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Fundamentals of the Chilean Economy

Fundamentals of the Chilean Economy. Central Bank of Chile October 2002. Fiscal Strength. Monetary Strength. Financial System Strength. Microeconomic & Institutional Strength. External Sector Strength. Fundamentals of the Chilean Economy. Macroeconomic and Financial Stability.

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Fundamentals of the Chilean Economy

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  1. Fundamentals of the Chilean Economy Central Bank of ChileOctober 2002

  2. Fiscal Strength Monetary Strength Financial System Strength Microeconomic & Institutional Strength External Sector Strength Fundamentals of the Chilean Economy Macroeconomic and Financial Stability

  3. Monetary Strength

  4. spot 750 650 ceiling 550 central parity 450 350 floor 250 90 91 92 93 94 95 96 97 98 99 00 01 02 Chile: Nominal Exchange Rate (CLP/USD)

  5. 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 3,5 -0,5 2,5 98 00 92 93 94 95 96 97 99 01 02 91 90 Chile: Monetary Policy Interest Rate(%) * Before June 1995: PRBC 90 days rate

  6. 120 110 100 90 80 70 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 Chile: Real Exchange Rate (index, 1986=100)

  7. 10 9 8 7 6 5 PRC 8 years PRC 20 years 4 3 2 Oct-92 Abr-93 Oct-93 Abr-94 Oct-94 Abr-95 Oct-95 Abr-96 Oct-96 Abr-97 Oct-97 Abr-98 Oct-98 Abr-99 Oct-99 Abr-00 Oct-00 Abr-01 Oct-01 Abr-02 Sept-02 Chile: Long-Term Int. Rate: Central Bank Instruments (%) CPI-adjusted

  8. Fiscal Strength

  9. Chile Czech Rep. 2 Thailand Malaysia Argent. Israel Peru 0 Korea -2 Mexico Poland -4 Hungary Colombia -6 Latin America Countries -8 Other Emerging Economies Brazil -10 Fiscal Balance: Average 1992-2001(% GDP)

  10. 120 100 Latin American Countries 80 Other Emerging Economies 60 40 Chile 20 Czech Rep. Colombia 0 Thailand S. Korea Argent. Israel Peru Malaysia Hungary Mexico Poland Brazil Public Debt 2001(% GDP; Source: Moody´s and Ministry of Finance)

  11. 3 actual 2 structural 1 0 -1 -2 90 91 92 93 94 95 96 97 98 99 00 01 02(e) Chile: Fiscal Balance(% GDP)

  12. Financial System Strength

  13. 14 Basel Indicator Non Performaning Loans 12 10 minimum required 8 6 4 2 0 94 95 96 97 98 99 00 01 02 (jun) Chile: Banking Solvency Indicators(%)

  14. Netherlands Spain stronger US UK France Germany Australia Italy Hong Kong (15, amount 76) Chile Brazil Mexico less strong Malaysia Japan South Korea Thailand Argentina Ranking of Banking Strength(Source: Moody´s, july 2002)

  15. insurance companies 100 mutual funds 80 60 40 20 pension funds 0 1994 1995 1996 1997 1998 1999 2000 2001 Chile: Financial Savings by Institutional Investors (% GDP)

  16. (Issuance) (total outstanding) 7 3,0 6 2,5 issuance 5 2,0 4 1,5 3 1,0 2 outstanding 0,5 1 0 0,0 1994 1995 1996 1997 1998 1999 2000 2001 Chile: Domestic Corporate Bond Market(USD billions)

  17. External Sector Strength

  18. 300 250 200 150 100 50 0 00 60 65 70 75 80 85 90 95 02 Chile: Total Exports Volume(index 1990=100)

  19. Agriculture 1980 Mining Industry 2001 1960 Chile: Exports by Sector(% total exports)

  20. Others: 4% Rest of Asia: 12% USA: 20% Japan: 11% China: 7% Latam: 21% UK: 5% EU: 20% Chile: Distribution of Merchandise Exports(January-August 2002)

  21. 6 5 4 3 2 forecast 1 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 Chile: Current Account Deficit (% GDP)

