Country Report Chile Chile at a glance: 2005-06 OVERVIEW Presidential and congressional elections due in December 2005 will continue to dominate the political scene. The ruling centre-left Concertación coalition will benefit from strong economic growth and from the popularity of the current president, Ricardo Lagos. Its candidate, Michelle Bachelet, is well ahead of the two Alianza candidates, Joaquín Lavín and Sebastián Piñera, in opinion polls. Mr Piñera’s decision to stand in the presidential election has altered the dynamics of the campaign. Nevertheless, the Economist Intelligence Unit expects Ms Bachelet to win the election. Legislative activity will slow as congressmen focus on re-election, but, despite this, we still expect policy to remain essentially sound. After reaching 5.8% in 2005, GDP growth will slow to 5.1% in 2006 as monetary policy is tightened and the external environment becomes less favourable. Monetary tightening will keep 12-month inflation within the 2-4% target range set by the Banco Central de Chile (the Central Bank) in the forecast period. The stability of the peso will be underpinned by continued growth in export earnings and sustained foreign direct investment (FDI) inflows. The current-account balance will turn to a small deficit in 2006, reflecting deteriorating terms of trade. Key changes from last month Political outlook • The Alianza’s campaign has been shaken by Mr Piñera’s decision to stand against Mr Lavín. Soledad Alvear has withdrawn from the Concertación primary, which was due in July, meaning that Ms Bachelet will be the only Concertación candidate. Economic policy outlook • As expected, a mining royalty has been introduced. Chile will still be one of the world’s most attractive investment locations for mining companies. Economic forecast • We have revised up our forecast for export earnings and the import bill for 2005, following strong growth in both over the first five months of the year. July 2005 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. 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Chile 1 Contents Chile 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 6 Quarterly indicators 7 Outlook for 2005-06 7 Political outlook 8 Economic policy outlook 9 Economic forecast 13 The political scene 19 Economic policy 25 The domestic economy 25 Output and demand 26 Employment, wages and prices 28 Financial indicators 30 Sectoral trends 33 Foreign trade and payments List of tables 9 International assumptions summary 10 Gross domestic product by expenditure 12 Forecast summary 16 Opinion poll results 2005: who would you like to be the next president of Chile? 20 Evolution of economic expectations 20 Central government finances 21 Stock of government debt 21 The mining royalty tax 25 Gross domestic product growth by demand 26 Gross domestic product growth by sector 27 Price and wage trends 28 Employment trends 29 Bank results, May 2005 29 Stockmarket performance 30 Results of the main annual crops in the 2004/05 season 31 Meat exports, 2004 33 Imports of cars and LCVs by origin, 2005 Country Report July 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 2 Chile 34 Foreign trade 34 Balance of payments 35 Net international reserves 35 Foreign debt List of figures 13 Gross domestic product 13 Consumer price inflation Country Report July 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 Chile 3 Chile July 2005 Summary Outlook for 2005-06 Presidential and congressional elections due in December 2005 will dominate the political scene. The ruling centre-left Concertación coalition will benefit from strong economic growth and from the popularity of the current president, Ricardo Lagos. The Economist Intelligence Unit expects its candidate, Michelle Bachelet, to win the election. Despite a slowing of legislative activity as congressmen focus on re-election, we expect policy to remain essentially sound. After reaching 5.8% in 2005, GDP growth will slow to 5.1% in 2006 as monetary policy is tightened and the external environment becomes less favourable. Inflation will stay within its target range. The peso will be under- pinned by growth in export earnings and sustained foreign direct investment inflows. The current-account balance will turn to a small deficit in 2006. The political scene The announcement of Mr Piñera's candidacy was the final blow for Ms Alvear, who subsequently withdrew her candidacy, leaving Ms Bachelet as the Concertación’s sole presidential candidate. Juntos Podemos has registered its presidential candidate, Tomás Hirsch. The armed forces are continuing its modernisation and deepening its integration. Funding for large military purchases is likely to change. There has been some controversy over environmental protection. A new penal justice system has been introduced. Economic policy Slow monetary tightening has continued. The fiscal surplus reached 1.4% of GDP in the first quarter. A mining royalty has been passed. There will be no partial privatisation of the state copper company, Codelco. A deal with Minmetals caused some controversy. Pacific-4, which includes a free-trade agreement (FTA), has been signed with Brunei, New Zealand and Singapore. Chile will adopt international financial reporting standards. The domestic economy GDP growth slowed to 5.8% in the first quarter. Inflation is in the centre of the target range. Real wages are rising at a moderate pace and unemployment trending lower. Codelco has issued a local bond. Yields of agricultural crops have improved and meat exports are booming. The Spence copper mine will boost BHP Billiton. Tourist arrivals are expected to reach 2m and automotive sales will reach a new record this year. Foreign trade and payments The trade and current-account surpluses narrowed in the first few months of 2005. Net international reserves are on the rise. Foreign debt increased by 3.3% in the first four months of 2005. Editors: Martin Pickering (editor); Fiona Mackie (consulting editor) Editorial closing date: July 14th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule Country Report July 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 4 Chile Political structure Official name Republic of Chile Form of government Presidential system, based on 1980 constitution The executive The president, elected for a period of six years, is head of state and appoints the cabinet National legislature Bicameral legislature (Congress): a 48-member Senate, comprising 38 elected members, nine members appointed for eight-year terms and one senator for life, Eduardo Frei; and a Chamber of Deputies, with 120 members elected for four-year terms Legal system The 21 Supreme Court judges are appointed until retirement (compulsory at 75 years) by the president and confirmed by a two-thirds majority in the Senate; 16 regional courts of appeal and the members of the lower courts are appointed by the Supreme Court National elections January 2000 (presidential), October 2000 (municipal), December 2001 (congressional); next elections due December 2005 (presidential and congressional) National government Ricardo Lagos, who is recognised as leader by both the PPD and the PS, heads the Concertación coalition;