Fundamentals of the Chilean

Economy

Central Bank of Chile

October 2002
Fundamentals of the Chilean Economy

Monetary Fiscal
Strength Strength

Macroeconomic
and
Microeconomic Financial Stability
Financial System
& Institutional
Strength
Strength

External Sector
Strength
2
Monetary Strength
Chile: Nominal Exchange Rate
(CLP/USD)

750 spot

650

550 ceiling
central
450 parity

350
floor
250
90 91 92 93 94 95 96 97 98 99 00 01 02
4
Chile: Monetary Policy Interest Rate
(%)

CPI-adjusted Int. Rate Nominal Int. Rate

12,5
11,5
Overnight Rate * 11,5
9,5 10,5

CPI-adjusted MPR 9,5

7,5
8,5
5,5 7,5
6,5
3,5 5,5
4,5
1,5
Nominal MPR 3,5
-0,5 2,5
90 91 92 93 94 95 96 97 98 99 00 01 02

* Before June 1995: PRBC 90 days rate 5

Chile: Real Exchange Rate
(index, 1986=100)

120

110

100

90

80

70
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

6
Chile: Long-Term Int. Rate: Central Bank
Instruments (%) CPI-adjusted
10

5 PRC 8 years

4 PRC 20 years

2
t -92 r-93 t-93 r-94 t-94 r-95 t-95 r-96 t-96 r-97 t-97 r-98 t-98 r-99 t-99 r-00 t-00 r-01 t-01 r-02 t-02
Oc Ab Oc Ab Oc Ab Oc Ab Oc Ab Oc Ab Oc Ab Oc Ab Oc Ab Oc Ab Sep

7
Fiscal Strength
Fiscal Balance: Average 1992-2001
(% GDP)

2 Chile
Argent. Czech Rep. Israel Malaysia Peru Thailand
0

-2 Korea
Mexico
-4 Poland

-6 Colombia Hungary
Latin America Countries
-8
Other Emerging Economies

-10 Brazil

9
Public Debt 2001
(% GDP; Source: Moody´s and Ministry of Finance)

120

100
Latin American Countries
80 Other Emerging Economies

60

40

20 Chile

0
Argent. Colombia Peru S. Korea Thailand Czech Rep. Israel
Brazil Mexico Malaysia Poland Hungary

1
Chile: Fiscal Balance
(% GDP)

3
actual
2
structural
1

-1

-2
90 91 92 93 94 95 96 97 98 99 00 01 02(e)

11
Financial System Strength
Chile: Banking Solvency Indicators
(%)

14 Basel Indicator
Non Performaning Loans
12

10
minimum
8 required

0
94 95 96 97 98 99 00 01 02 (jun)
1
Ranking of Banking Strength
(Source: Moody´s, july 2002)

Netherlands
Spain
US stronger
UK
France
Germany
Australia
Italy
Hong Kong
Chile (15, amount 76)
Brazil
Mexico
Malaysia
Japan
South Korea
Thailand less strong
Argentina

1
Chile: Financial Savings by Institutional Investors
(% GDP)

100 insurance companies

mutual funds
80

60

40

20
pension funds
0
1994 1995 1996 1997 1998 1999 2000 2001
1
Chile: Domestic Corporate Bond Market
(USD billions)

(total outstanding) (Issuance)

7 3,0
6 2,5
5 issuance 2,0
4
1,5
3
1,0
2
1 outstanding 0,5

0 0,0
1994 1995 1996 1997 1998 1999 2000 2001

1
External Sector Strength
Chile: Total Exports Volume
(index 1990=100)

300

250

200

150

100

50

0
60 65 70 75 80 85 90 95 00 02

1
Chile: Exports by Sector
(% total exports)

Agriculture

1980

Mining

Industry
2001
1960

1
Chile: Distribution of Merchandise Exports
(January-August 2002)

Others: 4%
USA: 20%
Rest of Asia: 12%

Japan: 11%

China: 7%
Latam: 21%

UK: 5%

EU: 20%
2
Chile: Current Account Deficit
(% GDP)

2
forecast
1

0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

2
Chile: Cumulative Investment Abroad
(% GDP)

50

45

40

35

30

25

20

15

10

-
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Jun-
02

2
Net International Reserves
(% Short Term Debt + Amortizations)

350

300 Latin American Countries

Investment Grade Countries
250

200

150

100

50

Korea
Argentina

Brazil

Peru

Chile

Malaysia

Thailand

Poland

Hungary
Colombia

Mexico

Czech Rep.
2
Sovereign Spreads
(basis points, September 2002)

