The Chilean Economy

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)

House prices are falling in Chile and the UF (the currency to buy houses and apartments in Chile) is falling against the local currency the Chilean Pesos. See the chart below:
uf

Building Projects from private investors are put on hold. Just one example below:

The Torre Gran Costanera in las Condes should have become Chiles tallest building, costs where estimated at USD 600 mio. but the project has been put on hold.

 

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

UF also Unidad de Fomento is used in Chile as a currency for Property and Mortgages
UF also Unidad de Fomento is used in Chile as a currency for Property and Mortgages

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.

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5 thoughts on “The Chilean Economy

  1. Liz

    And Chile will have Wimax soooon! jejeje Just kidding… besides the economic indicators you can also find good food, security and good quality life, so yes, I am happy to live in Chile! 🙂

    1. David Kropelnicki

      Good food????? Quality of life????The food is God awful, as they do not pay chefs large salaries! The serve meat that is full of antibiotics and hormones and charge huge prices. One of their “famous” Italian restaurants managed to ruin a simple desert named Zabaglione by using cheap sherry instead of Marsala wine! Each time I have had fish at any restaurant in this place, I have gotten sick! They are so cheap, they keep the product for too long before throwing it out. It is an over priced country with nothing to offer.

      1. Cris

        hey Polack, stop whinning about Chile when you just had a shitty restaurant experience, big deal…so if I go to Applebees in Newark, NJ, does that mean all of the USA has bad food and sucks? Think about that…and if you want real food, good hearty Chilean food, go to Dona Tina…go stuff yourself with Zabaglione in Italy you fool.

  2. The fact the UF is currently decreasing a bit in value shouldn’t be among the negatives. This is just the current bout of deflation at work, reflecting lower energy and food prices. Things are becoming more affordable after two years of strong inflation. If you put the UF on a longer time series you’ll see it has built up more than it should have over the last 5 years. The current decline is small in proportion and more like a plateau than a drop.

  3. Pingback: The Chilean Finance Minister « Andre in Chile

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