Chile

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Chile Snapshot

Wealthiest in LatAm

Chile is classified as an upper-middle income country and is the most prosperous nation of Latin America. The
country has an increasingly diversified economy and has the highest GDP per capita of all Latin American
countries.

Favorable Business Environment

Chile ranks first among all Latin American countries in the Human Development Index and Ease of
doing business. Additionally, the country has one of the lowest corruption perception index in Latin
America.

Regional Reference for Political and Economic Stability

Chile is a regional reference for political and economic stability, with low indebtedness levels
and the existence of a significant sovereign wealth fund with USD 21bi of assets used to
mitigate oscillation in copper prices.

Effective Fiscal Policy

Chile has one of the highest savings ratio of Latin America, around 25% of GDP. Additionally,
the country pursues counter-cyclical fiscal policies, all of which increase potential GDP growth
in downturn years and prevent overheating in good years.

Effective Monetary Policy

The country has a legally independent Central Bank and has pursued an inflation target of 3% with a
1% range since 2006. The CB has successfully anchored inflation expectations in a country that has
faced significant hyperinflation in the previous decades.

Focus on International Trade

Chile has pursued an international trade agenda, pushing for multi bilateral and regional trade and
cooperation agreements. The country currently has 22 trade agreements with over 60 countries,
which correspond to around 80% of worlds GDP.

Source: Ita BBA

2

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Chile | Key Stats

General Information
Head of Government
Michelle Bachelet

Debt Ratings

Central Bank

Next monetary meeting

A+

BCCH

11/08/2016

Aa3

Next Elections

Last Rate Change

AA-

Nov-17

Maintained

Population

Main Interest rate

Benchmark Rate

17,508,260

TASA CAMARA

3.50%

Foreign Reserves

Inflation Index

Inflation target

38,722,950,000

Unidad de Fomento (UF)

3.0% 1.0%

Market Data
Stock Index IPSA

USDCLP Spot

4,200

730

690

3,800

670

3,600

650

650.8

630
Oct/15 Nov/15 Dec/15 Jan/16 Feb/16 Mar/16 Apr/16 May/16 Jun/16

3,400
3,200
Oct/15 Nov/15 Dec/15 Jan/16 Feb/16 Mar/16 Apr/16 May/16 Jun/16

3m IRS

5Y CDS

4.00

120

3.90

110

3.80

100
80

3.60

3.40
Oct/15 Nov/15 Dec/15 Jan/16 Feb/16 Mar/16 Apr/16 May/16 Jun/16
Source: Bloomberg

78

90

3.70

3.50

4,109

4,000

710

3.50

70
60
50
Jan-14

Jul-14

Jan-15

Jul-15
3

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Chile | Indicators and Trade

Trade Data (USD blns)

General Information
Rankings

76

Global

Category

LatAm

66

71 75

55

Very High | 0.822

41st

1st

Ease of Doing
Business

41st of 189

4th

of 32

Economic Freedom

28th of 178

1st

of 28

Corruption Perception
Index

21st

2nd

HDI

2006

2007

64

Income Status

of 28

2008

2009

Import Partners

High Income

Central Bank
Independence

Other
45%

Legal Very High

Dollarization

92 91

91 90

83 87

2011

2012

2013

2014

69

2010

Imports

of 174

95

88

51

46

0.822

83

USA
20%

Exports

Export Partners
Other
41%

China
20%

Very Low

Brazil
Germany
7%
Argentina
4%
5%

GDP Growth

China
25%

USA
13%
S. Korea
Brazil
5%
6%

Japan
10%

Inflation

500.0
6.0%

4.0%

400.0

2.0%

276.6
258.0 250.5 261.4
250.7 265.1

300.0
217.3
200.0

154.7

0.0%
-2.0%

173.1 179.6 172.1

-4.0%
-6.0%

100.0

-8.0%

0.0

-10.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E
Chile Nom. GDP (USD)

LatAm Real GDP Growth

Source: Bloomberg, IMF, World Bank, CIA World Factbook, OECD

Chile Real GDP Growth

4

Economic History

Chiless economic liberalization took place after Pinochets coup dtat: the country has transformed from one of the poorest in
Latin America to the richest in GDP per capita

Chicago boys implemented a series of economic reforms including privatization, economic liberalization deregulation. Reforms
were widely contested but significant economic growth, efficiency in government and low levels of inflation were achieved

Political transition to democracy from 1990: successors maintained most of economic policies while boosting social spending
moderately and benefitting from rise in commodity prices

Country has achieved unprecedented transparency and political stability in Latin America: countercyclical fiscal policy has
successfully protected the country from coppers price oscillation

The countrys Central Bank has pursued an inflation target of 3% with a 1% range since 2006. The CB has successfully anchored
inflation expectations and was granted full autonomy

