Chile04

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  • The Southernmost nation of LA and one of the longest and narrowest nations in the world. It probably derives its name from the indigenous Mapulche world “Chili” which means “where the land ends” Situated south of Peru and west of Bolivia and Argentina, bordered by the Atlantic Ocean and Pacific Ocean Chile’s land - described as an extravaganza of “crazy geography”. It extends some 4,300 km from the desert north to the glacial south. In the North is the driest place on earth, the Atacama Desert, and In the Center is a 1,100-km-long thickly populated valley with most of Chile’s arable land At the Southern tip of Chile’s mainland is Punta Arenas, the southernmost city in the world.
  • Culture: an intoxicating blend of the many influences that have shaped it two Nobel Prize winning poets (Gabriela Mistral and Pablo Neruda) Chile’s New Song Movement established it as a leader in the world of folk music
  • 1520 – The first European to visit what is now Chile was Ferdinand Magellan, a Portuguese explorer XVI century - Spanish Settlement despite fierce resistance from the Indian tribe of the Araucanians 1810 - Independence from Spain Sept. 18, the Chilean Independence Day 1879-83 - War of the Pacific (Peru & Bolivia) => it incorporated the mineral rich Atacama desert to the north and the southern temperate territories. The first half of the 20 th century - the political climate swing between right and left with no government having sufficient support to cement large scale reform.
  • 1960s - the social reforms were successfully instituted by the Christian Democrats, who targeted housing, education, health and social services 1970 – Salvador Allende Gossens became the first president elected on a Marxist-Leninist program in a non-Communist country of the western hemisphere. He instituted the state control of the economy, nationalizing all basic industries, banks, and communications. 1973-1989 - The military rule of General Augusto Pinochet Ugarte. He suspended the constitution, dissolved the Congress, and embarked on a campaign of terror against leftist elements in the country. However, Pinochet government, with its austere controls, slashed inflation and stimulated production. 1990s – the Civilian Rule was restored: democracy returned to Chile although many of the previous regime’s leaders still have a significant influence March 2000 - Ricardo Logos, the first socialist president to run the country since Allende 2001 - was dominated by the trial in London of general Pinochet
  • The current constitution of the Republic was aapted in September 1980 and made effective in March 1981. Since 1989, elections have been fair and open, and political transition has been peaceful.
  • Chile is a Republic consisting of Executive, Legislative and Judicial branches. There are two political coalitions that have dominated since 1989. .The center-left Concertacion , which span the political spectrum from socialist to center Christian Democrat, has been in power for 12 years. .The center-right opposition coalition of Alianza por Chile gain votes in 2000 elections campaigning on rising unemployment, price increases and government corruption. Over the last decade both alliances have moved toward the center to attract moderate voters.
  • United Labor Central (CUT) - includes trade unionists from the country's five largest labor confederations
  • On his first 2 years in office, Lagos has concentrated on economic reforms . The government passed legislation providing for capital market and capital account liberalization, improved corporate governance, labor market reforms, unemployment insurance and fiscal consolidation. In the remainder of his administration, Lagos is likely to tackle state modernization and decentralization and the reform of the public health and educational systems.
  • The Bicameral National Congress (Congreso Nacional) consists of two houses. The Senate (Senado) has 48 seats and the Chamber of Deputy (Camera de Diputados) has 120 seats. In the new legislative composition, Concertation has only a slim majority and this may make it more difficult for the government to put through economic legislation and political reforms.
  • The Bicameral National Congress (Congreso Nacional) consists of two houses. The Senate (Senado) has 48 seats and the Chamber of Deputy (Camera de Diputados) has 120 seats. In the new legislative composition, Concertation has only a slim majority and this may make it more difficult for the government to put through economic legislation and political reforms.
  • In the last decade, overall poverty levels have been sharply reduced as a result of strong economic growth and well directed social programs (reduced the poverty rate in half). One of Logos’ longer term goals is to reduce income disparity. Chile’s per capita income remains among the least equitable distributed, even in LA: the upper 20% of the population holds 60% of the country’s wealth. Income disparity is also reflected in Chile’s Gini coefficient of 56.5 (out of 100, with zero representing complete income equality)
  • In the last decade, overall poverty levels have been sharply reduced as a result of strong economic growth and well directed social programs (reduced the poverty rate in half). One of Logos’ longer term goals is to reduce income disparity. Chile’s per capita income remains among the least equitable distributed, even in LA: the upper 20% of the population holds 60% of the country’s wealth. Income disparity is also reflected in Chile’s Gini coefficient of 56.5 (out of 100, with zero representing complete income equality)
  • The Central Bank is autonomous from the government, conducts monetary and exchange rate policy, regulates international capital movements and also regulates bank operations
  • The Central Bank is autonomous from the government, conducts monetary and exchange rate policy, regulates international capital movements and also regulates bank operations
  • The government introduced in March 2000 a fiscal policy rule, the ‘structural balance’, based on a measure that strips out much of the noise generated by cyclical factors (see box). The measure adjusts central government revenues for temporary deviations of gross output from its potential level, and for deviations of copper prices from a specified reference level. The government has targeted a 1% of GDP structural surplus for 2001-2005.
  • Pension system a public pay-as-you-go system transformed into a fully-funded system of individual accounts administrated by private competitive fund administrators (Administradoras de Fondos de Pensiones, or AFPs). Currently, 7 AFPs manage about $35bn in assets (excluding the military and the police)
  • Interest Rate Chile’s independent central bank targets the daily interbank nominal interest rate, managing ST liquidity primarily using repurchase agreements. The shift in August 2001 to a nominal target should reduce volatility in exchange rates, monetary aggregates, and ST nominal interest rates and is more suitable for a flexile exchange rate regime without capital control. It should also provide greater transparency and easier risk management.
  • The central bank also targets inflation with a band of 2-4% on a continuous basis, with the aim to keep inflation at the midpoint of the band over a one- to two-year horizon (a two-year horizon is used for headline inflation, one year for underlying inflation).
