0 225.0 Copper export earnings (US$ bn) 37.6 41.7 37.1 31.2 30.0 30.7 Source: The Economist Intelligence Unit. Copper output will increase at an annual average 4% per year in 2008-12, with substantial new mining projects coming on-stream. It will produce 5.7m tonnes of copper in 2008, rising to 6.7m tonnes by 2012. The state copper studies agency, Cochilco, estimates expenditure on copper mine development to total US$22bn in the 2008-11 period, around half of which is slated to come from Codelco. The sector will remain buoyed by very strong (albeit declining) international prices for copper, the result of continued dynamic growth in emerging Asia. The price of copper is forecast to ease, The average price of copper was US$3.68/lb in the first half of 2008, which but remain high by historical standards compares with US$3.22/lb in the whole of 2007. This is up from an annual average of only US$1.00/lb in 2000-05. The sharp rise in the price in recent years is a result of the tightness of the world’s copper market, with low global stocks and, particularly, firm demand growth owing to a booming global economy, particularly in China and India, and a scarcity of significant projects able to be built at relatively short notice, which in the copper mining industry means two to three years. The low prices in the early years of this decade discouraged investment in exploration and in engineering studies to prepare mining projects. Global demand growth will remain firm, owing to continued economic development in China and India, but supply growth has now started to exceed it, exerting downward pressure on prices from 2009. Copper mining companies will invest around US$22bn in Chile in 2008-11, and Cochilco forecasts that production could reach almost 8m tonnes by 2015. However, we estimate that it will rise to 6.75m tonnes. Export earnings from copper will reach a forecast US$41.7bn in 2008, more than double the 2005 total, after which they will ease towards US$30bn by the end of the forecast period. With over 160m tonnes in proven high-grade copper reservesquot;30% of the world’s totalquot;that have the added advantage of being in close proximity to the sea, Chile has been the favourite destination of copper mining investment for over two decades. This has made it by far the world’s largest copper producer, accounting currently for around 35% of world copper output. The country will remain a competitive mining investment destination because of its privileged geological conditions, as well as its political and economic stability. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 26 Chile Codelco is carrying out a US$1bn investment (in 2006-10) in central Chile on a two-phase expansion of its Andina division, which produced 218,000 t/y of copper in 2007. It is also spending US$1.5bn at its El Teniente division to increase output from 400,000 t/y to 500,000 t/y. Private-sector development, which does not have the same political and financial constraints as Codelco, will continue to accelerate: Escondida (57.5% of which is owned by UK/Australia-based BHP Billiton), which is already the largest copper mine in the world, will have its capacity increased by a further 50%, from 1.5m t/y. Xstrata Copper (Switzerland) and Antofagasta Minerals (Chile) also have substantial new development plans. As in 2007 and 2008, occasional industrial action is likely to disrupt mining production at times over the forecast period as both full-time and contracted workers seek to increase pay and conditions. Wage and price inflation % 2007 2008 2009 2010 2011 2012 Consumer prices 4.4 8.4 6.2 3.7 3.1 3.0 Average wages 7.3 6.5 4.5 4.2 4.2 4.0 Real wages 2.8 -1.8 -1.6 0.5 1.0 0.9 Unit labour costs 7.0 12.4 -9.7 -2.9 -0.6 -0.9 Labour costs per hour (US$) 3.3 3.7 3.4 3.4 3.5 3.5 Inflation will be a major policy The 2007-08 international fuel and food price inflation shock (exacerbated by challenge Chile’s energy woes) is a major challenge for Chilean policymakers, and we do not expect the rate of consumer price inflation to fall to the target rate of 3% (with 1 percentage point of tolerance either way) until 2010. The short-term prospects are of pressing concern: having averaged 2.9% in 1999-2006, inflationary pressures picked up again in mid-2007, caused by a harsh southern hemisphere winter and very strong growth in international food and fuel prices. Since July 2007 consumer price inflation has steadily gathered pace, reaching 9.5% in July 2008. From 3.9% in July 2007, 12-month producer price inflation has also increased sharply, reaching 14.4% in July 2008, indicating underlying pressures on the consumer price level. However, with global food prices forecast to fall from 2009 and the monetary authorities having tightened policy sharply in mid-2008, we consider that consumer price inflation will be on a downward path from late 2008 and will be brought back to target by 2010. Average annual growth in real wages reached 2.8% in 2007, following rises of an annual average 1.9% in 2004-06. Real wages will be hit by the current bout of inflation, and are forecast to fall by 1.8% this year and 1.6% in 2009. After this they will resume a moderate pace of increase in 2010-12, owing to the downward pressure exerted by a tight employment market. After a rise in unemployment in 2008 (to 8% from 7% in 2007), unemployment will ease only slowly; rigid labour regulations will stop unemployment from falling more rapidly, and workers will be more keen to protect their jobs than to press for wage increases. This reduces the risk of a wage price spiral taking hold. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 27 Exchange rates 2007 2008 2009 2010 2011 2012 Exchange rate Ps:US$ (av) 522.46 490.98 559.72 586.71 601.13 615.74 Exchange rate Ps:US$ (end-period) 495.82 530.79 577.22 593.93 608.38 622.99 Exchange rate Ps:¥100 (av) 443.61 466.65 550.10 615.97 654.89 670.81 Real effective exchange rate index (1997=100; av) 88.3 92.3 83.4 80.8 80.2 79.6 Purchasing power parity Ps:US$ (av) 371.3 390.4 396.6 393.7 393.1 394.5 Chile has maintained a free-floating exchange system since 1999, and there is no prospect of a policy change. The Central Bank reserves the right to intervene in local markets during times of extreme volatility. Our forecast is that, although the real exchange rate will be much weaker in the outlook period than in 2006- 08 when it experienced a sharp appreciation, the peso will still be on average at a similar level in 2008-12 as in 2003-07. Following an appreciation of 16% in real terms in 2003-07, owing to a sharp improvement in Chile’s terms of trade, including a trebling of copper prices, and widening interest rate differentials with the US, the exchange rate strengthened in the first three months of 2008: the rate reached Ps442:US$1 in March 2008 from Ps526:US$1 in June 2007. Since then the peso has weakened, reaching Ps493:US$1 by late July 2008. This has been the result of intervention by the Banco Central de Chile (the Central Bank) in the exchange market since April, which will see the monetary authority buy US$8bn over the course of 2008. Nevertheless, over the year as a whole the peso will appreciate by 5.3% compared with 2007. The local currency will lose strength as copper prices ease and the current-account surplus narrows and then moves to deficit in 2008, when we forecast a real depreciation of 9%, the strongest in a decade, bringing it close to its 2005 level in real terms. External sector US$ bn 2007 2008 2009 2010 2011 2012 Current-account balance 7.2 -0.2 -2.1 -5.9 -5.7 -4.8 Current-account balance (% of GDP) 4.4 -0.1 -1.1 -3.1 -2.9 -2.4 Goods: exports fob 67.6 75.7 78.4 82.1 90.8 100.7 Goods: imports fob -44.0 -57.5 -61.0 -69.5 -77.1 -84.6 Trade balance 23.7 18.2 17.4 12.7 13.6 16.1 Services: credit 8.8 10.1 9.4 10.0 10.9 11.7 Services: debit -9.9 -11.4 -11.5 -11.9 -12.5 -13.4 Services balance -1.2 -1.4 -2.1 -1.8 -1.6 -1.7 Income: credit 5.6 7.3 6.8 5.8 6.3 6.5 Income: debit -23.9 -27.5 -27.0 -25.3 -26.9 -28.9 Income balance -18.3 -20.2 -20.2 -19.5 -20.6 -22.4 Current transfers: credit 3.6 3.8 3.7 3.7 3.9 4.1 Current transfers: debit -0.6 -0.7 -0.9 -0.9 -0.9 -1.0 Current transfers balance 3.0 3.1 2.8 2.8 3.0 3.1 The current account is forecast to move Following a surplus of 4.4% of GDP in 2007, the current account is moving to into deficit from 2008 deficit owing to strongly rising import growth and deteriorating services and income deficits. The current-account deficit is set to average 1.4% of GDP in 2008-12. This forecast is heavily dependent on projections for the price of copper. A difference of 1 US cent in the average annual copper price typically represents a difference of around US$110m in Chile’s merchandise exports. But Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 28 Chile fluctuations in the copper price also impact profit repatriation levels by foreign Trade and current-account investors, with counterbalancing effects on the current-account. balance (US$ m) The expansion of Chile!s network of FTAs and extraordinarily benign external Trade balance conditions (strong demand and record high prices for Chile!s main