Chile has actively pursued trade liberalization: the country currently has 22 trade agreements with over 60 countries, which
represent an access to over 80% of the worlds GDP

Chile is classified as an upper-middle income country and is the most prosperous nation of Latin America. The country is a
reference for political and economic stability, with low indebtedness levels

Countercyclical policies have mitigated impact of coppers price in its economy. As a result, the country has outperformed Latin
America greatly in the past thirty years and is now a regional model for economic growth

Liberalization

Transition to
Democracy and
Stability

General Facts

Economic Outlook

Activity

Inflation &
Exchange Rate

Political
Outlook

The most recent activity data confirm that Chiles economy slowed sharply in Q2 2015.Growth expected of 2.2% 3.2% for 2015 and
2016, respectively

Weak internal demand, currency depreciation and lower oil prices continued to boost the trade balance during 2Q15. The currentaccount deficit is expected to wide to 1.1% of GDP in 2015 and 1.8% in 2016, which is comfortable considering fall in copper prices

The annual fiscal deficit for 2015 is expected to reach 3.1% of GDP, compared to the latest prediction of 2.5%

On an annual basis, inflation accelerated to 4.4% in June, and thus, breached the high end of the target range. Inflation expected to
reach 3.7% by the end of this year before slowing to 3.0% in 2016

With uncertainty over the Greek and Chinese economies rising and U.S data coming strong, the Chilean peso has weakened this
year. Once the volatility in international markets subsides and copper prices recover, the exchange rate is expected to end this year
at 645 and 650 pesos to the dollar in 2015 and 2016, respectively

Bachelets second term is currently in a confidence crisis. Cabinet has been reshuffled while her son is in the epicenter of
corruption scandal

Bachelet has recently reappointed new secretary of general of presidency Jorge Insunza and finance minister Rodrigo Valds in a
shift to centrism and fiscal credibility. In spite of cabinet changes, approval ratings to the president fell to a minimum of 27% in
June, while Bachelets disapproval rate rose to 68%

CLP and Copper Correlation

BCCH Intervention

Copper Effect

The country has had a floating exchange rate system since 1999.
The government does not usually intervene in the FX market, but
has used swap instruments in the past to avoid over-appreciation.
In 2011, the CB implemented a USD 12 billion reserve program
consisting of daily basis purchases of USD 50 million which
depreciated the Chilean peso.

Chile has the third most liquid onshore spot market in Latin America,
with an average daily rate of around USD 2bn.

The currency has weakened sharply due to the decrease in

international prices of copper. The correlation is high and further
devaluation is linked to Chinas economic growth forecast.

Weaker fiscal growth and the fall in the copper prices put further
devaluation pressures

110
105
100
95
90
85
80

75
70
65
60
Jan-13

Apr-13

Jul-13

Oct-13

Jan-14

Apr-14

Exchange rate

Source: Bloomberg

Jul-14

Oct-14

Jan-15

Apr-15

Jul-15

Copper

Chile At a glance
Chile Basic Facts - 2014
Population 17.6mi
HDI 0.822 - Very high - 41st
Fiscal Deficit 1.6%
Most developed economy of Latin America
Economic freedom - 7th freest (Heritage Foundation)
22 trade agreements with 60 countries 80% of Worlds GDP
18000
16000
14000
12000
10000
8000
6000
4000
2000
0

FDI % GDP

USD GDP Per Capita - Nominal

7.30%

3.60%
3.00%

1.90%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Argentina

Source: CEPAL, World Bank 2013

Chile

Brazil

Chile

Brazil
Chile

Brazil

Latin America
Latin America

Argentina

Argentina

Chile in Latin America

Highest GDP per capita of Latam

($22500 PPP)

Aa3, AA- and A+ ratings from

main agencies

$21bi of assets in sovereign fund.

Historical Context
Presidents since redemocratization

Chiles economic liberalization took place after Pinochets coup

d'tat: the country has transformed from one the poorest in Latin
America to the richest in GDP per capita.

Chicago boys implemented a series of economic reforms including

privatization, economic liberalization deregulation. Reforms were
widely contested but significant economic growth, efficiency in
government and low levels of inflation were achieved.

Political transition to democracy from 1990: successors maintained

most of economic policies while boosting social spending
moderately and benefitting from rise in commodity prices.

Country has achieved unprecedented transparency and political

stability in Latin America: countercyclical fiscal policy has
successfully protected the country from coppers price oscillation.

The countrys Central Bank has pursued an inflation target of 3%

with a 1% range since 2006. The CB has successfully anchored
inflation expectations and was granted full autonomy.

Bachelets second term is currently in a confidence crisis: Cabinet

has been reshuffled while her son is in the epicentre of corruption
scandal.

