Why are continuing concerns in Chile Despite Good News?

Editor's Note: In Chile, unlike Argentina, the energy savings plan seems to bear fruit. The Chileans have saved energy in a month in which the energy difficulties were expected to feel. But there are many more good news for Chile, we Horacio summarizes in this article today. I can send your comments to: paola@moneyweekes.com

Why are continuing concerns in Chile, despite the good news?

Buenos Aires, Argentina

April 8, 2008

The outlook presented earlier this year was really too dark for the Chilean economy (I already had talked about it about a month ago http://moneyweekes.com/bachelet-suma-preocupaciones-en-la-segunda-parte-de -your-command /). The energy problems had been compounded by drought, an inflation rate at levels not experienced for years Chile, and Chilean peso appreciation in real trouble putting the government of Bachelet.

Within this gloomy picture, the latest data released so far show that the Chilean economy is positively avoiding the various obstacles that will come along.

March looked to be the month of blackouts in Chile. It was almost a fact that the energy crisis was going to feel. However, none of this happened because during the month of March, it achieved a 9.4% saving in energy consumption ... Success energy savings plan held by Bachelet and a greater awareness of the Chilean people? ... I guess a little of everything. And I think it was so because, in the case of Argentina, the preliminary results of energy savings plan are not showing a significant level of energy savings (up one can say that the result is minimal).

The evolution of Chile's exchange rate against the dollar is hitting on another front Chilean producers. The Chilean peso appreciated by 12.5% ​​so far this year against the dollar. However, the trade balance showed a positive result in the first three months of the year with a value of U.S. $ 6,100 million. It is true that by the time Chile is maintaining its external surplus, but the appreciation of its currency no longer a threat and this is well reflected in the fact that in this first quarter, while exports had an increase year of 15.1%, imports were up 38.6%.

The growth that reached the Chilean economy grew 5.6% during the month of February, slightly above market forecasts that were located at 5.5%, is also another good news that they met in the past days. And considering that such data is not a result that motivates action by the Central Bank to raise its benchmark rate.

With the economic growth data released, the decision taken by the Central Bank of Chile at the meeting next Thursday, according to market expectations, will be to keep its benchmark rate steady at 6.25%. This would eliminate more pressure on the exchange rate.

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Another good news for Chile occurred two weeks ago, when the Senate unanimously approved the Chile Free Trade Agreement with Colombia, this being the most comprehensive free trade agreement concluded between two Latin American countries and the only one that includes a chapter on government procurement in the region . It also includes an investment chapter that seeks to promote and protect flows in both directions, by establishing clear rules. Chile also closed on these days the rounds of FTA negotiations with China. In 2007, the first year of the FTA with China, growth in exports to that country in 140% made became the main destination for Chilean exports. Clearly these two FTAs ​​will increase the growth potential outside doors of the Chilean economy.

With all this good news from Chile I might be tempted to say that the outlook for the coming months will be positive. But the reality is not. The problems exist and are dormant. As autumn progresses and the temperatures continue to decline, tensions over energy capacity will increase. So far this obstacle is being overcome, but there are doubts about whether this can be overcome for a long time.

With a nominal appreciation of the exchange rate of 18% since early 2007, the competitiveness of Chilean companies has clearly deteriorated. This will surely reduce the trade surplus unless the measures implemented by the Bachelet government to take effect or will decide new measures to tackle the problem.

While the fact of increasing consumer prices, which turned out to be 0.8% in March was less than expected, which would increase the chances of inflation back to levels around 4% by year's end the annual change in consumer prices are both still high (8.5% in March). High fuel prices and heavy dependence on imports from Chile them (imports about 90% of its oil needs), in combination with the problems of drought, are factors that are affecting the current level of inflation and are beyond the control of the authorities.

Despite the good signs that yielded economic data in recent days, the problems to be solved Bachelet's government to maintain good performance of the economy are many and complex. Will be seen how the government's response to these challenges.

We will meet again tomorrow,

Horacio Pozzo