export Current-account balance commodity, copper), have resulted in an export boom in recent years. Export 25,000 20,000 earnings increased from US$21.7bn in 2003 to US$67.6bn in 2007, with copper 15,000 earnings rising from US$7.8bn to US$37.6bn in the period. Between 2003 and 10,000 5,000 2007, the merchandise trade surplus rose strongly, a trend that is being reversed 0 -5,000 in 2008 as a result of faster import spending growth. With merchandise export -10,000 earnings of US$38.3bn and an import bill of US$28bn, Chile recorded a trade 2002 03 04 05 06 07 08 09 10 11 surplus of US$10.3bn in the first half of 2008, down from US$15bn in the year- Sources: Banco Central de Chile; earlier period, owing to rapid growth in the import bill. This reversal of recent Economist Intelligence Unit. trends will continue in 2009-10, with export earnings growth outpaced by that of imports as copper prices ease and investment-related imports stay strong. Non-copper export earnings growth in the forecast period will be led by salmon, agro-industry and cellulose, helped by improved access to world markets as import tariff reductions associated with Chile!s wide range of FTAs take effect and as demand growth in Asia, Chile!s most important regional export market, stays strong. Following growth of 30.7% in 2008, merchandise import growth is set to ease in line with slowing private consumption growth in 2009-12, to a still firm annual average of 10.5%, supported by solid investment inflows and reduced tariff from Chile!s FTAs. This will lead to a declining forecast trade surplus in 2008-10 (when it will reach US$13bn), before it rises again in 2011-12 as fresh export capacity comes on stream and the slide in the average price of copper eases. Chile’s services deficit will rise in 2008-09 amid rising freight and insurance costs as import spending rises and as outbound tourism rises faster than inbound. In 2010-12 services inflows will be supported by trends in tourism. The country’s traditional income deficit will rise in 2008-12 to a record annual average US$20.6bn from an average US$11.9bn in 2003-07. The deficit has surged since 2006 owing to record outward profit remittances by mining multinationals, and although these will not continue to grow at such rates as in recent years (as the price of copper declines), they will remain high owing to Chile!s growing levels of FDI. Income credits are also set to remain high by historic standards (at an annual average US$6.5bn in 2008-12, compared with US$3bn in 2003-07) owing to increased income from foreign reserves and Chile!s sovereign wealth funds. The surplus in unilateral transfers will fall from a 2008 high as outward transfers from foreign workers in Chile, mostly from Peru and Bolivia, increase. Foreign direct investment in Chile Stocks and flows Annual foreign direct investment (FDI) inflows as measured by the Chilean Foreign Investment Committee reached a record US$14.5bn in 2007 (8.8% of GDP), owing to a surge in investment in mining, energy and transport infrastructure. This followed annual average inflows of US$6.5bn in 2003-06. Further investment opportunities are lifting FDI further in 2008, when first-quarter inflows increased by 75% year on year, to US$6.2bn; it is forecast to reach US$18.5bn over the year as a whole. The stock of FDI reached US$91.5bn (55.8% of GDP) in 2007, the largest ratio to GDP of FDI stock in the region. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 29 Although Chile’s basic infrastructure is reaching maturity, and there are few chances that the remaining state companies will be privatised, annual FDI inflows are forecast to remain robust in 2008-12, averaging around 9% of GDP, led by investment into mining, energy, transport, telecommunications, livestock, aquaculture and tourism. In recent years Chile’s importance as a regional investor has increased, particularly in the airline, shipping and retail sectors. FDI outflows totalled US$3.8bn in 2007, and are forecast to rise further as Chilean companies continue to expand abroad. Origin and distribution The US remains the largest investor, accounting for 25.3% of FDI into Chile in the period from 1974 to 2007. However, Spanish companies have been the most active foreign investors in recent years, raising the country’s share of cumulative FDI flows to 21.5% (a result, among other things, of the acquisition by Spanish companies of leading local operators in energy and telecoms, and heavy investment in transport infrastructure projects through build-operate-transferquot;BOTquot; concessions). Canada is the third-largest source country, with 16.6% of the total, as a result of its strong participation in local mining ventures. These countries are followed by the UK (8.7%); Australia (4.6%); Japan (2.9%); and Italy (2.6%). Mining accounts for 32.7% of the total foreign investment in Chile since 1974, compared with 20% into utilities (electricity, water and gas); 10.2% into communications; 10.2% into financial services; 4.5% into the chemical industry; 3.6% into the food and beverages industry; 3.3% into insurance; and 2.4% into wholesale and retail trade. Other sectors have received smaller FDI injections, including other manufacturing, construction and the forestry, aquaculture and agricultural sector. Determinants Chile’s foreign investment regime has been in place for three decades and is one of the most liberal in the world. Based on the principle of non-discrimination between local and foreign investors, foreign investors are able to sign formal contracts with the state that guarantee them access to foreign exchange at the best market rate for the repatriation of capital and profits. Investors also enjoy additional protection as a result of the rapidly expanding network of investment-protection accords and double-taxation treaties signed with other countries. Generally sound regulation, combined with political and economic stability and firm growth, have helped to boost FDI inflows since the early 1990s. Chile’s managerial talent and comparatively well-qualified labour force, together with a reputation for order and safety, are also combining with the country’s rapidly expanding network of free-trade agreements (FTAs) to attract a growing number of multinationals to use the capital, Santiago, as their headquarters for Latin America. Impact FDI funded a growing share of gross fixed investment in Chile in the 1990s, averaging 25.5% of gross fixed investment in 1996-98, compared with 10.4% in 1990-92. In 1999 currency depreciation and depressed domestic private investment lifted the ratio to 61.1%, but this fell back to 28.5% in 2000. In 2001-06 FDI funded 28% of the gross fixed investment that materialised in Chile in that period, contributing to the modernisation of infrastructure, including telecoms. The ratio was lifted to 42.9% in 2007 owing to large mining and energy investments. FDI has also made a major contribution in terms of the transfer of technology and managerial expertise, and has helped to open access to foreign markets for Chilean investors. Potential Transparent business operating conditions, political stability, a fundamentally sound economy and a huge network of free- trade, double-taxation and investment-protection accords will combine with the most modern infrastructure in Latin America and a growing pool of skilled labour to ensure that Chile continues to attract substantial FDI inflows. Services will overtake mining as the main magnet for foreign investment in the forecast period, but opportunities will also grow in agro- industry, aquaculture, the utilities, telecoms and communications, as well as in tourism infrastructure. External debt 2007 2008 2009 2010 2011 2012 Total external debt (US$ bn) 57.6 65.7 67.9 71.2 75.1 77.9 Total external debt (% of GDP) 35.1 33.9 37.0 38.3 38.6 38.2 Debt-service ratio, paid (%) 11.2 10.9 11.3 11.8 11.3 10.6 Chile's moderate foreign debt will not Chile’s foreign indebtedness is moderate and will not be a significant source of present a macroeconomic risk risk for its macroeconomic performance in the forecast period. According to Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 30 Chile Central Bank statistics, foreign debt rose by US$5.5bn or 9.8% in the first five months of 2008, reaching US$61.3bn. The central government is awash with the proceeds from extraordinary copper export earnings, and will prepay its foreign obligations where convenient, while saving most of the proceeds from the bonanza. To this end the government has set up a reserve fund, from which it will be able to draw in lean years, rather than borrow abroad. In these circumstances, gross public-sector foreign debt will trend downward in 2008-12 from already low levels (gross external government debt totalled US$3bn in May 2008), despite continued external borrowing by Codelco, to help finance its investment programme. Investment-related commercial credit has seen private-sector external debt rise sharply in recent years (from US$6.5bn at end- 2006 to US$11bn in May 2008), and growth in private-sector external debt is forecast to rise further over the forecast period as investment spending rises. Nevertheless, as financing conditions tighten the private sector!s approach will become more cautious. As a result, we expect the stock of medium and long- term private-sector foreign debt to rise from US$39bn in 2007 to US$50bn in 2012. We can expect nominal debt growth in 2008-12 that will entail a slight increase in the ratio of debt to GDP, from an estimated 35.1% of GDP in 2007 to an average 38.4% in 2010-12. The Central Bank will maintain a conservative international reserves policy, keeping the country well protected against external shocks. At US$21.5bn in July 2008, Chile’s total international reserves (not including gold) were sufficient to cover 4.1 months of merchandise imports at their average level of the first six months of the year. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 31 Market opportunities Market outlook 2007 2008 2009 2010 2011 2012 Population (m) 16.6 16.8 16.9 17.1 17.2 17.4 GDP (US$ bn at market exchange rates) 163.9 194.1 183.5 186.0 194.6 204.1 GDP per head (US$ at market exchange rates) 9,876 11,576 10,839 10,879 11,279 11,726 GDP (US$ bn at PPP) 230.6 244.1 258.9 277.2 297.5 318.5 GDP per head (US$ at PPP) 13,896 14,559 15,296 16,213 17,249 18,301 Personal disposable income (US$ bn) 77.3 89.5 78.5 77.4 79.3 81.2 Household consumption (US$ bn) 89.6 105.3 98.6 99.9 103.5 106.9 Household consumption per head (US$) 5,400 6,280 5,820 5,840 6,000 6,140 Exports of goods & services (% change) 7.8 3.0 4.6 8.9 7.9 7.9 Imports of goods & services (% change) 14.3 8.7 5.0 8.3 7.3 7.1 Chile has a relatively small market, with a population of 16.6m in 2007, and GDP equivalent to US$163.9bn at 2007 market-exchange rates, or US$9,876 per head. It is the most stable Latin American economy, owing to decades of stable and orthodox monetary and fiscal policies, which have also turned it into the fastest-growing economy in the region in the past three decades. The economy underwent a period of expansion in 2004-07, with GDP growth averaging 5.3% per year, but is forecast to ease to an average of 4.1% per year in 2008-12. Chile is also an attractive market, because its retail and distribution systems are modern and its business practices are fair. Inequality will continue to fall and real Chile’s dollar GDP per head will average US$11,260 in the outlook period, with incomes rise further rises constrained by a weakening exchange rate. Although Chile’s per- head GDP figures continue to hide vast inequalities, the trend of rising inequality has ended, with improvements in poverty and equity measurements recorded in the Ministry of Planning and Co-operation’s most recently conducted Encuesta de Caracterización Socio-Económica Nacional (Casen, the national socioeconomic characteristic survey), in 2006. The proportion of the Chilean population living in poverty fell from 18.7% in 2003 to 13.7% (2.21m) people in 2006. This includes 3.2% of the population (around 520,000) living in extreme poverty, down from 4.7% in 2003. A household is defined as living in extreme poverty when its monthly income per head is insufficient to acquire one basic food basket that in 2006 had a cost of Ps23,549 (US$44.30) in urban areas and Ps18,146 in rural areas. Although the country’s income distribution remains inequitable, the 2006 survey recorded, for the first time since 1990, a small but statistically meaningful step towards greater social equity. The Gini coefficient, which varies between 0 (absolute egalitarianism) and 1 (which a country would obtain if a single individual monopolised absolutely all the national income), fell from 0.57 in 2003 to 0.54 in 2006. Similarly, the ratio between the income absorbed by the richest 20% of the population and that absorbed by the poorest 20%quot;the so- called 20/20 ratioquot;fell to 13.1 in 2006 from 14.51 in 2003. Measured after the direct monetary transfers from the state to the most vulnerable households, the Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 32 Chile ratio between the revenue of the richest 20% of households and the poorest 20% fell to 7.1, a trend that is expected to continue. Consumer expenditure 2007 2008 2009 2010 2011 2012 US$ m Food, beverages & tobacco 21,942 25,654 23,937 24,194 25,004 25,736 Housing & household fuels 9,187 10,767 10,189 10,361 10,757 11,129 Clothing & footwear 5,839 6,563 5,903 5,838 5,937 6,030 Household goods & services 13,685 15,587 14,279 14,257 14,596 14,914 Health 6,471 7,726 7,394 7,584 7,934 8,263 Transport & communications 10,479 12,759 12,177 12,501 13,110 13,687 Leisure & education 6,472 7,635 7,183 7,292 7,570 7,830 Hotels & restaurants 4,964 5,901 5,533 5,623 5,848 6,061 Other 10,601 12,716 11,968 12,212 12,754 13,264 Total 89,640 105,309 98,564 99,861 103,509 106,913 % of total Food, beverages & tobacco 24.5 24.4 24.3 24.2 24.2 24.1 Housing & household fuels 10.2 10.2 10.3 10.4 10.4 10.4 Clothing & footwear 6.5 6.2 6.0 5.8 5.7 5.6 Household goods & services 15.3 14.8 14.5 14.3 14.1 13.9 Health 7.2 7.3 7.5 7.6 7.7 7.7 Transport & communications 11.7 12.1 12.4 12.5 12.7 12.8 Leisure & education 7.2 7.3 7.3 7.3 7.3 7.3 Hotels & restaurants 5.5 5.6 5.6 5.6 5.7 5.7 Other 11.8 12.1 12.1 12.2 12.3 12.4 Rises in average income and education standards, together with widespread access to mortgage loans and consumer credit, have gradually reduced differences in consumption patterns between people in the wide middle- income sector of the population. The April 2002 census found that the proportion of households owning their own home reached 72.5% in 2002 (compared with 68.3% in 1992), and the average quality of the housing stock has also improved substantially. The proportion of housing units described as precarious fell from 9% to 3.6% of the total. Over 50% were built of bricks or concrete, 96.5% were connected to the water network, 96.6% to the electricity grid, and 91% to the sewage network. The number of housing units increased by 28.2% in the ten years to 2002, double the demographic growth in this period, which reduced the number of people per housing unit from 4.3 in 1992 to 3.8 in 2002. The proportion of households owning at least one car reached 59.4% in 2002, up from 44.9% in 1992. In addition, 87% of households were equipped with a colour television (52.6% in 1992), 82.1% with a refrigerator (54.6%), and 78.8% with a washing machine (48.2%). Demographic trends will change spending patterns in the forecast period. The population is ageing, with a steadily falling mortality rate and a sharp reduction in the country’s population growth, which fell from 1.6% in the decade to 1992, to 1.2% in the decade to 2002. This yielded a fall in the proportion of the population aged under 15, from 29.7% in 1995 to 23.8% in 2007, whereas the proportion of the over-65s rose from 6.5% to 8.4%. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 33 Social indicators and living standards 2007 2012 Chile Latin America (av) Chile Latin America (av) Health Healthcare spending (% of GDP) 7.0 6.9 7.2 7.4 Healthcare spending (US$ per head) 694 482 840 638 Infant mortality rate (per 1,000 live births) 8.4 22.3 7.4 18.9 Physicians (per 1,000 population) 1.2 2.0 1.2 1.8 Food and beverages Food, beverages & tobacco (% of household spending) 24.5 31.6 24.1 28.5 Meat consumption (kg per person) 75.0 66.8 83.3 73.1 Milk consumption (litres per person) 127.2 127.8 137.5 136.0 Alcoholic drinks, sales volume (litres per person) 46.4 38.9 51.5 41.7 Coffee & tea consumption (kg per person) 2.1 – 2.1 – Consumer goods in use (per 1,000 population) Passenger cars 109 112 150 139 Telephone main lines 205 187 187 171 Mobile phone subscribers 841 638 995 761 Television sets 696 446 880 530 Personal computers 238 187 368 280 Retail sales volume (per 1,000 population) Refrigerators 25.0 18.4 29.1 21.2 Video recorders – – – – Washing machines 22.8 13.3 28.2 16.1 Households No. of households (m) 4.6 114.0 5.4 124.2 No. of people per household (av) 3.6 3.8 3.2 3.7 Stock of dwellings (per 1,000 population) 304 235 343 244 Income and income distribution Median household income (US$) 9,114 8,125 8,064 8,329 Average monthly wage (US$) 599 521 735 620 Gini coefficient 54.9 a 52.8 a – – Share of household income (%): lowest 20% 3.8 a 3.0 a – – highest 20% 60.0 a 58.4 a – – highest 10% 45.0 a 42.2 a – – top 20%/bottom 20% ratio 15.7 a 19.9 a – – a Latest available year. Sources: UN Statistical Office; World Bank; Food and Agriculture Organisation (FAO); Euromonitor; World Health Organisation (WHO); national statistical offices; Pyramid Research; Economist Intelligence Unit estimates and forecasts. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 34 Chile Long-term outlook The long-term outlook 2008-10 2011-20 2021-30 2008-30 Population and labour force (% change; annual av) Total population 0.99 0.75 0.48 0.66 Working-age population 1.43 0.70 0.11 0.54 Working-age minus total population 0.44 -0.05 -0.37 -0.12 Labour force 1.94 0.60 0.26 0.63 Growth and productivity (% change; annual av) Growth of real GDP per head 2.9 3.7 3.5 3.5 Growth of real GDP 3.9 4.4 4.0 4.1 Labour productivity growth 1.6 3.7 3.7 3.4 Growth of capital stock 7.4 5.8 5.0 5.7 Total factor productivity growth -0.5 1.9 2.1 1.6 Policy consensus and economic There is consensus on the need to maintain a liberal market economy and openness put Chile in a good position pursue prudent monetary and fiscal policies. Policy stability and the strong protection afforded to property rights help to reduce business risk and stimulate investment. A wide network of bilateral free-trade agreements (FTAs) has also helped Chile to attract foreign direct investment (FDI) and diversify its economy, and these conditions will stand Chile in good stead in the future. The ratio of gross fixed investment to GDP will rise to 25.4% in 2008-12 and 27.3% in 2013-17. This will be helped by substantial FDI inflows attracted by Chile’s natural resources and its comparative advantages as a base for Latin American opera- tions. The country’s efforts to turn itself into a regional platform for multi- national corporations will be maintained, facilitated by the country’s reputation for stability and security, its well-developed financial system, the quality of its transport and communications infrastructure, and its comprehensive network of FTAs, double-taxation agreements, and investment protection accords. Initial conditions: Chile’s per head GDP of US$9,876 in 2007 is the highest in the region, helped since 2004 by currency appreciation; in purchasing power parity (PPP) terms, it was US$13,896, first in Latin America ahead of Argentina’s US$13,300. Although Chile is constrained by a small internal market, it is rapidly catching up with developed-country levels and expects in 2008 or 2009 to become only the second country in Latin America (after Mexico) to become a member of the OECD. Chile will continue to attract manufacturing investment, but its competitiveness as a global manufacturing centre will lag Asian rivals. As a commodity producer, Chile will face more volatile terms of trade than Asian competitors, whose comparative advantage is founded on low labour costs. This means that growth is likely to remain dependent on world copper prices. Demographic trends: Although Chile’s population is still young by inter- national standards, its demographic profile is ageing. Those aged under 20 made up 49.4% of the population in 1960, but this share had fallen to 38.5% by 1992 and 32.7% by 2007. The proportion of people aged 65 and over rose from 4.3% in 1960 to 6.5% in 1992 and 8.5% in 2007. This is the result of slowing population growth and rising life expectancy at birth, to 78.3 years in 2005. Although improving and not as stark as in other Latin American countries, income inequality distorts Chile’s GDP per head figures. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 35 External conditions: The most important external factor affecting the Chilean economy is the international price of copper. Chile has over one-third of the world’s proven copper reserves and is by far the world’s largest producer. Ongoing demand growth from China and India will keep copper prices high by historical standards, particularly in 2008-09, although the Economist Intelligence Unit expects the levels of 2011-12 to remain double those that prevailed before 2004. In order to reduce its traditional reliance on copper, Chile has diversified its export base in the past 15 years quite successfully. Chile has the most open economy in Latin America, having pursued a wide range of bilateral FTAs, which help both to attract investment and to spread Chile’s external risk. Fish farming, cellulose, forestry, tourism, fruit, wine, poultry, pork and beef will be among the fastest-growing industries in the next ten years, as Chile’s good zoo- and phytosanitary conditions and its access to the leading world markets attract rising investment volumes. Growth in export industries will be boosted by its FTAs which mean that 85% of trade is conducted on a preferential basis. Institutions and policy trends: The country will maintain its strongly pro- market policy direction, helping to increase savings, investment and maintain solid levels of growth. There has been a strong pro-market policy in Chile for 30 years, and this will continue in the forecast period. This will be augmented by continued gradual policy and institutional reforms. Structural reform, through both deregulation and more efficient regulatory regimes, will further strengthen its position as one of the region’s leading investment locations. A civil service reform is under way that will model the civil service on public administrations with a reputation for best practice. The reform will replace political nominees by qualified technocrats at the head of all agencies executing government programmes, which should yield a gradual rationalisation of government procedures and greater efficiency. Long-term performance: Chile’s tradition of policy continuity, abundant natural resources, open investment legislation and modern infrastructure will stand the economy in good stead for continued firm economic growth. Its model will remain investment and export-led growth, based on solid macroeconomic fundamentals. Productivity growth will be helped by sustained investments in new technologies and transport, communications and energy infrastructure, and a modernisation of the education system. The country’s transport infrastructure, built and maintained through build- operate-transfer (BOT) concessions, will expand further as smaller roads are upgraded. Capacity at ports and airports will expand in line with contracted investment commitments, facilitating integration of the Southern Cone transport infrastructure and turning Chilean ports into gateways for trade between members of the Mercado Común del Sur (Mercosur, the Southern Cone customs union) and the Asia-Pacific region. This will also contribute to the expansion of Chile’s service exports, including tourism, retail, international transport, medical services, computer services, insurance and banking. The leading Chilean retail chains will continue their successful expansion in Latin America. They will consolidate their already significant presence in Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 36 Chile Argentina and Peru; expand their bridgeheads in Brazil, Colombia and Mexico; and explore new markets in the region. Similarly, in international transport services, the national airline, LAN, and the CSAV shipping holding are fast- growing global companies with leading positions in South America. Inflation will stay close to OECD levels. The current account will maintain a manageable deficit, and at times a modest surplus. The commitment to fiscal and monetary prudence, developed over the past three decades, will be further consolidated. Credit and capital markets will deepen, with growth in bank assets and the funds managed by Administradoras de Fondos de Pensiones (AFPs, private pension funds), insurance companies and mutual funds. Together with continued investment in human capital and infrastructure, these changes will increase Chile’s adaptability and raise productivity levels. The business environment will benefit from greater transparency in the public sector and the simplification of administrative procedures. The judiciary will become more agile and transparent as a modernisation of the civil justice system follows the reform of the penal system implemented in 2000-05. We forecast that average annual GDP growth will reach 4.4% in 2011-20, moderating to 4% in 2021-30. The capital stock will continue to grow and investment will rise as a share of GDP. As growth in the working age population slows, the increase in the amount of labour will slow and growth will become more dependent on productivity gains. Income and market size 2007 2010 2020 2030 Income and market size Population (m) 16.6 17.1 18.4 19.3 GDP (US$ bn at market exchange rates) 164 186 394 860 GDP per head (US$ at market exchange rates) 9,880 10,880 21,400 44,510 Private consumption (US$ bn) 90 100 218 511 Private consumption per head (US$) 5,400 5,840 11,830 26,440 GDP (US$ bn at PPP) 231 277 547 1,054 GDP per head (US$ at PPP) 13,900 16,210 29,700 54,550 Exports of goods & services (US$ bn) 77 96 263 689 Imports of goods & services (US$ bn) 55 79 240 703 Memorandum items GDP per head (at PPP; index, US=100) 30.2 32.3 38.1 44.3 Share of world population (%) 0.25 0.25 0.25 0.24 Share of world GDP (% at market exchange rates) 0.31 0.28 0.32 0.36 Share of world GDP (% at PPP) 0.35 0.35 0.38 0.40 Share of world exports (%) 0.46 0.42 0.49 0.53 Methodology for long-term forecasts The time horizon for the detailed forecasts and analysis in the Country Forecast report is a five-year period. The Main report now also carries a new section on the long-term outlook (which replaces the ten-year outlook), including projections of key macroeconomic and market size variables up to 2030. Depending on the indicator, average growth rates in a sub-period or values at select points in time are reported. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 37 Many companies make strategic business decisions over timeframes in excess of five years. Our long-term projections will provide information to facilitate such decisions. Long-term forecasts and scenarios are also the key to understanding some of the big economic issues that will shape global business in the coming decades. The Economist Intelligence Unit is well placed to build on and extend the five-year forecasts to produce long-term projections and scenarios because of the existing forward-looking analysis and models in the Country Forecast (in particular, the business environment rankings model and the ICT industry forecasts). These are used to forecast some of the key drivers of long-run growth, as explained in detail below. Growth projections The main building blocks for the long-term forecasts of key market and macroeconomic variables are long-run real GDP growth projections. We have estimated growth regressions (based on cross-section, panel data for 86 countries for the 1970- 2000 period) that link real growth in GDP per head to a large set of growth determinants. The sample is split into three decades: 1971-80, 1981-90 and 1991-2000. This gives a maximum of 258 observations (86 countries for each decade); given missing values for some countries and variables, the actual number of observations is 246. The estimation of the pooled, cross-section, panel data is conducted on the basis of a statistical technique called Seemingly Unrelated Regressions. The determinants of growth consist of the scope for convergence (based on initial GDP per worker at the start of a period); demographic variables; a set of policy variables (measuring the fiscal stance, openness to trade, and the government regulatory burden in product, credit and labour markets); a measure of institutional quality; geography (climate, location and the degree of primary export orientation); education levels and labour quality (as measured by mean years of schooling and life expectancy); the external economic environment (changes in the terms of trade); the level of development of information and communications technology (ICT); and historical legacies (history of independent statehood). The regressions, which have high explanatory power for growth, allow us to forecast the long-term growth of real GDP per head for sub-periods up to 2030, on the basis of demographic projections and assumptions about the evolution of policy variables and other drivers of long-term growth. Definitions of variables The dependent variable is GDPG: Average annual growth in real GDP per head, in the 1970s, 1980s and 1990s, measured at national constant prices. The independent variables include: LnGDPPL: The natural logarithm of GDP (adjusted for purchasing power parityquot;PPP) per worker (that is, per population aged 15-65) in constant 1980 US dollars at the start of each decade. Expressed as an index, US=1. LnSCHOOL: The natural logarithm of the mean years of schooling of the population aged over 15 at the start of each decade. Missing values for some countries are filled in by estimating mean years of schooling on the basis of an equation relating mean years of schooling (where available) to gross primary school enrolment ten years previously, and to secondary and tertiary enrolment ratios five years previously. LnLIFEEXP: The natural logarithm of life expectancy at birth at the start of each decade. This variable also enters the equation in squared form, reflecting diminishing returns to growth of increases in life expectancy at high levels. OPEN: Updated Sachs-Warner index of opennessquot;the fraction of years during each decade in which a country is rated as an open economy according to the following four criteria: (1) average tariff rates below 40%; (2) average quota and licensing coverage of imports of less than 40%; (3) a black-market exchange-rate premium that averaged less than 20%; and (4) no extreme controls (taxes, quotas, state monopolies) on exports. INST: Index of institutional quality (on a scale of 1-10) that is an average of five sub-indices of measures of the rule of law, quality of the bureaucracy, corruption, the risk of expropriation and the risk of government repudiation of contracts. Forecast values are based on corresponding indicators from our business environment rankings. LABPOP: The difference between the growth rate of the working-age population (aged 15-65) and the growth rate of the total population in each decade in the 1970-2000 period. TOT: The average annual rate of change of the terms of trade in a given decade. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 38 Chile GOVSAV: The average government savings ratio in each decade (current government revenue minus current government expenditure) expressed as a share of GDP. TRADESH: The average share of trade (exports and imports of goods and services) in GDP, lagged by one decade to deal with the endogeneity of growth and trade. GOVREG: An index on a scale of 1-10 of regulation of product, credit and labour markets. For forecast periods, the composite index is based on seven indicators from three categories of our business environment rankings modelquot;from Policy towards private enterprise (ease of setting up new businesses, freedom to compete, price controls); from Financing (openness of the banking system, financial market distortions) and from Labour markets (restrictiveness of labour laws, wage regulation). LnICT: The natural logarithm of an index, on a scale of 1-10, of the development of information and communications infrastructure. ICT development is found to influence growth significantly only from the 1990s, with little or no impact in previous decades. For 1990 the index is measured simply on the basis of fixed telephone lines per 1,000 population. From 2000 a more sophisticated measure is constructed, reflecting the very rapid development of ICT. The composite ICT index is based on ten indicators. Six indicators are quantitative and rely on our forecasts of fixed-line telephone penetration (lines per 100 population); mobile telephone penetration (subscribers per 100 population); the stock of personal computers (PCs per 100 population); Internet users (per 100 population); the number of Internet servers (per million population); and broadband penetration (per 1,000 population). In addition, there are four qualitative indicators from our “e-readiness” model. These include the quality of Internet connections, the development of e-business, the development of online commerce and the exposure of the population to the Internet (“Internet literacy”). Each of the ten indicators is transformed into an index scaled 1-10. The composite ICT infrastructure/use index, on a 1-10 scale, is an average of the ten component indices. Control variables include PRIMARY: Share of the exports of primary products in GDP at the start of a decade; TROPIC: Percentage of the land area within a country that has a tropical climate; COLONY: History of independent statehoodquot;a dummy variable taking the value of 1 if a country was a colony before 1945; and, in some specifications, regional dummy variables. Summary of findings As in other studies, income per head and human capital are found to be important determinants of growth, with the coefficient on the logarithm of GDP per worker suggesting a relatively modest pace of convergence. The measures of institutional quality and of government regulation enter significantly in all specifications. We found a strong positive impact on growth of government savings and openness in all specifications. The criteria for classifying countries as open are quite permissive. The crucial aspect of trade policy captured by the measure is that it is a high level of distortion, rather than modest levels, that is deleterious for growth. The trade share variable is also moderately significant. The openness index (which is more of a true measure of policy) is hardly affected by the inclusion of trade/GDP shares in the equation. The correlation of the two measures is only .26. Although a tropical climate is highly significant, as is the share of primary exports in GDP, other geographic indicatorsquot;such as access to the sea, distance from major growth centres and the proportion of the population residing near coastlinesquot;were not significant. A colonial past (pre-1945) is found to have a significant negative impact on growth, even in the 1970-2000 period. Productivity growth The forecasts of GDP growth, of capital stock growth (based on estimated investment shares and assumed depreciation rates) and of growth in labour supply (based on projections of working-age population and assumptions on labour force participation) yield labour productivity growth and total factor productivity growth forecasts. The latter utilise the growth accounting identity, GY=b*GK+c*GL+A, where GY is growth of real GDP, GK growth of the capital stock and GL growth of human capital (the labour force adjusted for changes in skills). “A” stands for growth in total factor productivity; “b” and “c” are the shares of capital and labour in income. Trade values are forecast on the basis of simple import (function of GDP and relative prices) and export functions. Forecast market exchange rates (that is, the differential between PPP and market exchange rates) depend on the differential in labour productivity growth between a country and the US. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 39 Data summary Global outlook 2003 a 2004 a 2005 a 2006 a 2007 b 2008 c 2009 c 2010 c 2011 c 2012 c International assumptions (%) World GDP growth 2.7 4.1 3.5 4.0 3.8 2.8 2.6 3.2 3.3 3.2 US GDP growth 2.5 3.6 3.1 2.9 2.2 a 1.2 1.1 2.4 2.5 2.5 Latin America growth 2.2 5.9 4.4 5.4 5.4 4.1 3.5 4.1 4.1 4.1 World trade growth 6.3 10.8 7.5 9.1 7.3 6.1 6.3 7.3 7.6 7.7 US CPI 2.3 2.7 3.4 3.2 2.9 a 4.1 2.8 2.5 2.5 2.4 EU27 CPI 2.0 2.1 2.0 2.1 2.3 3.5 2.4 2.1 1.9 1.8 Industrial raw materials (export price) 13.0 21.0 10.2 49.6 11.2 -0.3 -6.0 -4.6 -6.4 -2.5 Oil price (Brent; US$/b) 28.9 38.3 54.4 65.4 72.7 a 120.2 110.0 113.0 115.0 120.0 US$ 3-month commercial paper rate 1.1 1.5 3.4 5.0 5.1 a 2.8 2.8 4.2 4.8 4.8 US$:€ (av) 1.13 1.24 1.25 1.26 1.37 a 1.56 1.54 1.45 1.37 1.32 ¥:€ (av) 131.1 134.4 137.1 145.9 161.2 a 164.1 156.2 138.1 125.8 121.2 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. Gross domestic product, at current market prices 2003 a 2004 a 2005 a 2006 a 2007 a 2008 b 2009 b 2010 b 2011 b 2012 b Expenditure on GDP (Ps bn at current market prices) GDP 51,156 58,303 66,193 77,652 85,640 95,279 102,704 109,112 116,950 125,655 Private consumption 32,109 34,615 38,546 42,009 46,834 51,705 55,169 58,589 62,222 65,831 Government consumption 6,146 6,655 7,317 8,116 8,974 10,365 11,528 12,357 13,255 14,204 Gross fixed investment 10,307 11,245 14,008 15,132 17,610 22,141 25,034 28,098 30,929 34,020 Exports of goods & services 18,685 23,764 27,355 35,514 40,310 44,682 51,266 56,173 61,347 67,697 Imports of goods & services 16,581 18,415 21,719 23,896 28,524 34,078 40,771 46,635 51,386 56,730 Stockbuilding 490 438 685 776 436 464 477 528 583 633 Domestic demand 49,053 52,954 60,557 66,034 73,854 84,675 92,209 99,573 106,988 114,688 Expenditure on GDP (US$ bn at current market prices) GDP 74.0 95.7 118.3 146.4 163.9 194.1 183.5 186.0 194.6 204.1 Private consumption 46.4 56.8 68.9 79.2 89.6 105.3 98.6 99.9 103.5 106.9 Government consumption 8.9 10.9 13.1 15.3 17.2 21.1 20.6 21.1 22.0 23.1 Gross fixed investment 14.9 18.4 25.0 28.5 33.7 45.1 44.7 47.9 51.5 55.3 Exports of goods & services 27.0 39.0 48.9 67.0 77.2 91.0 91.6 95.7 102.1 109.9 Imports of goods & services 24.0 30.2 38.8 45.1 54.6 69.4 72.8 79.5 85.5 92.1 Stockbuilding 0.7 0.7 1.2 1.5 0.8 0.9 0.9 0.9 1.0 1.0 Domestic demand 70.9 86.9 108.2 124.5 141.4 172.5 164.7 169.7 178.0 186.3 Economic structure (% of GDP at current market prices) Private consumption 62.8 59.4 58.2 54.1 54.7 54.3 53.7 53.7 53.2 52.4 Government consumption 12.0 11.4 11.1 10.5 10.5 10.9 11.2 11.3 11.3 11.3 Gross fixed investment 20.1 19.3 21.2 19.5 20.6 23.2 24.4 25.8 26.4 27.1 Stockbuilding 1.0 0.8 1.0 1.0 0.5 0.5 0.5 0.5 0.5 0.5 Exports of goods & services 36.5 40.8 41.3 45.7 47.1 46.9 49.9 51.5 52.5 53.9 Imports of goods & services 32.4 31.6 32.8 30.8 33.3 35.8 39.7 42.7 43.9 45.1 Memorandum items Copper production ('000 tonnes) 4,904 5,413 5,321 5,361 5,557 5,658 5,913 6,179 6,457 6,748 National savings ratio (%) 20.1 22.2 23.4 25.2 25.5 23.6 24.1 23.5 25.0 26.2 a Actual. b Economist Intelligence Unit forecasts. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 40 Chile Gross domestic product, at constant prices 2003 a 2004 a 2005 a 2006 a 2007 a 2008 b 2009 b 2010 b 2011 b 2012 b Real expenditure on GDP (Ps bn at constant 2003 prices) GDP 51,156 54,247 57,263 59,749 62,793 65,027 67,488 70,457 73,565 76,746 Private consumption 32,109 34,426 36,965 39,372 42,420 44,222 45,434 46,909 48,677 50,370 Government consumption 6,146 6,518 6,903 7,305 7,732 8,235 8,622 8,915 9,272 9,643 Gross fixed investment 10,307 11,339 14,045 14,455 16,174 17,898 19,182 20,717 21,960 23,277 Exports of goods & services 18,685 21,170 22,084 23,290 25,111 25,861 27,038 29,438 31,771 34,282 Imports of goods & services 16,581 19,634 23,006 25,431 29,061 31,579 33,168 35,927 38,545 41,276 Stockbuilding 490 428 272 758 416 390 380 405 430 450 Total domestic demand 49,053 52,711 58,185 61,890 66,743 70,746 73,618 76,946 80,338 83,739 Real expenditure on GDP (% change) GDP 4.0 6.0 5.6 4.3 5.1 3.6 3.8 4.4 4.4 4.3 Private consumption 4.2 7.2 7.4 6.5 7.7 4.2 2.7 3.2 3.8 3.5 Government consumption 2.4 6.1 5.9 5.8 5.8 6.5 4.7 3.4 4.0 4.0 Gross fixed investment 5.7 10.0 23.9 2.9 11.9 10.7 7.2 8.0 6.0 6.0 Exports of goods & services 6.5 13.3 4.3 5.5 7.8 3.0 4.6 8.9 7.9 7.9 Imports of goods & services 9.7 18.4 17.2 10.5 14.3 8.7 5.0 8.3 7.3 7.1 Stockbuilding (% contribution to GDP growth) 0.5 -0.1 -0.3 0.8 -0.6 0.0 0.0 0.0 0.0 0.0 Total domestic demand 4.8 7.5 10.4 6.4 7.8 6.0 4.1 4.5 4.4 4.2 Real contribution to GDP growth (%) Private consumption 2.6 4.5 4.7 4.2 5.1 2.9 1.9 2.2 2.5 2.3 Government consumption 0.3 0.7 0.7 0.7 0.7 0.8 0.6 0.4 0.5 0.5 Gross fixed investment 1.1 2.0 5.0 0.7 2.9 2.7 2.0 2.3 1.8 1.8 External balance -0.7 -1.1 -4.5 -2.1 -3.0 -2.8 -0.6 -0.5 -0.4 -0.3 a Actual. b Economist Intelligence Unit forecasts. Gross domestic product by sector of origin 2003 a 2004 a 2005 a 2006 a 2007 a 2008 b 2009 b 2010 b 2011 b 2012 b Origin of GDP (Ps bn at constant 2003 prices) GDP at factor cost 45,904 50,562 55,652 59,484 64,358 66,648 69,169 72,212 75,398 78,658 Agriculture 2,470 2,742 2,934 2,989 3,080 3,203 3,325 3,451 3,589 3,732 Industry 20,298 23,475 27,043 29,657 32,957 34,012 35,170 36,563 38,015 39,494 Services 23,136 24,346 25,675 26,838 28,321 29,432 30,674 32,199 33,794 35,431 Origin of GDP (real % change) Agriculture 2.9 11.0 7.0 1.9 3.0 4.0 3.8 3.8 4.0 4.0 Industry 8.8 15.7 15.2 9.7 11.1 3.2 3.4 4.0 4.0 3.9 Services 3.2 5.2 5.5 4.5 5.5 3.9 4.2 5.0 5.0 4.8 Origin of GDP (% of factor cost GDP) Agriculture 5.4 5.4 5.3 5.0 4.8 4.8 4.8 4.8 4.8 4.7 Industry 44.2 46.4 48.6 49.9 51.2 51.0 50.8 50.6 50.4 50.2 Services 50.4 48.1 46.1 45.1 44.0 44.2 44.3 44.6 44.8 45.0 Memorandum item Industrial production (% change) 1.7 7.6 3.4 2.1 3.9 3.2 3.4 4.0 4.0 3.9 a Actual. b Economist Intelligence Unit forecasts. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 41 Growth and productivity 2003 a 2004 a 2005 a 2006 a 2007 a 2008 b 2009 b 2010 b 2011 b 2012 b Growth and productivity (%) Labour productivity growth 0.7 1.7 3.7 2.6 1.4 0.8 1.5 2.4 2.4 2.5 Total factor productivity growth 0.1 1.3 1.7 0.7 0.0 -0.6 -0.2 0.2 0.3 0.5 Growth of capital stock 5.0 5.6 7.8 7.1 7.7 6.9 7.3 8.3 8.0 7.7 Growth of potential GDP 3.9 6.2 4.9 3.2 5.9 3.1 3.6 4.3 4.0 4.1 Growth of real GDP 4.0 c 6.0 c 5.6 c 4.3 c 5.1 c 3.6 3.8 4.4 4.4 4.3 Growth of real GDP per head 2.8 c 4.9 c 4.4 c 3.3 c 4.0 2.5 2.8 3.4 3.5 3.4 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual. Economic structure, income and market size 2003 a 2004 a 2005 a 2006 a 2007 b 2008 c 2009 c 2010 c 2011 c 2012 c Population, income and market size Population (m) 15.9 16.1 16.3 16.4 16.6 16.8 16.9 17.1 17.2 17.4 GDP (US$ bn at market exchange rates) 74.0 95.7 118.3 146.4 163.9 a 194.1 183.5 186.0 194.6 204.1 GDP per head (US$ at market exchange rates) 4,650 5,940 7,270 8,910 9,880 11,580 10,840 10,880 11,280 11,730 Private consumption (US$ bn) 46.4 56.8 68.9 79.2 89.6 a 105.3 98.6 99.9 103.5 106.9 Private consumption per head (US$) 2,920 3,530 4,230 4,820 5,400 6,280 5,820 5,840 6,000 6,140 GDP (US$ bn at PPP) 162.9 178.0 198.6 213.8 230.6 a 244.1 258.9 277.2 297.5 318.5 GDP per head (US$ at PPP) 10,230 11,060 12,210 13,010 13,900 14,560 15,300 16,210 17,250 18,300 Personal disposable income (Ps bn) 32,799 34,768 36,176 37,522 b 40,393 43,935 43,929 45,430 47,693 49,995 Personal disposable income (US$ bn) 47.4 57.0 64.6 70.8 b 77.3 89.5 78.5 77.4 79.3 81.2 Growth of real disposable income (%) 3.9 5.4 0.3 1.4 b 4.0 2.7 -3.7 0.5 2.6 2.5 Memorandum items Share of world population (%) 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 Share of world GDP (% at market exchange rates) 0.20 0.23 0.27 0.30 0.31 a 0.32 0.29 0.28 0.28 0.27 Share of world GDP (% at PPP) 0.34 0.34 0.35 0.35 0.35 a 0.35 0.35 0.35 0.36 0.36 Share of world exports (%) 0.28 0.35 0.39 0.47 0.48 a 0.44 0.44 0.43 0.45 0.45 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. Fiscal indicators 2003 a 2004 a 2005 a 2006 a 2007 a 2008 b 2009 b 2010 b 2011 b 2012 b Fiscal indicators (% of GDP) Central government expenditure 21.2 19.9 19.2 18.1 18.6 19.5 19.2 19.6 19.7 19.5 Interest 1.1 1.0 0.8 0.7 0.6 0.6 0.5 1.0 1.1 1.3 Non-interest 20.0 19.0 18.4 17.4 18.0 19.0 18.6 18.7 18.7 18.2 Central government revenue 20.8 22.0 23.9 25.8 27.4 28.2 24.1 21.4 21.0 20.7 Central government balance -0.4 2.1 4.6 7.7 8.8 8.7 4.9 1.8 1.2 1.1 Primary balance 0.7 3.0 5.5 8.4 9.4 9.2 5.5 2.8 2.3 2.4 Public debt 13.0 10.7 7.3 5.3 4.1 2.9 5.0 5.7 7.2 8.6 a Actual. b Economist Intelligence Unit forecasts. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 42 Chile Monetary indicators 2003 a 2004 a 2005 a 2006 a 2007 a 2008 b 2009 b 2010 b 2011 b 2012 b Monetary indicators Exchange rate Ps:US$ (av) 691.4 609.5 559.8 530.3 522.5 491.0 559.7 586.7 601.1 615.7 Exchange rate Ps:US$ (year-end) 599.4 559.8 514.2 534.4 495.8 530.8 577.2 593.9 608.4 623.0 Exchange rate Ps:€ (av) 781.9 757.8 697.3 665.8 715.1 765.9 859.2 850.7 823.5 812.8 Exchange rate Ps:€ (year-end) 756.1 757.9 606.6 705.3 724.0 833.3 860.1 837.4 809.1 825.1 Real effective exchange-rate index (av), CPI-based 76.1 80.7 85.6 89.6 88.3 c 92.3 83.4 80.8 80.2 79.6 Purchasing power parity Ps:US$ (av) 314.0 327.5 333.3 363.2 371.3 390.4 396.6 393.7 393.1 394.5 Money supply (M2) growth (%) 0.6 17.8 19.3 16.1 18.2 10.7 6.4 1.9 7.8 8.1 Domestic credit growth (%) 3.5 11.4 9.7 12.3 23.1 7.5 7.9 3.3 7.8 8.1 Short-term lending rate (av; %) 6.2 5.1 6.7 8.0 8.7 12.1 10.1 8.1 8.1 8.1 Deposit rate (av; %) 2.7 1.9 3.9 5.1 5.6 7.0 6.3 5.8 5.8 5.8 Money market rate (av; %) 2.5 2.3 4.5 5.3 6.0 7.1 6.3 5.6 5.5 5.5 Long-term interest rate (av; %) – 6.2 5.9 6.1 5.3 6.5 5.8 5.1 5.1 5.1 a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates. Employment, wages and prices 2003 a 2004 a 2005 a 2006 a 2007 b 2008 c 2009 c 2010 c 2011 c 2012 c The labour market (av) Labour force (m) 6.5 6.8 6.8 6.8 7.2 7.3 7.4 7.6 7.7 7.8 Labour force (% change) 3.1 4.6 0.8 -0.1 4.9 2.0 1.9 1.9 1.4 1.4 Employment (m) 5.9 6.2 6.3 6.4 6.7 6.8 7.0 7.1 7.3 7.4 Employment (% change) 3.3 4.3 1.8 1.7 3.6 2.7 2.2 2.0 2.0 1.8 Unemployment (m) 0.5 0.6 0.5 0.4 0.5 0.5 0.5 0.5 0.4 0.4 Unemployment rate (%) 9.5 10.0 9.3 8.0 7.0 a 8.0 7.9 7.2 6.8 6.8 Wage and price inflation (%) Consumer prices (av) 2.8 1.1 3.1 3.4 4.4 a 8.4 6.2 3.7 3.1 3.0 Consumer prices (year-end) 1.1 2.4 3.7 2.6 7.8 a 7.9 4.5 3.2 3.0 3.0 Producer prices (av) 6.6 2.5 5.4 7.0 6.7 a 13.6 5.5 3.9 3.8 3.8 GDP deflator (av) 5.9 7.5 7.6 12.4 4.9 7.4 3.9 1.8 2.7 3.0 Private consumption deflator (av) 3.2 0.5 3.7 2.3 3.5 5.9 3.9 2.9 2.3 2.2 Government consumption deflator (av) 3.3 2.1 3.8 4.8 4.5 8.4 6.2 3.7 3.1 3.0 Fixed investment deflator (av) 2.5 -0.8 0.6 5.0 4.0 13.6 5.5 3.9 3.8 3.8 Average nominal wages 3.8 2.9 5.0 5.4 7.3 a 6.5 4.5 4.2 4.2 4.0 Average real wages 0.9 1.8 1.9 2.0 2.8 a -1.8 -1.6 0.5 1.0 0.9 Unit labour costs (Ps-based; av) 3.6 3.2 5.1 5.3 b 5.4 5.6 2.9 1.8 1.8 1.5 Unit labour costs (US$-based) 3.2 17.1 14.4 11.1 b 7.0 12.4 -9.7 -2.9 -0.6 -0.9 Labour costs per hour (Ps) 1,404.3 1,445.0 1,516.8 1,599.0 b 1,716.3 1,827.8 1,910.1 1,990.3 2,073.9 2,156.9 Labour costs per hour (US$) 2.0 2.4 2.7 3.0 b 3.3 3.7 3.4 3.4 3.5 3.5 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 43 Current account and terms of trade 2003 a 2004 a 2005 a 2006 a 2007 a 2008 b 2009 b 2010 b 2011 b 2012 b Current account (US$ bn) Current-account balance -0.8 2.1 1.4 6.8 7.2 -0.2 -1.3 -5.0 -3.9 -2.9 Current-account balance (% of GDP) -1.1 2.2 1.2 4.7 4.4 -0.1 -0.7 -2.7 -2.0 -1.4 Goods: exports fob 21.7 32.5 41.3 58.5 67.6 75.8 79.1 82.6 90.9 100.6 Goods: imports fob -17.9 -22.9 -30.5 -35.9 -44.0 -57.7 -61.4 -69.6 -76.1 -83.1 Trade balance 3.7 9.6 10.8 22.6 23.7 18.1 17.8 13.0 14.9 17.5 Services: credit 5.1 6.0 7.1 7.8 8.8 10.2 9.8 10.5 11.4 12.2 Services: debit -5.7 -6.8 -7.8 -8.5 -9.9 -11.5 -11.5 -11.8 -12.4 -13.2 Services balance -0.6 -0.7 -0.6 -0.6 -1.2 -1.2 -1.7 -1.3 -1.0 -1.0 Income: credit 1.6 2.0 2.5 3.5 5.6 7.3 6.8 5.8 6.2 6.4 Income: debit -6.0 -9.8 -12.9 -21.9 -23.9 -27.6 -27.0 -25.3 -26.9 -28.9 Income balance -4.5 -7.8 -10.5 -18.4 -18.3 -20.2 -20.2 -19.5 -20.7 -22.5 Current transfers: credit 0.9 1.4 2.2 3.8 3.6 3.8 3.6 3.7 3.9 4.0 Current transfers: debit -0.3 -0.3 -0.4 -0.5 -0.6 -0.7 -0.9 -0.9 -0.9 -1.0 Current transfers balance 0.6 1.1 1.8 3.3 3.0 3.1 2.8 2.8 2.9 3.1 Terms of trade Export price index (US$-based; 2005=100) 63.0 82.0 100.0 135.8 149.0 c 170.2 164.7 157.2 154.7 154.1 Export prices (% change) 12.3 30.1 21.9 35.8 9.7 c 14.3 -3.3 -4.5 -1.6 -0.3 Import price index (US$-based; 2005=100) 110.9 108.1 100.0 103.7 111.2 c 130.4 131.8 133.1 133.3 134.2 Import prices (% change) -6.1 -2.5 -7.5 3.7 7.2 c 17.3 1.1 1.0 0.2 0.7 Terms of trade (2006=100) 56.8 75.8 100.0 131.0 134.0 c 130.6 124.9 118.1 116.0 114.8 Memorandum item Export market growth (%) 7.4 c 11.5 c 6.9 c 8.4 c 5.2 c 5.2 5.7 7.0 7.0 7.2 a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates. Foreign direct investment 2003 a 2004 a 2005 a 2006 a 2007 b 2008 c 2009 c 2010 c 2011 c 2012 c Foreign direct investment (US$ bn) Inward direct investment 4.3 7.2 7.0 7.4 14.5 18.5 15.6 16.6 17.8 19.1 Inward direct investment (% of GDP) 5.8 7.5 5.9 5.0 8.8 9.5 8.5 8.9 9.1 9.4 Inward direct investment (% of gross fixed investment) 28.9 38.9 27.9 25.8 42.9 41.0 34.9 34.6 34.5 34.5 Outward direct investment -1.6 -1.6 -2.2 -2.9 -3.8 -5.5 -5.9 -6.3 -6.8 -7.3 Net foreign direct investment 2.7 5.6 4.8 4.5 10.6 13.0 9.7 10.3 11.0 11.8 Stock of inward direct investment 67.6 74.4 78.2 84.1 91.5 110.0 125.6 142.1 159.9 179.0 Stock of inward direct investment per head (US$) 4,249 4,622 4,808 5,121 5,512 6,560 7,417 8,315 9,270 10,285 Stock of inward direct investment (% of GDP) 91.4 77.8 66.1 57.5 55.8 56.7 68.4 76.4 82.2 87.7 Memorandum items Share of world inward direct investment flows (%) 0.85 1.12 0.80 0.64 0.91 1.44 1.19 1.22 1.26 1.31 Share of world inward direct investment stock (%) 0.87 0.83 0.83 0.74 0.70 0.77 0.80 0.84 0.87 0.90 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 44 Chile External debt 2003 a 2004 a 2005 a 2006 a 2007 b 2008 c 2009 c 2010 c 2011 c 2012 c External debt Total external debt (US$ bn) 42.8 43.8 45.4 48.0 57.6 65.7 67.9 71.2 75.1 77.9 Total external debt (% of GDP) 57.9 45.8 38.4 32.8 35.1 33.9 37.0 38.3 38.6 38.2 Debt/exports ratio (%) 151.3 108.0 89.2 68.8 70.2 70.4 70.9 72.1 69.2 65.3 Debt-service ratio, paid (%) 28.5 23.6 15.1 19.8 11.2 10.9 11.3 11.8 11.3 10.6 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 45 Data sources and definitions The sources for global and domestic data refer to historical data. The source for all forecast data, unless otherwise stated, is the Economist Intelligence Unit Global data US and OECD GDP growth: OECD World GDP and trade growth: Economist Intelligence Unit aggregate US and OECD consumer price inflation: OECD Manufactures price: UN, Monthly Bulletin of Statistics Oil prices: dated Brent Non-oil commodities: Economist Intelligence Unit aggregate World copper prices: Economist Intelligence Unit aggregate US$ 3-month commercial paper rate: IMF, IFS Ps:US$ exchange rate: IMF, IFS; nominal weighted index, 1990=100 Domestic data GDP growth by demand component: Banco Central de Chile (BCC, the Central Bank), Boletín Mensual; 2003 prices Copper production: BCC, Boletín Mensual; m tonnes of all copper products Average copper price: LME, quoted in BCC, Boletín Mensual US$ copper exports: BCC, Boletín Mensual US$ GDP: IFS; current prices, from local currency at annual average exchange rate PPP: purchasing power parity, average ratio of prices in Chile to prices in the US Demographic profile data: UN, population projections, medium variant; ILO, labour force projections GDP per head: US$ GDP divided by population Real GDP growth per head: real growth in GDP deflated by population growth Budget balance: non-financial public sector (NFPS) balance only; Ministerio de Hacienda Inflation: BCC; December 1998=100 Wage and salary inflation: BCC Wage costs and unemployment rate: BCC, Boletín Mensual Exchange rate: BCC; market rates expressed as Ps:US$ Real exchange rate: ratio of estimated annual average purchasing power parity (PPP) for tradeable products to annual average exchange rate Interest rates: IFS; bank rate offered (charged) on deposits (loans) of 30-89 days; given in annual terms by compounding weighted average monthly rates Balance of payments: BCC Total external debt: World Bank, Global Development Finance Total debt service: World Bank, Global Development Finance; principal repayments made against long-term debt, plus interest payments and IMF charges paid against total external debt Debt-service ratio: ratio of total debt service paid to exports of goods and services Abbreviations IFS: International Financial Statistics IMF: International Monetary Fund ILO: International Labour Organisation LME: London Metal Exchange Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 46 Chile Guide to the business rankings model Outline of the model Calculating the rankings The business rankings model measures the quality or The rankings are calculated in several stages. First, each of attractiveness of the business environment in the 82 the 91 indicators is scored on a scale from 1 (very bad for countries covered by Country Forecasts using a standard business) to 5 (very good for business). The aggregate analytical framework. It is designed to reflect the main category scores are derived on the basis of simple or criteria used by companies to formulate their global business weighted averages of the indicator scores within a given strategies, and is based not only on historical conditions but category. These are then adjusted, on the basis of a linear also on expectations about conditions prevailing over the transformation, to produce index values on a 1-10 scale. An next five years. This allows the Economist Intelligence Unit to arithmetic average of the ten category index values is then utilise the regularity, depth and detail of its forecasting work calculated to yield the aggregate