  • Exchange rate September 1999 – the move to a freely floating ExR was accompanied by the central bank’s explicit commitment to avoid intervention in the foreign exchange market except under extraordinary circumstances. During 2001 the nominal ExR come under pressure from lower copper prices, reduced domestic growth and continuing uncertainty about Argentina. Beginning with August, the central bank intervened in the ExR market to support the peso, selling almost $700mn of its reserves and it issued $2bn US dollar indexed bonds increasing he stock that can be potentially used for hedging.
  • Chile’s external debt is low compared to other LAC => as a consequence, the country is less dependent on & less vulnerable to swings in external financing Throughout the 1990s growth in corporate debt has accounted for virtually all the expansion in Chile’s gross external debt. This is considerably higher than the median of 75% of foreign exchange receipts for all A category sovereigns. Currently, 85% of Chile’s external debt is owed by the private sector, sharply up from 31% in 1991. Large Chilean corporates have successfully accessed credit abroad, while multinationals with Chilean operations have also had an easier time borrowing abroad to finance expansion, as compared to comparable operations in other Latin American countries. This reflects Chile’s lower country risk and better institutional framework.
  • Throughout the 1990s growth in corporate debt has accounted for virtually all the expansion in Chile’s gross external debt. This is considerably higher than the median of 75% of foreign exchange receipts for all A category sovereigns. Currently, 85% of Chile’s external debt is owed by the private sector, sharply up from 31% in 1991. Large Chilean corporates have successfully accessed credit abroad, while multinationals with Chilean operations have also had an easier time borrowing abroad to finance expansion, as compared to comparable operations in other Latin American countries. This reflects Chile’s lower country risk and better institutional framework.
  • Commercial banks represent the most significant source of external financing (47% of total medium- and long-term external debt at end-2000), while international bond issuance has gradually displaced borrowing from multilateral organizations. The share of total medium- and long-term debt owed to multilateral organizations fell from 28% in 1993 to 4% in 2001. On the contrary, external liabilities from private sources have increased significantly. Financing from Chilean companies’ bond issues abroad continues to rise noticeably as well, up from 2% of medium- and long-term debt in 1993, to 21% in 2001.
  • Commercial banks represent the most significant source of external financing (47% of total medium- and long-term external debt at end-2000), while international bond issuance has gradually displaced borrowing from multilateral organizations.
  • Chile’s external debt stock has a relatively favorable maturity profile, with 83% of the total being medium and long-term in nature and sustaining a duration of 4.2 years at the end of 2000.
  • From 1995 to 2001, short-term external debt by residual maturity averaged US$4,950 million, and US$2,100 million as measured by original maturity. Until 1996, short-term loans by original maturity were significantly higher than short-term liabilities derived from amortizations on longer term debt falling due within the next year. However, due to the sharp rise in medium-and long-term external borrowing, the situation has since been reversed. Duration of medium-and long-term external debt has fluctuated between 5.0 and 4.1 in the nineties. The higher level of this indicator in 1993 may be explained by the debt structure according to debtor sector. Indeed the public sector’s share in medium- and long-term debt was high, and its profile of amortizations averaged over 15 years . This ratio decreased during the following years, specially in 1995, when prepayments to Multilateral Organizations were made.
  • As regards the distribution of external borrowing by type of interest rate, at the end of 2000, 63% was at floating rates, and 37% at fixed rates. By currency, 96% was denominated in US dollars and the remaining 4% was mainly in euros and yens.
  • Chile's early adoption of debt conversion generated favorable publicity in the international financial press concerning the country's economic performance, business climate, and economic openness => to promote FDI flows to Chile
  • In LAC, only Chile and Mexico have an investment grade rating It was a bit higher than the last 10-year bond sold in 1999 (Argentina crisis)
  • We can see an increase in the CA deficit in the last 2 years and we think that this is likely to continue in 2002 as a consequence of the deterioration of the trade balance. This takes into account the 6% cut in copper exports Slow recovery of the global economy An acceleration of the import growth resulting from the devaluation of the Argentine peso
  • Chile’s historical commitment to fiscal austerity was reflected in the general government surplus throughout much of the 1990s. The government introduced in March 2000 a fiscal policy rule, the ‘ 1% structural surplus’ , meaning that it intends to post a surplus of 1% of GDP using a methodology that attempts to measure the fiscal result, isolating temporary factors such as recession or overheated economic growth and copper price below its long-term trend. The government has targeted a 1% of GDP structural surplus for 2001-2005. However, in 2001 the general government deficit was almost 1% of GDP and in 2002 it is likely to reach 2% of GDP. The 2002 budget (with expenditures of about $1.55bn higher than the expected revenues $1.17bn) failed to reduce the deficit and may have a negative impact on the ratings. Government spending budgeted in 2001 was programmed using a $0.92/pound copper price and 5.7% potential output growth rate, but the actual copper price last year was $0.72/pound and the output growth was 2.9%
  • Here, reserves include gold also. Although the import cover decreased since 1999 ~ 13 months, it is still high even when we compare it with other LA countries. Mexico’s ratio is equal to 3 months (almost the limit) and Brazil can cover 8 months of imports by using its reserves.
  • The debt service ratio as a percentage of foreign exchange receipts (exports of goods & services) was 33% in 2001 and it is expected to rise at almost 35% in 2002. Nevertheless, even with this decline, Chile’s external liquidity remains relatively comfortable. Compared with other LAC it has a better position than Brazil, but Mexico has a debt service ratio of only 26%.
  • Chile’s external debt as a percentage of GDP has increased steadily since 1997, in 2001 the ratio was almost 58% therefore it tends to be toward the higher range of A category sovereigns.
  • Compared with other LAC, Chile’s ratio is half than Brazil’s Debt/Exports ratio, but we can see that it can be improved as we look at Mexico’s ratio.
  • Compared with other LAC, Chile’s ratio is half than Brazil’s Debt/Exports ratio, but we can see that it can be improved as we look at Mexico’s ratio.