Patricio Aylwin (9094)

Eduardo Frei (94-00)

Ricardo Lagos(0006)

Sebastin Piera
(10-14)

Michelle Bachelet
(06-10), (14-18)

10

Structure of the economy

Chiles economy is highly integrated to the worlds economy. Significant reliance on copper
prices.
Exports

Imports
Other
15%

Other
27%

Machinery
22%

Food
3%
Rubber
5%
Copper
52%

Fish
4%
Chemicals
5%

Plastic
5%
Natural gas
3%
Steel
5%

Oil
19%

Transport
equipment
16%

Other ores Wine/Grapes

7%
5%

Export - Partners

Chemicals
8%

Import - Partners

China
23%

US
23%

Others
24%

Other
34%

US
12%
Italy
3%
Netherlands
3% India
3%

Brazil
5%

South Korea Japan

6%
11%

Equador
3%
Peru
3%
Colombia
3%
Japan
3%
South Korea
3% Mexico
3%Germany Argentina
5%
6%

China
18%

Brazil
6%

Recent downfall in copper prices has undermined countrys growth forecast

Source: MIT Research

11

Chiles economic growth key metrics

Chile leads Latin American nations in competitiveness,

innovation, economic freedom and income per capita.

Trade as % of GDP
56%

Chiles central government debt is at 16.5% of GDP, ahead of

most developing countries.

25%

The country has privatized social security which encouraged

savings, around 25% of GDP (2010-2014).

Political turmoil, Chinas deceleration and high inequality

remain as future challenges for Chile.

Chile

5.60%

5.60%

Brazil

Agriculture
4%

5.40%

5.20%
4.50%
4.40%

Argentina

Brazil

GDP Composition

5.90%
5.80%
5.80%

5.60%

Argentina
Chile

GDP growth

22%

4.30%

4.10%

3.70%
3.30%
2.80%

Industry
35%

2.50%
Services
61%

2005

2006

2007

2008

2009

2010

2011

2012

2013

-1%
-1.60%
Source: World Bank

Chile

Latin America

12

Primary Sector

Primary Sector - Exports Billion USD

The primary sector of the economy is responsible for 3.5% of

GDP and employs 10% of the population.

5.4

Chile is the greatest exporter of grapes and plums, second

largest of avocado and fifth largest of wine and frozen pork.

5
4.7

Chiles agrobusiness represents 9% of its GDP as of 2013.

Food business comprises two thirds of Chiles

agrobusiness.

Primary sector as % of GDP

Wood and woodpulp

Fish

Wood and woodpulp

Fruits
Fish

Fruits

Subdivision of primary sector

Silviculture
18%

Fruit Farming
40%

Crop growing
18%

Animal Husbandry
24%
Source: International Trade Centre, World Bank

13

Industry

Copper refining, nitrate products and iron smelting are

key parts of Chiles industry.

The country also has a sizable textile, clothing and

leather industry.

Foreign Direct Investment bi USD 2014

45.36

18.1

17.13
10.8

Since 2000, Chiles industry has grown at a 3.1%

annual rate, compared to an overall 4.5% rate.

5.4

3.42

0.2

Much of the decline in industry share over time is due

to lower value added in copper products.
Mining

Services

Other

Utilities

Manufacturing

Transport

Construction

Agriculture

Industry breakdown

Long Run Industrys share of domestic product

Other
7%

Food
22%
Metals &
Machinery
20%

Beverage/Tobacco
13%

Oil
7%

Source: Central Bank of Chile

Source: Central Bank of Chile, World Bank

Chemicals
14%

Cellulose
11%

Textile
Furniture 3%
3%
14

Copper
Copper prices downfall

CODELCO only major SOE not privatized since

1980s.

Company has 20% of the worlds reserves of

copper and 11% of copper production.

Country is a significant price-maker regarding

this commodity.

Expansionary fiscal policy negatively

correlated with copper prices.

China is the main destination of the

commodity: recent slowdown has hurt Chiles
economic prospect.

Chiles fiscal policy has largely avoided Dutch

disease and overappreciation of CUP.

Share of copper production

Others
30%

Chile
31%

Russia
5%
Australia
5%
RDC Congo
6%

China
9%
United
States
7%

Peru
7%

15

Service Sector

Chile has in the past decades highly diversified and

liberalized its service sector: telecommunications,
finance, construction and transports are the most
important subdivisions.
The country has promoted the internationalisation
of its service sector. Commercial services
accounted for a third of non copper Chilean
exports.

Labour employment breakdown

Agriculture
10%

Industry
24%

Service
66%

Unemployment rate
Services breakdown

Service share %

Other
19%

Financial and
Business
services
25%

Transport
11%
Personal
services
17%

Construction
12%

Source: CIA World Factbook, Statista - 2013

Commercial,
restaurants
and hotels
16%

16

Unidad de Fomento

Key point: The exchange rate between the UF and the Chilean peso is constantly adjusted to inflation so that the
value of the Unidad de Fomento remains constant on a daily basis during low inflation.