7,000

6,000
Latin American Countries
Investment Grade Countries
1500

1000

500
Chile

0
Argent. Colom. Peru S. Korea Thailand Hungary
Brazil Mexico Malaysia Poland Israel

2
 Microeconomic &
Institutional Strength
Competitiviness Ranking 2002
(Source: International Institute for Management Development)

USA
Hong Kong
Australia + compet.
Germany
U. Kingdom
Chile (19, amount 49)
France
Spain
Malaysia
S.Korea
Czech Rep.
Japan
Italy
Thailand
Brazil
Mexico - compet.
Argentina

2
Economic Freedom Index 2001
(Source: The Heritage Foundation)

Hong Kong
US
UK + freedom
Australia
Chile (9, amount 156)
Germany
Thailand
Czech Rep.
Argentina
S.Korea
Italy
Spain
France
Mexico
Malaysia -freedom
Brazil

2
Corruption Index
(June 2001; Source: Transparency International)

Australia
U. Kingdom - corrupt.
USA
Chile (17, amount 102)
Germany
Spain
France
Italy
Malaysia
Korea
Brazil + corrupt.
Rep. Checa
Mexico
Argentina
Thailand

2
Macroeconomic Stability
Chile: GDP, 1960-2002
(billions of 1996 Chilean pesos)

40000
35000
30000
25000

20000
15000
10000
5000
1960 1970 1980 1990 2002(e)
3
Chile: GDP Growth
(Annual %)

14
12
10 average 1985-2001
8
6
4
2
0
-2
85 89 93 97 01

3
Chile: Inflation and Targets
(annual %)

35

30

25

20

15

10

0
90 91 92 93 94 95 96 97 98 99 00 01 02

3
Recent Structural Reforms
Further Trade Integration
Bilateral and Multilateral Negotiations:
General Import Tariff (%)
16

14
• Free trade agreement with EU
12

10
• Currently negotiation Free Trade agreements with the US, EFTA, Korea
8

2
• WTO, FTAA
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03

3
Capital Markets Reforms: Central Bank
• Elimination of all remaning foreign exhange restrictions

• Substitution of nominal MPR for CPI-adjusted MPR

• Streamlining of debt issued by the Central Bank

3
Capital Markets Reforms: legal changes
• New corporate governance and tender offer regulation

• Elimination of capital gains tax on liquid stocks and

reduction of withholding tax on interest from 35 to 4%
on local bonds for foreign investors

• Increased flexibility for allocation of personal savings

3
How to Reduce Growth
Volatility?
GDP Growth
(Annual %)

30

20

10

-10

-20

-30
1900 1920 1940 1960 1980 2001
3
Terms of Trade
(index 1990=100)

120

110

100

90

80

70
80 82 84 86 88 90 92 94 96 98 00 02 04
3
Chile: Exports by Sector
(% total exports)

Agriculture

1980

Mining

Industry
2001
1960

4
How to Reduce Growth Volatility?
• Fiscal policy based on rules.

• Inflation-targeting monetary policy (nominal anchor)

• Flexible exchange rate policy (interest rate

stabilization)

4
Inflation and Targets
(annual %)

35

30

25

20

15

10

0
90 91 92 93 94 95 96 97 98 99 00 01 02

4
How to Reduce Growth Volatility?

Other Factors:
• Copper and oil compesatory funds

• Saving guaranteed by Pension Funds

• Banking and no banking finance

4
Chile: Financial Savings by Institutional Investors
(% GDP)

100 insurance companies

mutual funds
80

60

40

20
pension funds
0
1994 1995 1996 1997 1998 1999 2000 2001
4
Chile: Domestic Corporate Bond Market
(USD billions)

(total outstanding) (Issuance)

7 3,0
6 2,5
5 issuance 2,0
4
1,5
3
1,0
2
1 outstanding 0,5

0 0,0
1994 1995 1996 1997 1998 1999 2000 2001

4
Fundamentals of the Chilean Economy

Monetary Fiscal
Strength Strength

Macroeconomic
and
Microeconomic Financial Stability
Financial System
& Institutional
Strength
Strength

External Sector
Strength
4
Fundamentals of the Chilean
Economy

Central Bank of Chile

October 2002