  • Chile’s amortization schedule is concentrated in 2001, 2002 and 2003, reflecting the sizable increase in non-bank private debt contracted in 1996-99. Amortization requirements of the public sector, by contrast, are moderate and will steadily decline. The total amount for these three years account for 41 % of medium-and long-term external debt at December 31, 2000, and is explained by the increase in these external liabilities, specially between 1996 and 1999. During the last six years, the average annual growth rate of external debt was 11%.
  • The country and its companies enjoy the lowest risk premiums in the region
  • The country and its companies enjoy the lowest risk premiums in the region
  • High income disparity (the upper 20% of the population holds 60% of the country’s wealth) the upper 20% of the population holds 60% of the country’s wealth.
  • High income disparity (the upper 20% of the population holds 60% of the country’s wealth) the upper 20% of the population holds 60% of the country’s wealth.
  • Chile04

    1. 1. Country Risk Analysis: Republic of Chile Last updated on: April 2002 Based on a country risk report by Alina Maria TANASA Dalis CHHORN
    2. 2. Outline <ul><li>I Country Snapshot </li></ul><ul><li>II Political & Social Setting </li></ul><ul><li>III Economic Performances & Structural Issues </li></ul><ul><li>IV Fiscal, Monetary & Exchange Rate Policies </li></ul><ul><li>V Balance of Payments </li></ul><ul><li>VI Debt Analysis </li></ul><ul><li>VII Rating & Rankings </li></ul><ul><li>VIII Strengths & Weaknesses </li></ul><ul><li>IX Country Risk Overview </li></ul>
    3. 3. Geography <ul><li>Chile - “where the land ends” </li></ul><ul><li>Area - 756,950 sq. km </li></ul><ul><li>Arable land - 7% </li></ul><ul><li>Coastline: 6,435 km </li></ul><ul><li>Chile - extravaganza of “crazy geography” </li></ul><ul><ul><li>North - the Atacama Desert </li></ul></ul><ul><ul><li>Center - thickly populated valley with most of Chile’s arable land (Mediterranean climate) </li></ul></ul><ul><ul><li>South - Punta Arenas </li></ul></ul><ul><li>Natural resources : copper, timber, iron, </li></ul><ul><li>ore, nitrates, precious metals, molybdenum </li></ul>
    4. 4. People <ul><li>Population - 15,328,467 (July 2001) </li></ul><ul><li>Growth rate: 1.13% (2001) </li></ul><ul><li>90% mestizo, 5% Indians, 5% European descendent </li></ul><ul><li>Capital city: Santiago (population 5.2 million) </li></ul><ul><li>Large cities: Concepción, Viña del Mar </li></ul><ul><li>Rural population: 15% </li></ul><ul><li>Life expectancy: 75.94 years </li></ul><ul><li>Illiteracy rate: 4.8% (Latin America 12%) </li></ul>Chile's capital, Santiago
    5. 5. Culture & Religion <ul><li>Culture : an intoxicating blend of the many influences that have shaped it </li></ul><ul><ul><li>two Nobel Prize winning poets </li></ul></ul><ul><ul><li>a leader in the world of folk music </li></ul></ul><ul><li>Religions : Roman Catholic 89%, Protestant 11%, small Jewish and Muslim populations </li></ul><ul><li>Language : Spanish and a handful of native languages, including Aymara, Mapulche and Rapa Nui </li></ul>
    6. 6. History <ul><li>1520 - Ferdinand Magellan landed in Chile </li></ul><ul><li>16 th century - Spanish Settlement despite fierce resistance from the Indian tribe of the Araucanians </li></ul><ul><li>1810 - Independence from Spain </li></ul><ul><ul><li>Sept. 18, the Chilean Independence Day </li></ul></ul><ul><li>1879-83 - War of the Pacific (Peru & Bolivia) </li></ul><ul><li>First half of the 20 th century - the political climate swing between right and left </li></ul>
    7. 7. <ul><li>1960s - the social reforms were successfully instituted by the Christian Democrats </li></ul><ul><li>1970 - The Allende Regime </li></ul><ul><li>1973-1989 - Pinochet Government </li></ul><ul><li>1990s - Civil Rule Restored </li></ul><ul><li>March 2000 - Ricardo Lagos, the first socialist president to run the country since Allende </li></ul><ul><li>2001 – Pinochet’s trial </li></ul>Pinochet: Leader of the bloodiest coup in 20th-century Latin America History
    8. 8. II Political & Social Setting <ul><li>Constitution - September 1980 </li></ul><ul><ul><li>based on the Spanish law </li></ul></ul><ul><ul><li>some influences from the French and Austrian laws </li></ul></ul><ul><li>Elections: since 1989, fair and open </li></ul><ul><li>Next presidential election: 2006 </li></ul><ul><li>Administrative divisions : </li></ul><ul><ul><li>12 Regions & the capital </li></ul></ul><ul><ul><li>Provinces (Governor) </li></ul></ul><ul><ul><li>Municipalities (Mayor or Alcalde) </li></ul></ul>
    9. 9. Government <ul><li>Republic with Executive, Legislative and Judicial branches </li></ul><ul><li>Main political actors </li></ul><ul><li>The center-left Concertacion: from socialists to center Christian Democrats </li></ul><ul><li>The center-right opposition coalition of Alianza por Chile </li></ul>
    10. 10. Political actors <ul><li>Concertacion </li></ul><ul><ul><li>Christian Democrat </li></ul></ul><ul><ul><li>Socialist </li></ul></ul><ul><ul><li>Party for Democracy </li></ul></ul><ul><ul><li>Radical Social Democrats </li></ul></ul><ul><li>Alianza por Chile </li></ul><ul><ul><li>Independent Democratic Union </li></ul></ul><ul><ul><li>National Renovation </li></ul></ul><ul><li>Pressure Groups </li></ul><ul><ul><li>The Roman Catholic Church </li></ul></ul><ul><ul><li>University student federations at all major universities </li></ul></ul><ul><ul><li>United Labor Central (CUT) </li></ul></ul><ul><ul><li>The Army </li></ul></ul>
