Fundamentals of the Fundamentals of the Chilean EconomyChilean Economy
Central Bank of ChileCentral Bank of ChileOctober 2002October 2002
2
Fundamentals of the Chilean Fundamentals of the Chilean EconomyEconomy
Macroeconomic Macroeconomic andand
Financial Financial StabilityStability
External External Sector Sector
StrengthStrength
Microeconomic Microeconomic & Institutional & Institutional
StrengthStrength
Financial Financial SystemSystemStrengthStrength
Monetary Monetary StrengthStrength
FiscalFiscalStrengthStrength
Monetary StrengthMonetary Strength
4
Chile: Nominal Exchange Rate (CLP/USD)
250250
350350
450450
550550
650650
750750
9090 9191 9292 9393 9494 9595 9696 9797 9898 9999 0000 0101 0202
spot
central parity
ceiling
floor
5
Chile: Monetary Policy Interest Chile: Monetary Policy Interest RateRate (%)(%)
* Before June 1995: PRBC 90 days rate
Nominal Int. RateCPI-adjusted Int. Rate
CPI-adjusted MPR
Overnight Rate *
-0,5
1,5
3,5
5,5
7,5
9,5
11,5
90 91 92 93 94 95 96 97 98 99 00 01 02 2,5
3,5
4,5
5,5
6,5
7,5
8,5
9,5
10,5
11,5
12,5
Nominal MPR
6
Chile: Real Exchange Rate (index, 1986=100)
7070
8080
9090
100100
110110
120120
8686 8787 8888 8989 9090 9191 9292 9393 9494 9595 9696 9797 9898 9999 0000 0101 0202
7
Chile: Long-Term Int. Rate: Central Chile: Long-Term Int. Rate: Central Bank Instruments Bank Instruments (%) (%) CPI-adjustedCPI-adjusted
2
3
4
5
6
7
8
9
10
Sept-02
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
PRC 8 years
PRC 20 years
Fiscal StrengthFiscal Strength
9
Fiscal Balance: Average 1992-2001
(% GDP)
-10-10
-8-8
-6-6
-4-4
-2-2
00
22
Argent.Argent.
BrazilBrazil
Chile
ColombiaColombia
Czech Rep.Czech Rep.
HungaryHungary
IsraelIsrael
KoreaKorea
MalaysiaMalaysia
MexicoMexico
PeruPeru
PolandPoland
ThailandThailand
Latin America CountriesLatin America Countries
Other Emerging EconomiesOther Emerging Economies
10
Public Debt 2001 (% GDP; Source: Moody´s and Ministry of Finance)
0
20
40
60
80
100
120
Argent.Brazil
ColombiaMexico
Peru
Chile
S. KoreaMalaysia
ThailandPoland
Czech Rep.
Hungary
Israel
Latin American CountriesOther Emerging Economies
11
Chile: Fiscal BalanceChile: Fiscal Balance(% GDP)(% GDP)
-2-2
-1-1
00
11
22
33
9090 9191 9292 9393 9494 9595 9696 9797 9898 9999 0000 0101 02(e)02(e)
structural
actual
Financial System Financial System StrengthStrength
13
Chile: Banking Solvency Indicators
(%)
0
2
4
6
8
10
12
14
94 95 96 97 98 99 00 01 02 (jun)
Basel IndicatorNon Performaning Loans
minimumminimumrequiredrequired
14
ArgentinaArgentinaThailandThailand
South KoreaSouth KoreaJapanJapan
MalaysiaMalaysiaMexicoMexicoBrazilBrazilChileChile
Hong KongHong KongItalyItaly
AustraliaAustraliaGermanyGermany
FranceFranceUKUKUSUS
SpainSpainNetherlandsNetherlands
(15, amount 76)(15, amount 76)
Ranking of Banking StrengthRanking of Banking Strength(Source: Moody´s, july 2002)(Source: Moody´s, july 2002)
stronger
less strong
15
Chile: Financial Savings by Institutional Investors (% GDP)
00
2020
4040
6060
8080
100100
19941994 19951995 19961996 19971997 19981998 19991999 20002000 20012001
pension funds
insurance companies
