Chile: Economic Overview

Global Finance, January 1997 | Go to article overview

Chile: Economic Overview


Chile's economy has expanded continuously for 13 years, averaging more than 6% growth a year. Now, under the leadership of President Eduardo Frei, Chile has joined the Mercosur trade bloc, which should boost its economy even more.

Growth over the recent past has been led by exports, which are concentrated in primary products and processed natural resources, principally copper, fresh fruit, and forestry and fish products.The export boom has been sparked by soaring investment, both foreign and domestic. The mix of, and the markets for, Chile's exports are becoming increasingly diversified. The dependency on copper is declining, and Latin America is joining the United States,Asia, and the European Union as important purchasers. The prevailing exchange rate is allowed to float within a 20% band around a central rate, or a so-called crawling peg, that is adjusted to compensate for differences between Chilean inflation and that of its trading partners.The band allows for significant fluctuation in the real value of the peso, which has appreciated significantly: 30% in the last few years. Since the peso has risen above the top of the floating band on occasion, there is speculation that the government may widen or alter the band, effectively revaluing the peso.

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FOREIGN INVESTMENT CLIMATE

Since Chile first received an international investmentgrade rating in 1992, Chilean firms have raised funds abroad-through borrowing, selling bonds, and issuing stock-to finance investment. But most foreign investment in the country is direct investment; it is not likely to flee in response to temporary bad news.

Privatization is a particularly attractive opportunity for foreign investment in Chile.The government is currently in the process of privatizing passenger rail service, as well as the last government-owned electric utility, and is discussing alternatives for the ports, airports, and water/sewage companies. Major new highway projects will be built under a concession program.

BANKING SYSTEM

Chile's banks are strong and relatively protected from substantial new foreign competition. As of early 1996, 37 banks were operating in Chile, high for a country with a 1995 GDP of just $72 billion. On September 30 1995, bank assets were $46 billion, loans totaled $32 billion, and deposits amounted to $29 billion.

Authorities have not allowed new banks to enter the market since the early 1980s' financial crisis, except via purchasing existing banks.This restriction applies to domestic as well as foreign banks.Vigorous economic growth in recent years has strengthened bank profits, but restrictions remain on banks' ability to enter several rapidly growing areas of business, including pension fund management, factoring, and leasing.

DOMESTIC MARKET

The principal growth sectors over the short- to midterm are mining, telecommunications, manufacturing, forestry, and financial services.The mining, telecommunications, and forestry sectors have benefited from major investments by foreign companies,

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including US businesses. Although Chile is a small market, competition is intense since many foreign firms represented locally are aggressive and follow development projects closely. …

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