    11. 11. Executive branch <ul><li>President : Ricardo Lagos Escobar </li></ul><ul><li>since March 2000 ( the president is both the </li></ul><ul><li>chief of state and head of government) </li></ul><ul><li>Economic reforms: </li></ul><ul><ul><li>capital market and capital account liberalization </li></ul></ul><ul><ul><li>improved corporate governance </li></ul></ul><ul><ul><li>labor market reforms </li></ul></ul><ul><ul><li>unemployment insurance </li></ul></ul><ul><ul><li>fiscal consolidation </li></ul></ul><ul><ul><li>+ state modernization and decentralization </li></ul></ul><ul><ul><li>public health & educational reforms </li></ul></ul>Ricardo Lagos: Victorious
    12. 12. Legislative & Judicial branches <ul><li>Bicameral National Congress </li></ul><ul><li>Last elections - December 2001 </li></ul><ul><li>Judicial Branch </li></ul><ul><ul><li>The Supreme Court (“Corte Suprema”) </li></ul></ul><ul><ul><li>A series of appellate and lower courts </li></ul></ul>
    13. 13. Legislative & Judicial branches <ul><li>Outcomes of the December elections: </li></ul><ul><li>The weakening of the governing Concertacion </li></ul><ul><li>The shift in votes from the center Democracia Cristiana party to the right-wing Union Democratica Independiente </li></ul><ul><li>=> With no elections until 2004, the direction of political & economic policies will most likely become more consensus-based </li></ul>
    14. 14. Social Issues <ul><li>Poverty - reduced to half throughout the 1990s </li></ul><ul><ul><li>strong economic growth & well directed social programs </li></ul></ul><ul><ul><li>LA’s 3 rd highest income/capita on a purchasing power basis ( GNP/capita was 8410 PPP dollars in 2001, the regional average was 6052 PPP dollars ) </li></ul></ul><ul><ul><li>Decreased from 46% in 1987 to 21% in 2001 </li></ul></ul><ul><ul><li>Currently 11% of salaried workers receive minimum wage </li></ul></ul><ul><li>Income Disparity </li></ul><ul><ul><li>income/capita = one of the least equitably distributed in LA </li></ul></ul><ul><ul><li>Gini coefficient = 56.5 ( out of a total of 100, with zero representing complete income equality ) </li></ul></ul>
    15. 15. Social Issues <ul><li>Labor codes changes </li></ul><ul><li>September 2001 – after 2 years of debate, legislation modifying the labor code was approved by the Congress </li></ul><ul><li>Main changes introduced by the reform: </li></ul><ul><ul><li>Labor unions of different companies will be allowed to negotiate collectively if the owners agree </li></ul></ul><ul><ul><li>The maximum hours worked during a week were cut from 48 to 45 from 2005 </li></ul></ul><ul><ul><li>The introduction of part-time work contracts and work-training contracts => encouraging employment of youths </li></ul></ul>
    16. 16. Social Issues Unemployment persistence <ul><li>held down private consumption (grew only by 2% in 2001) </li></ul><ul><li>declined to 8.9% 2001Q4 from 9.7% in the previous quarter </li></ul>Government job creation - 150,000
    17. 17. Social Issues <ul><li>Military power </li></ul><ul><li>International disputes : </li></ul><ul><ul><li>short section of the southern boundary with Argentina is indefinite </li></ul></ul><ul><ul><li>Bolivia has wanted a sovereign corridor to the South Pacific Ocean since the Atacama area was lost to Chile in 1884 </li></ul></ul><ul><ul><li>dispute with Bolivia over Rio Lauca water rights </li></ul></ul><ul><ul><li>territorial claim in Antarctica (Chilean Antarctic Territory) partially overlaps Argentine and British claims </li></ul></ul>
    18. 18. Social Issues <ul><li>Military power </li></ul><ul><li>Designates four of the nine appointed senators every eight years </li></ul><ul><li>Maintains distinct pension and health insurance systems </li></ul><ul><li>The budget for the three armed services is pegged to a 1989 level of about $3bn and is adjusted for annual inflation (about 4.5% of GDP ) </li></ul><ul><li>10% of the annual earnings of the state copper company Codelco (0.4% of GDP) are set aside for military acquisitions </li></ul>
    19. 19. III Economic Performances <ul><li>Unlike most of Latin America, Chile is experiencing a deceleration rather than an outright halt to growth </li></ul><ul><li>Weaker economic performance reflected: </li></ul><ul><ul><li>a deterioration in Chile’s terms of trade and in global import demand </li></ul></ul><ul><ul><li>uncertainty generated by Argentina’s financial crisis </li></ul></ul><ul><ul><li>weak domestic demand </li></ul></ul><ul><li>=> These factors are likely to slow growth into the first half of 2002 before a moderate upturn is foreseen in the second half </li></ul>
    20. 20. Structural Issues <ul><li>Privatization </li></ul><ul><li>Most of Chile’s state assets were privatized in the 1970s and 1980s, beginning with banks and manufacturing firms in 1974-79, and followed by telecoms, electricity, and steel production in 1984-89 (large role of the debt/equity swaps) </li></ul><ul><li>State ownership of economic assets (~ 34.5% of GDP at end-2000) includes 100% ownership of: </li></ul><ul><ul><li>Banco del Estado, Chile’s fourth largest bank </li></ul></ul><ul><ul><li>Codelco, the copper producer </li></ul></ul><ul><ul><li>Enap, the oil and gas monopoly </li></ul></ul><ul><ul><li>Enami, a copper processing concern </li></ul></ul><ul><ul><li>the postal service and some railways </li></ul></ul>
    21. 21. Structural Issues <ul><li>Privatization </li></ul><ul><li>Future privatizations could take the form of concession sales through the state’s public-private partnership program </li></ul><ul><li>Since 1995 the government has awarded contracts for 30 projects, primarily highways and airports, generating $5.1bn </li></ul><ul><li>The government presented a portfolio of concession sales in infrastructure projects and prisons that could provide $3.1bn over 2001-2003 </li></ul>
    22. 22. Structural Issues <ul><li>Banking system </li></ul><ul><li>Chile's banking sector is the soundest and most solid in all of Latin America ( credit strength) </li></ul><ul><li>The Central Bank is autonomous from the government </li></ul><ul><li>The only state-owned bank is the Banco del Estado </li></ul><ul><li>Chile has the highest banking penetration in Latin America </li></ul><ul><li>Private banks handle nearly all corporate business </li></ul><ul><li>The largest Chilean bank is the new Banco Chile (Banco de Chile merged with Banco Edwards) followed by Banco Santiago and Banco Santander Chile </li></ul>