business environment score to generate a unique set of forward-looking business for each country, again on a 1-10 scale. environment rankings on a regional and global basis. The use of equal weights for the categories to derive the The business rankings model examines ten separate criteria overall score reflects in part the theoretical uncertainty about or categories, covering the political environment, the the relative importance of the primary determinants of macroeconomic environment, market opportunities, policy investment. Surveys of foreign direct investors! intentions towards free enterprise and competition, policy towards yield widely differing results on the relative importance of foreign investment, foreign trade and exchange controls, different factors. Weighted scores for individual categories taxes, financing, the labour market and infrastructure. Each based on correlation coefficients of recent foreign direct category contains a number of indicators that are assessed by investment inflows do not in any case produce overall the Economist Intelligence Unit for the last five years and the results that are significantly different to those derived from a next five years. The number of indicators in each category system based on equal weights. varies from five (foreign trade and exchange regimes) to 16 (infrastructure), and there are 91 indicators in total. For most quantitative indicators the data are arrayed in ascending or descending order and split into five bands Almost half of the indicators are based on quantitative data (quintiles). The countries falling in the first quintile are (eg, GDP growth), and are mostly drawn from national and assigned scores of 5, those falling in the second quintile score international statistical sources for the historical period (2003- 4 and so on. The cut-off points between bands are based on 07) and from Economist Intelligence Unit assessments for the the average of the raw indicator values for the top and forecast period (2008-12). The other indicators are qualitative bottom countries in adjacent quintiles. The 2003-07 ranges in nature (eg, quality of the financial regulatory system), and are then used to derive 2008-12 scores. This allows for are drawn from a range of data sources and business surveys intertemporal as well as cross-country comparisons of the adjusted by the Economist Intelligence Unit, for 2003-07. All indicator and category scores. forecasts for the qualitative indicators covering 2008-12 are based on Economist Intelligence Unit assessments. Measurement and grading issues The indices and rankings attempt to measure the average The main sources used in the business rankings model quality of the business environment over the entire include CIA, World Factbook; Economist Intelligence Unit, historical or forecast period, not simply at the start or at the Country Risk Service, Country Finance, Country Commerce; end of the period. Thus in the forecast we assign an average Freedom House, Annual Survey of Political Rights and Civil grade to elements of the business environment over 2008-12, Liberties; Heritage Foundation, Index of Economic Freedom; not to the likely situation in 2012 only. IMF, Annual Report on Foreign Exchange Restrictions; International Institute for Management Development, The scores based on quantitative data are usually calculated World Competitiveness Yearbook; International Labour on the basis of the numeric average for an indicator over the Organisation, International Labour Statistics Yearbook; UN, period. In some cases, the “average” is represented, as an Human Development Report; US Social Security approximation, by the recorded value at the mid-point of the Administration, Social Security Programs Throughout the period (2005 or 2010). In only a few cases is the relevant World; World Bank, World Development Report; World variable appropriately measured by the value at the start of Development Indicators; World Economic Forum, Global the period (eg, educational attainments). For one indicator Competitiveness Report. (the natural resources endowment), the score remains constant for both the historical and forecast periods. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • Chile 47 Indicator scores in the business rankings model 2003-07 2008-12 Regional Regional Chile averagea Chile averagea Political environment 1. Risk of armed conflict 5 3.9 5 4.1 2. Risk of social unrest 4 2.8 4 3.1 3. Constitutional mechanisms for the orderly transfer of power 4 3.4 4 3.5 4. Government and opposition 5 3.2 4 3.1 5. Threat of politically motivated violence 4 3.6 4 3.8 6. International disputes or tensions 4 3.4 4 3.3 7. Government policy towards business 4 3.1 5 3.2 8. Effectiveness of political system in policy formulation and execution 4 2.6 4 2.8 9. Quality of the bureaucracy 4 2.6 4 2.8 10. Transparency and fairness of legal system 3 2.4 4 2.5 11. Efficiency of legal system 4 2.4 4 2.4 12. Corruption 4 1.9 3 2.5 13. Impact of crime 3 2.6 3 2.6 Macroeconomic environment 1. Inflation* 5 3.9 4 3.8 2. Budget balance as % of GDP* 5 4.3 5 4.4 3. Government debt as % of GDP* 5 4.3 5 4.6 4. Exchange-rate volatility* 4 3.9 4 4.1 5. Current-account balance as % of GDP* 5 4.4 5 3.8 6. Quality of policymaking 4 3.2 4 3.1 7. Institutional underpinnings 4 3.3 4 3.3 8. Asset prices 4 3.0 4 3.0 Market opportunities 1. GDP, US$ bn at PPP* 3 3.0 3 3.0 2. GDP per head, US$ at PPP* 3 2.2 3 2.3 3. Real GDP growth* 4 4.2 4 3.7 4. Share of world merchandise trade* 2 1.9 3 2.2 5. Average annual rate of growth of exports* 3 3.1 3 2.3 6. Average annual rate of growth of imports* 5 4.2 3 3.3 7. The natural resource endowment* 3 3.2 3 3.2 8. Profitability* 5 4.8 4 3.9 9. Regional integration 3 3.0 4 3.4 10. Proximity to markets 1 2.3 1 2.1 Policy towards private enterprise and competition 1. Degree to which private property rights are protected 5 3.2 5 3.3 2. Government regulation on setting up new private businesses 4 2.9 4 3.0 3. Freedom of existing businesses to compete 5 3.3 5 3.3 4. Promotion of competition 5 2.8 5 3.0 5. Protection of intellectual property 4 2.6 4 2.9 6. Price controls 5 3.3 5 3.5 7. Distortions arising from lobbying by special interest groups 4 2.5 4 2.8 8. Distortions arising from state ownership/control 4 3.3 4 3.1 9. Minority shareholders 4 2.4 4 2.7 Policy towards foreign investment 1. Government policy towards foreign capital 5 3.5 5 3.7 2. Openness of national culture to foreign influences 4 3.8 4 3.8 3. Risk of expropriation of foreign assets 5 3.3 5 3.3 4. Availability of investment protection schemes 4 3.0 5 3.4 5. Government favouritism 5 3.0 5 3.1 Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008
    • 48 Chile Foreign trade and exchange controls 1. Capital-account liberalisation 5 4.0 5 4.1 2. Tariff and non-tariff protection** 5 3.3 5 3.8 3. Ease of trading 4 3.3 4 3.6 4. Openness of trade* 4 3.0 5 3.9 5. Restrictions on the current account 5 4.3 5 4.3 Taxes 1. The corporate tax burden** 4 3.6 3 3.5 2. The top marginal personal income tax* 4 4.7 4 4.7 3. Value-added tax* 3 3.2 3 3.3 4. Employers' social security contributions 5 3.6 5 3.3 5. Degree to which fiscal regime encourages new investment 4 2.5 4 2.9 6. Consistency and fairness of the tax system 4 2.4 4 2.5 7. Tax complexity 3 2.3 3 2.6 Financing 1. Openness of banking sector 4 3.5 4 3.8 2. Stockmarket capitalisation 4 2.3 4 2.7 3. Distortions in financial markets** 5 3.3 5 3.8 4. Quality of the financial regulatory system 4 3.1 4 3.4 5. Access of foreigners to local capital market 5 3.3 5 3.4 6. Access to medium-term finance for investment 4 2.3 4 2.9 The labour market 1. Labour costs adjusted for productivity* 4 3.9 4 3.9 2. Availability of skilled labour* 3 2.4 3 2.8 3. Quality of workforce 4 2.9 4 3.0 4. Quality of local managers 4 3.5 4 3.5 5. Language skills 3 3.1 3 3.1 6. Health of the workforce* 4 3.3 4 3.4 7. Level of technical skills 3 3.0 3 3.2 8. Cost of living* 4 4.2 5 3.7 9. Incidence of strikes** 3 3.2 3 3.3 10. Restrictiveness of labour laws 3 2.8 3 3.0 11. Extent of wage regulation 4 3.4 4 3.4 12. Hiring of foreign nationals 4 3.8 4 3.8 Infrastructure 1. Telephone density* 3 2.8 4 3.0 2. Reliability of telecoms network** 3 3.1 4 3.5 3. Telecoms costs* 4 3.2 5 3.8 4. Mobiles* 3 2.0 4 3.0 5. Stock of personal computers* 4 3.1 4 3.5 6. Internet use* 3 2.3 5 3.3 7. Broadband penetration* 3 2.8 5 3.3 8. R&D expenditure as % of GDP* 2 2.3 2 2.3 9. Research infrastructure 3 3.1 3 3.0 10. The infrastructure for retail and wholesale distribution** 3 2.4 4 2.8 11. Extent and quality of road network** 2 2.1 2 2.5 12. Extent and quality of the rail network** 4 2.5 4 2.5 13. Quality of ports infrastructure 4 2.9 4 3.2 14. Quality of air transport 4 3.3 4 3.5 15. Production of electricity per head* 3 2.2 3 2.3 16. Rents of office space* 4 4.4 4 3.6 Note. A single asterisk (*) denotes scores based on quantitative indicators. Indicators with a double asterisk (**) are partly based on data. All other indicators are qualitative in nature. a Out of 12 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela. Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008