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Fundamentals of the Chilean
Economy
Central Bank of Chile
October 2002
Fundamentals of the Chilean Economy
Monetary
Strength
Microeconomic
& Institutional
Strength
Fiscal
Strength
Macroeconomic
and
Financial Stability
Financial System
Strength
External Sector
Strength
2
Monetary Strength
Chile: Nominal Exchange Rate
(CLP/USD)
750
spot
650
550
ceiling
central
parity
450
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
11,5
Overnight Rate *
9,5
10,5
9,5
CPI-adjusted MPR
7,5
8,5
7,5
5,5
6,5
3,5
5,5
4,5
1,5
Nominal MPR
-0,5
3,5
2,5
90
91
92
93
94
95
* Before June 1995: PRBC 90 days rate
96
97
98
99
00
01
02
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
9
8
7
6
5
PRC 8 years
4
PRC 20 years
3
2
7
Fiscal Strength
Fiscal Balance: Average 1992-2001
(% GDP)
2
0
Chile
Argent.
Czech Rep.
Israel
-2
Malaysia
Peru
Thailand
Korea
Mexico
Poland
-4
-6
Colombia
Latin America Countries
-8
-10
Hungary
Other Emerging Economies
Brazil
9
Public Debt 2001
(% GDP; Source: Moody´s and Ministry of Finance)
120
100
Latin American Countries
Other Emerging Economies
80
60
40
20
Chile
0
Argent. Colombia
Peru
Brazil
Mexico
Czech Rep. Israel
S. Korea
Thailand
Malaysia
Poland
Hungary
10
Chile: Fiscal Balance
(% GDP)
3
actual
2
structural
1
0
-1
-2
90
91
92
93
94
95
96
97
98
99
00
01 02(e)
11
Financial System Strength
Chile: Banking Solvency Indicators
(%)
Basel Indicator
Non Performaning Loans
14
12
10
minimum
required
8
6
4
2
0
94
95
96
97
98
99
00
01
02 (jun)
13
Ranking of Banking Strength
(Source: Moody´s, july 2002)
Netherlands
Spain
US
UK
France
Germany
Australia
Italy
Hong Kong
Chile
Brazil
Mexico
Malaysia
Japan
South Korea
Thailand
Argentina
stronger
(15, amount 76)
less strong
14
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
15
Chile: Domestic Corporate Bond Market
(USD billions)
(Issuance)
(total outstanding)
7
3,0
6
2,5
5
issuance
2,0
4
1,5
3
1,0
2
outstanding
1
0
0,5
0,0
1994
1995
1996
1997
1998
1999
2000
2001
16
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
18
Chile: Exports by Sector
(% total exports)
Agriculture
1980
Mining
Industry
1960
2001
19
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%
20
Chile: Current Account Deficit
(% GDP)
6
5
4
3
2
forecast
1
0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
21
Chile: Cumulative Investment Abroad
(% GDP)
50
45
40
35
30
25
20
15
10
5
1 990 1 991
1 992 1 993 1 994 1 995 1 996 1 997 1 998 1 999 2000 2001
Jun02
22
Net International Reserves
(% Short Term Debt + Amortizations)
350
Latin American Countries
Investment Grade Countries
300
250
200
150
100
50
Hungary
Czech Rep.
Poland
Thailand
Malaysia
Korea
Chile
Peru
Mexico
Colombia
Brazil
Argentina
0
23
Sovereign Spreads
(basis points, September 2002)
7,000
6,000
1500
Latin American Countries
Investment Grade Countries
1000
500
Chile
0
Colom.
Peru
Argent.
Brazil
Mexico
S. Korea
Hungary
Thailand
Malaysia
Poland
Israel
24
Microeconomic &
Institutional Strength
Competitiviness Ranking 2002
(Source: International Institute for Management Development)
USA
Hong Kong
Australia
Germany
U. Kingdom
Chile
France
Spain
Malaysia
S.Korea
Czech Rep.
Japan
Italy
Thailand
Brazil
Mexico
Argentina
+ compet.
(19, amount 49)
- compet.
26
Economic Freedom Index 2001
(Source: The Heritage Foundation)
Hong Kong
US
UK
Australia
Chile
Germany
Thailand
Czech Rep.
Argentina
S.Korea
Italy
Spain
France
Mexico
Malaysia
Brazil
+ freedom
(9, amount 156)
-freedom
27
Corruption Index
(June 2001; Source: Transparency International)
Australia
U. Kingdom
USA
Chile
Germany
Spain
France
Italy
Malaysia
Korea
Brazil
Rep. Checa
Mexico
Argentina
Thailand
- corrupt.
(17, amount 102)
+ corrupt.
28
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)
30
Chile: GDP Growth
(Annual %)
14
12
average 1985-2001
10
8
6
4
2
0
-2
85
89
93
97
01
31
Chile: Inflation and Targets
(annual %)
35
30
25
20
15
10
5
0
90
91
92
93
94
95
96
97
98
99
00
01
02
32
Recent Structural Reforms
Further Trade Integration
General Import Tariff (%)
16
14
Bilateral and
Negotiations:
Multilateral
• Free trade agreement with
EU
• Currently negotiation Free
Trade agreements with the
US, EFTA, Korea
12
10
8
6
4
2
• WTO, FTAA
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03
34
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
35
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
36
How to Reduce Growth
Volatility?
GDP Growth
(Annual %)
30
20
10
0
-10
-20
-30
1900
1920
1940
1960
1980
2001
38
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
39
Chile: Exports by Sector
(% total exports)
Agriculture
1980
Mining
Industry
1960
2001
40
How to Reduce Growth Volatility?
• Fiscal policy based on rules.
• Inflation-targeting monetary policy (nominal anchor)
• Flexible exchange rate policy (interest rate stabilization)
41
Inflation and Targets
(annual %)
35
30
25
20
15
10
5
0
90
91
92
93
94
95
96
97
98
99
00
01
02
42
How to Reduce Growth Volatility?
Other Factors:
• Copper and oil compesatory funds
• Saving guaranteed by Pension Funds
• Banking and no banking finance
43
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
44
Chile: Domestic Corporate Bond Market
(USD billions)
(Issuance)
(total outstanding)
7
3,0
6
2,5
5
issuance
2,0
4
1,5
3
1,0
2
outstanding
1
0
0,5
0,0
1994
1995
1996
1997
1998
1999
2000
2001
45
Fundamentals of the Chilean Economy
Monetary
Strength
Microeconomic
& Institutional
Strength
Fiscal
Strength
Macroeconomic
and
Financial Stability
Financial System
Strength
External Sector
Strength
46
Fundamentals of the Chilean
Economy
Central Bank of Chile
October 2002