mutual funds
16
Chile: Domestic Corporate Bond Market (USD billions)
(total outstanding)(total outstanding) (Issuance)(Issuance)
00
11
22
33
44
55
66
77
19941994 19951995 19961996 19971997 19981998 19991999 20002000 200120010,00,0
0,50,5
1,01,0
1,51,5
2,02,0
2,52,5
3,03,0
outstanding
issuance
External Sector StrengthExternal Sector Strength
18
Chile: Total Exports VolumeChile: Total Exports Volume(index 1990=100)(index 1990=100)
00
5050
100100
150150
200200
250250
300300
6060 6565 7070 7575 8080 8585 9090 9595 0000 0202
19
Chile: Exports by SectorChile: Exports by Sector(% total exports)(% total exports)
1960196020012001
Mining
Industry
Agriculture
19801980
20
Chile: Distribution of Merchandise Chile: Distribution of Merchandise ExportsExports(January-August 2002)(January-August 2002)
USA: 20%USA: 20%
Latam: 21%Latam: 21%
EU: 20%EU: 20%
UK: 5%UK: 5%
China: 7%China: 7%
Japan: 11%Japan: 11%
Rest of Asia: 12%Rest of Asia: 12%
Others: 4%Others: 4%
21
Chile: Current Account Deficit (% GDP)
00
11
22
33
44
55
66
9090 9191 9292 9393 9494 9595 9696 9797 9898 9999 0000 0101 0202 0303 0404
forecast
22
Chile: Cumulative Investment Abroad (% GDP)
-
5
10
15
20
25
30
35
40
45
50
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Jun-02
23
Net International ReservesNet International Reserves (% Short Term Debt + Amortizations)(% Short Term Debt + Amortizations)
0
50
100
150
200
250
300
350
Arg
en
tin
a
Bra
zil
Colo
mb
ia
Mexic
o
Peru
Ch
ile
Kore
a
Mala
ysia
Th
ail
an
d
Pola
nd
Cze
ch
Rep
.
Hu
ng
ary
Latin American CountriesInvestment Grade Countries
24
Sovereign SpreadsSovereign Spreads (basis points, September 2002)(basis points, September 2002)
0
6,000
7,000
Argent.Brazil
Colom.Mexico
Peru
Chile
S. Korea
MalaysiaThailand
Poland
Hungary
Israel
500
1000
1500
Latin American CountriesInvestment Grade Countries
Microeconomic & Microeconomic & Institutional StrengthInstitutional Strength
26
ArgentinaArgentinaMexicoMexicoBrazilBrazil
ThailandThailandItalyItaly
JapanJapanCzech Rep.Czech Rep.
S.KoreaS.KoreaMalaysiaMalaysia
SpainSpainFranceFrance
ChileChileU. KingdomU. Kingdom
GermanyGermanyAustraliaAustralia
Hong KongHong KongUSAUSA
(19, amount 49)(19, amount 49)
Competitiviness Ranking 2002Competitiviness Ranking 2002(Source: International Institute for Management (Source: International Institute for Management Development)Development)
+ compet.
- compet.
27
BrazilBrazilMalaysiaMalaysia
MexicoMexicoFranceFranceSpainSpainItalyItaly
S.KoreaS.KoreaArgentinaArgentina
Czech Rep.Czech Rep.ThailandThailandGermanyGermany
ChileChileAustraliaAustralia
UKUKUSUS
Hong KongHong Kong
(9, amount 156)(9, amount 156)
Economic Freedom Index 2001 (Source: The Heritage Foundation)
+ freedom
-freedom
28
ThailandThailandArgentinaArgentina
MexicoMexicoRep. ChecaRep. Checa
BrazilBrazilKoreaKorea
MalaysiaMalaysiaItalyItaly
FranceFranceSpainSpain
GermanyGermanyChileChileUSAUSA
U. KingdomU. KingdomAustraliaAustralia
(17, amount 102)(17, amount 102)
Corruption Index Corruption Index (June 2001; Source: Transparency International)(June 2001; Source: Transparency International)
- corrupt.