    23. 23. Structural Issues <ul><li>Banking system </li></ul><ul><li>Provisioning and asset quality are comparable to OECD country banking sectors </li></ul><ul><li>Strong prudential regulations and extensive disclosure requirements developed after the 1982-84 banking crisis are enforced by an active banking superintendency </li></ul><ul><li>Chile's financial system remained solid despite adverse domestic and external conditions, in part because of strong supervision </li></ul>
    24. 24. Structural Issues <ul><li>Tariffs & Trade - l ow level of protectionism </li></ul><ul><li>Over the last two decades - unilateral tariff reductions brought rates from approximately 75% to a flat rate of 9% by 2001, with the concomitant elimination of non-tariff barriers </li></ul><ul><li>In 1998, the government approved a schedule to reduce tariffs to 6% by 2003 by lowering tariff levels by 1% per year </li></ul><ul><li>Opted not to enter NAFTA in 1998 </li></ul>
    25. 25. Structural Issues <ul><li>Tariffs & Trade </li></ul><ul><li>Has tariff preferences granted by bilateral trade accords with Canada, six Latin American countries, and associate status in Mercosur </li></ul><ul><li>Efforts to sign bilateral free trade agreements with the EU and the US </li></ul><ul><li>Negotiations with Central America countries and Korea </li></ul><ul><li>Negotiations with the US may be completed by early 2002 </li></ul>
    26. 26. Structural Issues <ul><li>Capital market reforms </li></ul><ul><li>November 2001 – Chile advanced the liberalization of its domestic capital market => Additional reforms: </li></ul><ul><ul><li>Elimination of the 15% capital gains tax levied on heavily traded stock & bond transactions </li></ul></ul><ul><ul><li>Elimination of the 4% tax paid by Chilean banks when repatriating interest earned on foreign credits </li></ul></ul><ul><ul><li>Tax exemptions on income earned from selected savings investments </li></ul></ul><ul><li>This will help to: </li></ul><ul><ul><li>Promote savings </li></ul></ul><ul><ul><li>Stimulate investment financing </li></ul></ul><ul><ul><li>Encourage competition </li></ul></ul>
    27. 27. IV Fiscal Policy Conservative (sustained macroeconomic stability & significant poverty reduction) Austerity => reflected in general government surplus throughout much of the 1990s
    28. 28. Fiscal Policy <ul><li>2000 - Logos administration, in order to strengthen the fiscal position & in line with his promises, pursued a prudent fiscal policy </li></ul><ul><ul><li>=>defined its objective in terms of structural balance of the central government (can be adjusted for cyclical developments), with an annual surplus of 1% of GDP to be first achieved in 2001 and then maintained </li></ul></ul><ul><li>2001 – Tax changes approved by the Congress: </li></ul><ul><ul><li>Individual income tax rates were reduced from 45% to 43% </li></ul></ul><ul><ul><li>Corporate rates raised from 15% to 16% (2003 – 17.5%) </li></ul></ul><ul><ul><li>Restrictions on the use of accelerated depreciation </li></ul></ul><ul><li>=> the general Government deficit = 1% of GDP </li></ul>
    29. 29. Fiscal Policy <ul><li>Pension system </li></ul><ul><li>1981 – landmark reform: Pension privatization </li></ul><ul><li>=> the state-run pension system transformed into a private system (AFPs) </li></ul><ul><ul><li>Deficit between the declining number of contributors and those still receiving pensions under the old system </li></ul></ul><ul><ul><li>Transition cost = 3.2% of GDP since 1981, financed by taxes </li></ul></ul><ul><ul><li>January 2002 - the AFPs won the right to manage the insurance accounts & to offer investors five types of funds (instead of two) with varying risk profiles </li></ul></ul>
    30. 30. Monetary & Exchange Rate Policy <ul><li>1. Interest Rates </li></ul><ul><li>Chile’s independent Central Bank </li></ul><ul><ul><li>Since August 2001, it targets the daily interbank nominal interest rate </li></ul></ul><ul><ul><li>Manages short-term liquidity primarily by using: repurchase agreements, open market operations & credit lines </li></ul></ul><ul><li>Reasons : </li></ul><ul><ul><li>Reduce volatility in the exchange rate </li></ul></ul><ul><ul><li>Lower short-term nominal interest rates </li></ul></ul><ul><ul><li>More suitable for a flexible exchange rate regime </li></ul></ul><ul><ul><li>Provide greater transparency </li></ul></ul>
    31. 31. Monetary & Exchange Rate Policy <ul><li>2. Inflation </li></ul><ul><li>Chile: inflation-targeting framework (target band is 2 - 4%) </li></ul><ul><li>2001: inflation < 3% despite the depreciation in the peso, due to a slower than expected recovery in domestic demand </li></ul>2001- was at the second lowest point since 1938
    32. 32. Monetary & Exchange Rate Policy <ul><li>3. Exchange rate </li></ul><ul><li>September 1999 - freely floating exchange rate </li></ul><ul><li>2001 the nominal exchange rate came under pressure due to: </li></ul><ul><ul><li>Lower copper prices </li></ul></ul><ul><ul><li>Reduced domestic growth </li></ul></ul><ul><ul><li>Continuing uncertainty about Argentina </li></ul></ul><ul><li>August 2001 - the Central Bank intervened to support the peso: </li></ul><ul><ul><li>Sold ~ $700mn of its foreign reserves </li></ul></ul><ul><ul><li>Issued $2bn USD-indexed bonds </li></ul></ul>
    33. 33. Monetary & Exchange Rate Policy <ul><li>In 2001, the peso depreciated about 14% against the dollar, largely as a consequence of contagion from Argentina and lower cooper prices. </li></ul>The currency strengthen since November as a result of the central bank intervention & growing sector differentiation from Argentina.