Extensively used for Real Estate and any secured loans whether private or public.

UF is used as indexed unit of account. The UF was widely used when Chile experienced high inflation and its
use has been strong since then.

Calculated daily and posted on Central Banks website .

UF to CUP historic series

The UF is a non paper currency constantly adjusted to inflation and is an index for most contracts.

Source: Central Bank of Chile

17

Market Conditions

Interest Rates overview

TPM: Tasa de Poltica Monetaria Monetary target of Chiles Central Bank. The CB has a target of 3% inflation
with a 1% tolerance.

ICP (ndice Cmara Promedio) Basis for interbank overnight average interest rate in CLP, published by the
CB and quoted on an actual/360 basis.

ICP Real Interbank overnight average interest rate adjusted by inflation (U.F). The ICP monthly is incorporated
in the UF index.

TAP (Tasa activa bancaria) Nominal/UF Floating average interbank/inflation-linked report interest rate
published by the Asociacin Nacional de Bancos.

TPM forecast

Source:Ita

18

Debt instruments overview

BCP (Bonos del Banco Central de Chile en Pesos): Domestic unsecured bonds bullet maturity and actual/365 fixed CLP
coupons. Maturities concentrated in 2,5 and 10 years.
BCU ( Bonos del Banco Central de Chile en UF): Domestic unsecured bonds bullet maturity and actual/365 coupon over UF
variation. Maturities concentrated in 2, 5 and 10 years
BTP (Bonos de la Tesorera de la Republica en Pesos): Domestic unsecured bonds bullet maturity and actual/368 coupon over
UF variation. Maturities concentrated in 7,10 and 20 years.
BTU (Bonos de la Tesorera de la Republica en FU): Domestic unsecured bonds bullet maturity and actual/368 coupon over UF
variation. Maturities concentrated in 7,10 and 20 years.

Main debt instruments

Source:Ita, JP Morgan

19

Debt instruments overview

Central Bank and treasure issues are mainly linked

to the UF although there are also nominal-rate
bonds in the market. Secondary market liquidity is
not high, given that a significant portion of these
instruments are acquired by pension funds and
insurance companies, which are held to maturity.

Pension funds (APF) are very important players in

the Chilean Market, managing approximately USD
200 billion in assets. Funds have been allowed to
diversify their risks outside Chile, and investments
outside Chile now represent 80% of AFPs total
assets.
Secondary market daily turnover at USD 400 million

Pension funds currently hold 22% of their assets

under management in local sovereign bonds, or
USD 34 billion. This represents around 61% of the
outstanding bond stock.

The vast majority of corporate issues in Chile are

linked to the UF and settled in CLP. Bonds issued
by the Chilean Central Bank and Treasury are
settled on DCV (Deposito Central de Valores).

20

FX overview

The CLP is a free-floating currency, although the central bank, Banco Central de Chile (BCCH), intervenes
occasionally.

The country has a floating exchange rate system since 1999. The government does not usually intervene in the
FX market, but has used swap instruments in the past to avoid overappreciation. In 2011, the CB implemented a
USD 12 billion reserve program consisting of daily basis purchases of USD 50 million which depreciated the
chilean peso.

The CLP trades on a non-deliverable basis, while there are active spot and forward markets onshore.

The CLP is thus fully convertible, although not deliverable offshore.

Chile has the third most liquid onshore spot market in Latin America, with an average daily trade of USD 1.7 - 2.2
billion.

21

Organised Markets and Exchanges

Santiago Stock Exchange (SSE) Chiles stock exchange. Chiles equity market performance is
measured by the IPSA, composed of the 40 stocks with the highest average annual trading volume in
the SSE.

The SSE trades stocks, bonds, investment funds, derivatives and gold and silver Chilean coins. It also
has an electronic trading platform called Telepregn, which trades U.S. dollars.

In addition to the IPSA, the SSE also posts two other indices: the General Stock Price Index and the
Inter-10 index.

IPSA 2015 - YTD

Source: CNN Markets - 2015

22

Conclusion Takeaway points

Chile is classified as an upper-middle income country and is the most prosperous nation of
Latin America.

The country has an increasingly diversified economy, even though copper still amounts for half
of its exports.

Countercyclical policies have mitigated impact of coppers price in its economy.

Chile is a reference for political and economic stability, with low indebtedness levels.

Chile has pursued an international trade agenda, pushing for multi bilateral and regional trade
and cooperation agreements

The country has outperformed Latin America greatly in the past thirty years and is now a
regional model for economic growth.

Main challenges include fighting relative high levels of inequality in comparison to other OECD
countries.

23