+ corrupt.
Macroeconomic StabilityMacroeconomic Stability
30
Chile: GDP, 1960-2002Chile: GDP, 1960-2002(billions of 1996 Chilean pesos)(billions of 1996 Chilean pesos)
50005000
1000010000
1500015000
2000020000
2500025000
3000030000
3500035000
4000040000
19601960 19701970 19801980 19901990 2002(e)2002(e)
31
Chile: GDP GrowthChile: GDP Growth(Annual %)(Annual %)
-2-2
00
22
44
66
88
1010
1212
1414
8585 8989 9393 9797 0101
average 1985-2001
32
Chile: Inflation and TargetsChile: Inflation and Targets(annual %)(annual %)
00
55
1010
1515
2020
2525
3030
3535
90 90 91 91 92 92 93 93 94 94 95 95 96 96 97 97 98 98 99 99 0000 0101 0202
Recent Structural Recent Structural ReformsReforms
34
Bilateral and Multilateral Negotiations:
Further Trade IntegrationFurther Trade Integration
General Import Tariff (%)
0
2
4
6
8
10
12
14
16
90 91 92 93 94 95 96 97 98 99 00 01 02 03
• Free trade agreement with EU
• Currently negotiation Free Trade agreements with the US, EFTA, Korea
• WTO, FTAA
35
Capital Markets Reforms: Central Capital Markets Reforms: Central BankBank• 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 Capital Markets Reforms: legal changeschanges• 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
How to Reduce Growth How to Reduce Growth Volatility?Volatility?
38
GDP GrowthGDP Growth(Annual %)(Annual %)
-30-30
-20-20
-10-10
00
1010
2020
3030
19001900 19201920 19401940 19601960 19801980 20012001
39
Terms of TradeTerms of Trade(index 1990=100)(index 1990=100)
7070
8080
9090
100100
110110
120120
8080 8282 8484 8686 8888 9090 9292 9494 9696 9898 0000 0202 0404
40
Chile: Exports by SectorChile: Exports by Sector(% total exports)(% total exports)
1960196020012001
Mining
Industry
Agriculture
19801980
41
How to Reduce Growth Volatility?How to Reduce Growth Volatility?
• Fiscal policy based on rules.
• Inflation-targeting monetary policy (nominal anchor)
• Flexible exchange rate policy (interest rate stabilization)
42
Inflation and TargetsInflation and Targets(annual %)(annual %)
00
55
1010
1515
2020
2525
3030
3535
90 90 91 91 92 92 93 93 94 94 95 95 96 96 97 97 98 98 99 99 0000 0101 0202
43
How to Reduce Growth Volatility?How to Reduce Growth Volatility?
• Copper and oil compesatory funds
• Saving guaranteed by Pension Funds
• Banking and no banking finance
Other Factors:
44
Chile: Financial Savings by Institutional Investors (% GDP)
00
2020
4040
6060
8080
100100
19941994 19951995 19961996 19971997 19981998 19991999 20002000 20012001
pension funds
insurance companies
mutual funds
45
Chile: Domestic Corporate Bond Market (USD billions)
(total outstanding)(total outstanding) (Issuance)(Issuance)
00
11
22
33
44
55
66
77
19941994 19951995 19961996 19971997 19981998 19991999 20002000 200120010,00,0
0,50,5
1,01,0
1,51,5
2,02,0
2,52,5
3,03,0
outstanding
issuance
46
Fundamentals of the Chilean Fundamentals of the Chilean EconomyEconomy
Macroeconomic Macroeconomic andand
Financial Financial StabilityStability
External External Sector Sector
StrengthStrength
Microeconomic Microeconomic & Institutional & Institutional
StrengthStrength
Financial Financial SystemSystemStrengthStrength
Monetary Monetary StrengthStrength
FiscalFiscalStrengthStrength
Fundamentals of the Fundamentals of the Chilean EconomyChilean Economy
Central Bank of ChileCentral Bank of ChileOctober 2002October 2002