    34. 34. V Balance of Payments <ul><li>Current account balance </li></ul><ul><ul><li>Trade balance </li></ul></ul><ul><li>Non-debt creating flows </li></ul><ul><ul><li>FDI </li></ul></ul><ul><ul><li>Portfolio equity investment </li></ul></ul><ul><li>Net errors and omissions </li></ul><ul><li>International reserves </li></ul>
    35. 35. Current account balance -2.2 -2.6 -1.7 -1.4 -0.1 -5.7 -5.0 -5.1 <ul><ul><li>% of GDP </li></ul></ul>-1488 -1594 -1061 -989 -78 -4144 -3728 -3512 <ul><ul><li>USD million </li></ul></ul>2003f 2002f 2001e 2000 1999 1998 1997 1996
    36. 36. Trade Balance Trade is important for Chile but it is not the only sector that Chile relies on.
    37. 37. Trading Partners
    38. 38. Exports structure
    39. 39. <ul><li>Chile is a big player in the copper global market: 42% of world copper production </li></ul><ul><li>Codelco: state-owned copper company that holds ~ 70% of national production </li></ul><ul><li>Canada is the largest single investor in copper </li></ul>Export – percentage of GDP
    40. 40. Imports structure  Chile is vulnerable to the oil price changes
    41. 41. <ul><li>Falling prices of copper and agriculture products exported matched with the falling price of the oil imported </li></ul><ul><li>Depreciation of the peso in 2001 helped to increase non-traditional goods exports in 2002  off-set the deterioration in terms of trade </li></ul>Trade balance
    42. 42. Foreign Direct Investment
    43. 43. Foreign Direct Investment <ul><li>From 1994 to 2000: </li></ul><ul><ul><li>Large inflows in mining, services, energy, banking, transport and telecom </li></ul></ul><ul><ul><li>Large outflows to US and other Latin American energy and financial service sectors </li></ul></ul><ul><ul><li> Outflows ~ $1bn in 2001 </li></ul></ul><ul><li>2001 : boost in FDIs  sales of domestic telecom and electric companies </li></ul><ul><li>2002 : most of the state-owned companies are already privatized adding with poor mining prices => FDIs will decrease </li></ul>
    44. 44. Foreign Direct Investment
    45. 45. Foreign Direct Investment Mining is the largest sector for FDIs
    46. 46. Net Errors and Omissions <ul><li>No capital flight  investors have confidence in the Chilean market </li></ul><ul><li>No under or over invoicing </li></ul>In millions of USD: Source: IIF 0 2002f 0 0 546 407 -828 -1021 -2050 2003f 2001e 2000 1999 1998 1997 1996
    47. 47. International reserves Foreign reserves fell by $0.5 billion in 2001 because of the central bank interventions in the foreign exchange market to limit the depreciation of Peso triggered by the crisis in Argentina.
    48. 48. Debt Analysis <ul><li>Composition of the debt by:debtors, creditors, maturity, currency & interest </li></ul><ul><li>Financial position in the IMF </li></ul><ul><li>London Club claims </li></ul><ul><li>Debt swaps </li></ul><ul><li>Bond market </li></ul><ul><li>Liquidity & Solvency ratios </li></ul><ul><li>Amortization schedule </li></ul>
    49. 49. Composition of debt by debtors <ul><li>Chile’s external debt is low ($37,790 mil end-2001) compared to other LAC </li></ul><ul><ul><li>=> less dependent on the debt </li></ul></ul><ul><ul><li>=> less vulnerable to swings in external financing </li></ul></ul><ul><li>1990s - the growth in corporate debt accounted for virtually all the expansion in Chile’s gross external debt </li></ul><ul><li>Currently, 85% of Chile’s external debt is owed by the private sector, sharply up from 31% in 1991 and 53% in 1993 </li></ul><ul><li>Chile’s lower country risk and better institutional framework => large Chilean corporates have successfully accessed credit abroad </li></ul>
    50. 50. Composition of debt by debtors
    51. 51. Composition of debt by creditors - medium and long-term debt - <ul><li>Commercial banks represent the most significant source of external financing (43% of total MT & LT external debt at end-2001) </li></ul><ul><li>International bond issuance (up from 2% of medium- and long-term debt in 1993 to 34% in 2001) has gradually displaced borrowing from multilateral organizations (fell from 28% in 1993 to 4% in 2000 ) </li></ul>
    52. 52. Composition of debt by creditors - medium and long-term debt -
    53. 53. Composition of debt by maturity <ul><li>83% of the total external debt stock is medium and long-term in nature </li></ul>
    54. 54. Composition of debt by maturity <ul><li>Only 32% represents original </li></ul><ul><li>ST liabilities in 2001 </li></ul>Duration of 4.2 years at the end of 2000
    55. 55. Composition of debt by currency and by interest 96% of debt denominated in USD 63% of the debt at floating rate
    56. 56. Financial position in the IMF - February 28, 2002 - <ul><li>No financial arrangement with IMF since 1990 => Chile has current account sustainability </li></ul><ul><li>Althoungh, now Chile has a CA deficit, it is expected to decrease in 2003 and to convert to surplus in 2004 due to the increases in export earnings </li></ul>35.70 305.61 Reserve position in the fund 64.30 550.49 Fund holding of currency 100 856.10 Quota % Quota SDR million General resource account
    57. 57. From BIS, the total claims from London Club at the end of Sep. 2001 are $42.457 bn including 47% from Spain, 17% from the US and 7% from Germany. There is a discrepancy between the BIS data and the Central Bank of Chile regarding the total external debt. London Club claims
    58. 58. London Club claims
    59. 59. Debt swaps <ul><li>Chile established the first institutionalised debt-equity swap in May 1985 </li></ul><ul><li>It had been able to retire $10.1bn through debt swaps between 1985-1990 </li></ul>Debt to commercial banks - Contribution to its reduction by debt-conversion programmes - (US$ billions) 5.9 1.4 23.6 Venezuela 5.7 4.1 71.4 Mexico 68.2 10.1 14.8 Chile 6.9 4.6 67.1 Brazil 37.5 9.5 25.3 Argentina % of debt conversions (2)/(1) x 100 Value of debt conversion 1985-1990 (2) Stock of commercial bank debt - 1985 (1) Country
