Magazine article Business Credit

Hot Spots: Chile

Magazine article Business Credit

Hot Spots: Chile

Article excerpt

Just minutes before recently elected Sebastian Pinera formally donned the sash of several severe aftershocks, following the earthquake in February and rattling Santiago and paraiso, reminded him and his entourage that he not have the luxury of a political honeymoon. he cancelled all lavish parties planned for his tion and was thrown into a whirlwind of activity, some of the worst-affected areas in Southern Chile holding Cabinet meetings late into the night. campaigned on a platform of fiscal prudence, vowing shrink the government and boost savings, he now himself forced to ramp up spending from the public and to have Chile borrow abroad for the first time 2004 in order to repair the damage done by the quake.

The damage is currently estimated at up to USD 30 lion, equivalent to about one-fifth of the nation's domestic product, of which perhaps USD 8 billion insured. While the officially pronounced death toll, retrospectively, was lowered to around 500, well below number that was first feared, about 150,000 were made homeless and will need shelter before just-started autumn in the Southern Hemisphere into winter. The damage is concentrated in the Southern regions of Maule, Bio-Bio and O'Higgins, which together account for about 15% of Chile's GDP and more than one-fifth of its industrial output.

For a few months, at least, it will cause a significant slow-down in industries such as fishing, forestry, pulp & paper, wine and agriculture. Interestingly, there are some indications that the temblors in some quarters may have inflamed sentiments about the nation's richpoor divide, as complaints are heard that the devastation was much worse in the poor barrios than in wealthy neighborhoods, where construction companies routinely maintain some of the strictest building codes in the world and most buildings suffered little damage.

This is likely to be a temporary phenomenon, however, which is apt to go away as reconstruction efforts go into full swing. Since most of the copper mines are in the North, the country's most important industry has been little affected. Water and electricity were quickly restored in most places, and most of the major ports are also back in operation. In raising funding for the huge rehabilitation operations, President Pinera can draw on savings of over USD 1 1 bitiion stashed away in an offshore "sovereign wealth" fund by his predecessor Michelle Bachelet.

To boot, Chile has practically no debt (all of its USD 1.75 billion in overseas obligations are due within three years, so the country could easily sell new bonds to rebuild) and it has an A+ rating from Standard ck Poor's, the highest investment credit rating in Latin America. Chile also has plenty of elbowroom to borrow at low interest rates from multilateral institutions, which have declared themselves eager to help. Central Bank President José de Gregorio, who boasts a doctorate in economics from MIT, where he studied under Rüdiger Dornbusch and Ben Bernanke, has made it clear that he means to keep monetary policy loose for the foreseeable future, even though inflation is apt to spike upward as a direct result of the natural disaster since it is "too early to know" whether the stimulus that will come from the government's reconstruction spending will fully offset the short-term destruction of capital and disruption of economic activity. …

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