Article updated on April 20th to include the most frequent news. To see the update scroll right to the end of the article
Whilst the entire world seems to be in huge economic trouble the situation in Chile seems a lot more stable. Here is my view of the current situation with link to sources. First the bad things (The article will turn more positive I promise just read on)
Building Projects from private investors are put on hold. Just one example below:
Chile is the world’s largest copper producer, accounting for around 35% of international output, and copper is by far its most important export. In 2007, export earnings from copper reached $37.6 billion, or 56% of total exports. Moreover, government revenue from copper–in the form of the profits of state copper company Codelco and taxes paid by private mining companies–accounted for almost a third of total fiscal income. Source Forbes The Copper price has been declining rapidly and is now at less than half of its peak.
Now lets focus on the positive news:
Even though the copper price has declined heavily since its peak in August 2008 the government had not relied on these high prices but forecasted with a price of $1.37 a pound less than half last years average. Source
The government did not spend all those extra profits but created a reserve fund in foreign currencies.
Chile has a more advantages compared to other economies in both South America and the rest of the world:
Chile had a high interest rate as the inflation (compared to the first world) was pretty high. The inflation went down and the Government is steadily decreasing its interest rates. See here a quote taken from Bloomberg:
Chile’s peso capped its first quarterly gain in a year, making it the world’s best performer in 2009, as the government tapped its foreign savings and the central bank slashed interest rates to boost growth. The peso advanced 9.5 percent against the U.S. dollar this quarter, more than any other currency tracked by Bloomberg.
The Chilean Central Bank has cut interest rates from 8.25 % at the end of 2008 to 2.25 currently (source)
Chile has US$23 billion in foreign currency reserves some of which it is using to support small businesses and the local economy.
Source The Economic Times
And it is also using part of these currency reserves to stimulate growth. The Chilean President unveiled a new stimulus package at the end of March which should translate to an extra 6 billion USD in additional lending to small businesses and homes. Source
After I finished this article I found another amazing article from my favourite magazine the economist about Chile’s stimulus package. Read it…
So this is why I am more positive about Chiles economy then about most other world economies.
What do you think about the Chilean economy? Are you feeling the decline? Are you positive or negative towards the short term future of the Chilean Economy?
update: by request of Oliver (who is right) I have also added a longer chart to reflect the history of the UF. As I did not find a chart on the net I have created my own using data from 1.Jan.2007 to 1.April.2009
Since Mortgages are also based in the currency UF (a weird thing) the decline helps people who currently have a mortgage.
update April 20th 2009: The Chilean Economy shrank 3,9% in February 2009 the 4th negative month in a row. The Chilean economy is now expected to contract by 0.5 % in 2009 see here the Reuters article from April 17th.