    60. 60. Debt swaps Chile retired almost 70% of its debt: =>Significant enough to reduce the debt burden =>Promote foreign direct investment: it converted the country’s debt to equity via privatisation =>Strengthened the private sector finance =>Helped Chile to be able to return to the international capital markets
    61. 61. Bond market <ul><li>Amount outstanding at Dec. 2001: US$ 6 billion </li></ul>
    62. 62. <ul><li>US$ 2.9 billion bonds were issued during 2001: </li></ul><ul><ul><li>US$1.6 billion: issued to finance the investment in electricity, telephone, forestry and highway concession projects </li></ul></ul><ul><ul><li>US$ 650 million: issued by the government with the yield of 7.2% (256 bp over the US treasury) </li></ul></ul><ul><ul><ul><li>=>Help to finance the central bank’s interventions in the foreign exchange market </li></ul></ul></ul><ul><ul><ul><li>=>Compensate the decline in the government’s revenues due to the decrease in the copper price </li></ul></ul></ul>Bond market
    63. 63. <ul><ul><li>The Chilean bond spreads have not been affected by the rising risk aversion towards the emerging markets and the worsening of Argentina crisis </li></ul></ul><ul><ul><li>The spreads on the $500 million bond issued in 1999 fell to 170bp at the end of January 2002 from 221bp at the beginning of 2001 </li></ul></ul>Bond market Bond spreads
    64. 64. <ul><li>Chile intended to sell $550 million international 10-year bonds this year in order to take advantage of the decline in the borrowing rate => refinance the debt </li></ul><ul><ul><li>Coupon: 7.125% </li></ul></ul><ul><ul><li>Spreads: 115 bp over the US treasury (the spreads of Mexico and Brazil are 2.41% and 6.99% respectively) </li></ul></ul><ul><li>The spread fell due to: </li></ul><ul><ul><li>Expected economic growth of Chile (~ 3.2% growth in 2002) </li></ul></ul><ul><ul><li>The economic strengthen in the US, Chile’s biggest trading partners </li></ul></ul>Bond market
    65. 65. Liquidity ratios Current Account to GDP (%) A negative CA balance, but a better ratio compared to other LAC or “A” category sovereigns
    66. 66. Liquidity ratios Current Account to GDP (%)
    67. 67. Liquidity ratios Budget deficit / GDP (%) <ul><li>General government budget surplus throughout much of the 1990s </li></ul><ul><li>M arch 2000: ‘ 1% structural surplus’ - the government targeted a 1% of GDP structural surplus for 2001-2005 </li></ul><ul><li>2001: the general government deficit ~ 1% of GDP and in 2002 it is likely to reach 2% of GDP => negative impact on the ratings </li></ul>
    68. 68. Liquidity ratios Reserves / Imports per month Chile’s import cover ~ 10 months Brazil ~ 8 months Mexico ~ 3 months
    69. 69. Liquidity ratios Debt Service Ratio Chile’s debt service ratio as a percentage of foreign exchange receipts (exports of goods & services) was 33% in 2001 and it is expected to rise to ~ 35% in 2002
    70. 70. Liquidity ratios Interest Ratio Chile’s interest ratio as a percentage of foreign exchange receipts (exports of goods, services & income) was 7.9% in 2001 and it is expected to decrease to ~ 6.1% this year
    71. 71. Solvency ratios External debt / GDP (%) <ul><li>Chile’s external debt as a percentage of GDP increased steadily since 1997 </li></ul><ul><li>In 2001 the ratio was 58% </li></ul><ul><li>It tends to be toward the higher range of “A” category sovereigns </li></ul>
    72. 72. Solvency ratios External debt / Exports (%) Compared with other LAC, Chile’s ratio is better than Brazil’s ratio, but Chile should improve it.
    73. 73. Solvency ratios External debt / Exports (%) Compared with other “A” category sovereigns, Chile’s ratio is decreasing, but not as much as the median rate.
    74. 74. Solvency ratios ST debt / Reserves (%) Chile’s international reserves are a good cushion to external shocks, although the ratio is increasing steadily.
    75. 75. Amortization schedule <ul><li>Concentrated in 2001-2003: reflecting the sizable increase in the non-bank private debt contracted in 1996-1999 </li></ul><ul><li>Amortization requirements of the public sector, by contrast, are moderate and will steadily decline </li></ul>
    76. 76. Debt Analysis - Conclusion <ul><li>Chile’s moderate external debt burden is characterized by: </li></ul><ul><ul><li>Limited central government indebtedness </li></ul></ul><ul><ul><li>Rising private sector debt </li></ul></ul><ul><ul><li>Favorable maturity profile </li></ul></ul><ul><ul><li>Favorable external liquidity compared to other Latin American and ‘A-’ rated sovereigns </li></ul></ul>
    77. 77. Ratings (2001) => Low country risk 33 BB- B1 BB- Brazil Ca Ba2 B2 Baa3 Baa1 Moody’s DDD BB+ BB- BB+ A- Fitch Selective default BB B BBB- A- S&Ps 20 Mexico 43 Argentina 36 Colombia 25 Venezuela 3 Chile CDC
    78. 78. A3 : Adverse political or economic circumstances may lead to a worsening in service payments, although the probability of a payment default is still low. Coface: Country risk rating 2001 The country rating measures the average corporate payment default in a given country and indicate to what extent a company’s financial commitments are affected by the local business, financial and political outlook. It ranks from low degree of risk (A1) to high degree of risk (D ) A4 Venezuela D Argentina A4 Mexico B Colombia B Brazil A3 Chile
    79. 79. Euromoney: Country risk (185 countries) 107 69 68 44 39 March 2002 46 Mexico 77 Argentina 69 Colombia 68 Brazil 40 Chile Sep. 2001
    80. 80. Euromoney:Global projection rating <ul><li>Global projection rating: assess the possibility of </li></ul><ul><li>economic growth in 185 countries. </li></ul>116 73 62 50 33 March 2002 50 Mexico 81 Argentina 70 Colombia 61 Brazil 34 Chile Sep. 2001
    81. 81. Corruption Perceptions Index 2001 <ul><li>Chile: 18 /91= Ireland </li></ul><ul><li>Germany: 20 </li></ul><ul><li>France: 23 </li></ul><ul><li>Japan: 21 </li></ul><ul><li>U.S: 16 </li></ul><ul><li>Mexico: 51 </li></ul><ul><li>Argentina: 57 </li></ul><ul><li>Brazil: 46 </li></ul>The country ranking is related to the international perceptions of the degree of corruption as seen by business people, risk analysts and the general public. It ranges between 10 (highly transparent and democratic) and 0 (highly corrupt).