  22. Chile: Cumulative Investment Abroad(% GDP)

  23. 350 Latin American Countries 300 Investment Grade Countries 250 200 150 100 50 0 Peru Chile Brazil Korea Poland Mexico Malaysia Hungary Thailand Colombia Argentina Czech Rep. Net International Reserves(% Short Term Debt + Amortizations)

  24. 7,000 6,000 Latin American Countries Investment Grade Countries 1500 1000 500 Chile S. Korea Hungary Thailand 0 Argent. Colom. Peru Malaysia Mexico Poland Brazil Israel Sovereign Spreads(basis points, September 2002)

  25. Microeconomic & Institutional Strength

  26. USA Hong Kong + compet. Australia Germany U. Kingdom (19, amount 49) Chile France Spain Malaysia S.Korea Czech Rep. Japan - compet. Italy Thailand Brazil Mexico Argentina Competitiviness Ranking 2002(Source: International Institute for Management Development)

  27. Hong Kong US + freedom UK Australia Chile (9, amount 156) Germany Thailand Czech Rep. Argentina S.Korea Italy -freedom Spain France Mexico Malaysia Brazil Economic Freedom Index 2001(Source: The Heritage Foundation)

  28. Australia - corrupt. U. Kingdom USA (17, amount 102) Chile Germany Spain France Italy Malaysia Korea + corrupt. Brazil Rep. Checa Mexico Argentina Thailand Corruption Index (June 2001; Source: Transparency International)

  29. Macroeconomic Stability

  30. 40000 35000 30000 25000 20000 15000 10000 5000 1960 1970 1980 1990 2002(e) Chile: GDP, 1960-2002(billions of 1996 Chilean pesos)

  31. 14 12 average 1985-2001 10 8 6 4 2 0 -2 85 89 93 97 01 Chile: GDP Growth(Annual %)

  32. 35 30 25 20 15 10 5 0 90 91 92 93 94 95 96 97 98 99 00 01 02 Chile: Inflation and Targets(annual %)

  33. Recent Structural Reforms

  34. General Import Tariff (%) 16 14 12 10 8 6 4 2 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 Further Trade Integration Bilateral and Multilateral Negotiations: • Free trade agreement with EU • Currently negotiation Free Trade agreements with the US, EFTA, Korea • WTO, FTAA

  35. 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

  36. 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

  37. How to Reduce Growth Volatility?

  38. 30 20 10 0 -10 -20 -30 1900 1920 1940 1960 1980 2001 GDP Growth(Annual %)

  39. 120 110 100 90 80 70 80 82 84 86 88 90 92 94 96 98 00 02 04 Terms of Trade(index 1990=100)

  40. Agriculture 1980 Mining Industry 2001 1960 Chile: Exports by Sector(% total exports)

  41. How to Reduce Growth Volatility? • Fiscal policy based on rules. • Inflation-targeting monetary policy (nominal anchor) • Flexible exchange rate policy (interest rate stabilization)

  42. 35 30 25 20 15 10 5 0 90 91 92 93 94 95 96 97 98 99 00 01 02 Inflation and Targets(annual %)

  43. How to Reduce Growth Volatility? Other Factors: • Copper and oil compesatory funds • Saving guaranteed by Pension Funds • Banking and no banking finance

  44. insurance companies 100 mutual funds 80 60 40 20 pension funds 0 1994 1995 1996 1997 1998 1999 2000 2001 Chile: Financial Savings by Institutional Investors (% GDP)

  45. (Issuance) (total outstanding) 7 3,0 6 2,5 issuance 5 2,0 4 1,5 3 1,0 2 outstanding 0,5 1 0 0,0 1994 1995 1996 1997 1998 1999 2000 2001 Chile: Domestic Corporate Bond Market(USD billions)

  46. Fiscal Strength Monetary Strength Financial System Strength Microeconomic & Institutional Strength External Sector Strength Fundamentals of the Chilean Economy Macroeconomic and Financial Stability

  47. Fundamentals of the Chilean Economy Central Bank of ChileOctober 2002

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