In mid 2008 the International Monetary Fund (IMF) in its annual report described Chile as a model for successful macroeconomic management among emerging market economies. The IMF went on to note that in Chile recent developmentshad been dominated by the global food and oil price shocks, exacerbated by domestic drought. Annual inflation was close to 9 percent in mid 2008, but was expected by the IMF to decline gradually in the second half of the year. Growth is likely to remain below trend through 2009. Chile has so far proved resilient to global market turmoil, but risks from a sharp global downturn, higher energy prices, and tightening of credit conditions for emerging markets remain. The structural fiscal surplus rule is as important as ever in shielding the economy from shocks, and room existing under the rule is being used to alleviate the impact of higher inflation on what the IMF terms ‘vulnerable population groups’, by which it means those Chileans living in poverty.

 

Chile continues to be the world’s largest copper producer. Revenues from copper sales have allowed Chile’s planners to create two reserve funds that in the first quarter of 2009 stood at US$22 billion. In addition, the central bank in early 2009 held a comparable amount in its international reserves. Bucking international trends, March 2009 saw credit rating agency Moodys raise its raising on Chilean sovereign debt from A2 to A1. At the same time the agency raised the ratings of four of Chile’s banks.

 

These re-appraisals had more to do with the perceived quality of Chile’s economic management than with the prevailing economic conditions. In February 2009 the economy contracted by 3.9 per cent, the largest contraction since May 1999, when it fell by a comparable amount. The statistics did not favour Chile: in February 2009 industrial output fell by a staggering 11.5 per cent, the largest drop since 1990. Demand for copper had fallen by around 10 per cent – to an estimated 383,000 tonnes. It was not only the demand for copper that fell – copper prices headed southwards, too. In 2006 copper had traded at highs of almost US$9,000 per tonne. By October 2008 the price had crashed to less than US$4,000 per tonne. Revenues from Copper fell by around 65 per cent over the previous year. Nevertheless, Chile’s Finance Minister Andres Velasco was quoted in the London Financial Times in late April 2009 as saying: ‘I don’t think there’s a single economy in the world where the country’s credit was upgraded and the next day the major banks in the country were upgraded, where between the central bank and the treasury you have almost a third of GDP in liquid assets and where you can pump up fiscal policy and have country risk go down, not up.’

 

 

These are the opening paragraphs of the Chile chapter in the Americas Review 2009 to be published in November 2009. To order your copy of the Americas Review 2009 simply click here