    82. 82. Opacity Index 2001 <ul><li>Opacity: the lack of clear, accurate, formal, and widely accepted practices </li></ul><ul><li>CLEAR: Corruption, Legal system, Economic policies, Accounting guidelines and Regulatory frameworks </li></ul><ul><li>By PricewaterhouseCoopers </li></ul><ul><li>Singapore </li></ul><ul><li>United States </li></ul><ul><li>Chile </li></ul><ul><li>U.K </li></ul><ul><li>Hong Kong </li></ul><ul><li>Mexico </li></ul><ul><li>Italy </li></ul><ul><li>Hungary </li></ul><ul><li>Uruguay </li></ul><ul><li>Egypt </li></ul>
    83. 83. Human Development Index (HDI) 34 62 69 51 39 2001 Mexico Argentina Colombia Brazil Chile 162 countries
    84. 84. Coface’s Index of external payment arrears Source: COFACE
    85. 85. Strengths <ul><ul><ul><li>Strong macro-economic fundamentals </li></ul></ul></ul><ul><ul><ul><li>Sound financial system (robust fiscal & monetary policy) </li></ul></ul></ul><ul><ul><ul><ul><li>Low fiscal and CA deficit </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Moderate external debt </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Low inflation </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Capital market liberalization </li></ul></ul></ul></ul><ul><ul><ul><li>Social consensus in favor of market oriented economic policy </li></ul></ul></ul>
    86. 86. Strengths <ul><ul><ul><li>Net creditor position of the public sector </li></ul></ul></ul><ul><ul><ul><li>Strong external liquidity position </li></ul></ul></ul><ul><ul><ul><li>Enjoys the lowest risk premiums in the region </li></ul></ul></ul><ul><ul><ul><li>The state’s low level of interference in the economy </li></ul></ul></ul><ul><ul><ul><li>Equal treatment provided to local and foreign investors </li></ul></ul></ul><ul><ul><ul><li>Rich in natural resources </li></ul></ul></ul><ul><ul><ul><li>Good quality of life and of human resources </li></ul></ul></ul>
    87. 87. Weaknesses <ul><ul><ul><li>Reduced parliamentary majority of the ruling Concertacion alliance after the recent elections </li></ul></ul></ul><ul><ul><ul><li>Military still wields unproportional amount of power </li></ul></ul></ul><ul><ul><ul><li>Increasing general government budget deficit </li></ul></ul></ul><ul><ul><ul><li>Increasing private sector debt burden </li></ul></ul></ul><ul><ul><ul><li>Heavy dependence on primary commodity exports (copper 40% of total exports; low-value-added 62% of the total exports) </li></ul></ul></ul><ul><ul><ul><li>Small domestic market </li></ul></ul></ul><ul><ul><ul><li>Unemployment persistence </li></ul></ul></ul><ul><ul><ul><li>Marked by excessive social inequality (the upper 20% of the population holds 60% of the country’s wealth) </li></ul></ul></ul>
    88. 88. Economic growth prospects Domestic financial stability Social & Political stability External competitiveness Overall Risk Assessment
    89. 89. Balance of payments sustainability Debt servicing capacity Overall MT perspectives Overall Risk Assessment
    90. 90. Main data sources <ul><ul><ul><li>IMF </li></ul></ul></ul><ul><ul><ul><li>World Bank; IDB </li></ul></ul></ul><ul><ul><ul><li>BIS </li></ul></ul></ul><ul><ul><ul><li>UNDP </li></ul></ul></ul><ul><ul><ul><li>The Central Bank of Chile (Banco Central de Chile) </li></ul></ul></ul><ul><ul><ul><li>Banco Santander Central Hispano </li></ul></ul></ul><ul><ul><ul><li>Deutsche Bank </li></ul></ul></ul><ul><ul><ul><li>Euromoney </li></ul></ul></ul><ul><ul><ul><li>IIF </li></ul></ul></ul><ul><ul><ul><li>www.latin-focus.com </li></ul></ul></ul><ul><ul><ul><li>www.fr.com </li></ul></ul></ul><ul><ul><ul><li>www.bloomberg.com </li></ul></ul></ul><ul><ul><ul><li>www.fitchrating.com </li></ul></ul></ul><ul><ul><ul><li>www.standardandpoors.com </li></ul></ul></ul><ul><ul><ul><li>www.moodys.com </li></ul></ul></ul><ul><ul><ul><li>www.coface.com </li></ul></ul></ul><ul><ul><ul><li>www.transparency.org </li></ul></ul></ul><ul><ul><ul><li>www.bradynet.com </li></ul></ul></ul><ul><ul><ul><li>www.unitar.org </li></ul></ul></ul><ul><ul><ul><li>www.opacityindex.com </li></ul></ul></ul><ul><ul><ul><li>www.foreigninvestment.cl </li></ul></ul></ul>

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