Page last updated at 00:07 GMT, Tuesday, 2 March 2010

Chilean economy well placed to rebuild

By Will Smale
Business reporter, BBC News

A resident takes photos of a building damaged in Talca, Chile
Commentators say the Chilean economy is well positioned to deal with the rebuilding work

While the human tragedy of the earthquake in Chile will be long-lasting, the impact on the country's economy is expected to be "limited and short-lived".

Despite the Chilean quake being stronger than the one in Haiti in January, the difference between the two nations is vast.

Haiti is the poorest nation in the Western Hemisphere, while Chile is the world's 46th richest. More pressingly, Chile is widely regarded as having the best-run economy in the whole of Latin America.

In the immediate aftermath of the two quakes, this meant that, thanks to Chile's stringent building regulations, far fewer buildings collapsed than in the Caribbean nation.

And as both countries rebuild, while Haiti is all but totally dependent upon overseas aid, Chile has the financial clout to recover without recourse to foreign support.

'Solid fiscal position'

According to Eqecat, a company that helps insurers model catastrophe risks, the Chilean quake will likely cost the country up to $30bn (£20bn), equivalent to about 15% of its annual economic output.

As the priority shifts from the urgent humanitarian needs to reconstruction, the strong state of government finances in Chile will facilitate these efforts
Curtis Mewbourne, investment group Pimco

Separate figures from research group Capital Economics predict that $30bn will the highest possible figure, and that the financial cost could instead be as low as $15bn.

More importantly, Capital still predicts the Chilean economy will expand 5% this year, as it continues to recover from recession in 2009.

"Chile's infrastructure and construction standards are much better [than Haiti] - a reflection of the fact that it is the most advanced, and just about the best-managed, economy in the region," says Neil Shearing, senior emerging markets economist at Capital.

He adds that while the reconstruction work will "present a major challenge" to President-elect Sebastian Pinera when his centre-right government takes office in two weeks time, "the country's solid fiscal position means there should be little constraint on public funding".

Financial prudence

But why is the Chilean economy in such good shape?

Copper
The strength of the Chilean economy has been helped by its copper reserves

Since the country returned to democracy in 1990, successive left-leaning governments have combined a free-market economy with prudent government spending.

Instead of wildly spending the country's vast copper reserves - it has one-third of the world's supplies - governments have saved a lot of these funds.

As a result, Chile has one of the lowest government debt to economic output ratios in Latin America.

At the same time, its inflation rate is currently at 1.5%, and the Chilean interest rate is 0.5%, where it has been since August of last year.

Taken together, these all mean that Chile has a strong credit rating. This will make it relatively easy and cheap for it to borrow any funds it needs on the international markets to aid the reconstruction work.

Meanwhile, the forthcoming Pinera-led government is expected to continue the prudent economic approach of its predecessor.

'Ample resources'

"The direct economic impact of the earthquake [could] be limited," says Curtis Mewbourne, of investment group Pimco.

President-elect Sebastian Pinera
President-elect Sebastian Pinera will take over in two weeks

"As the priority shifts from the urgent humanitarian needs to reconstruction, the strong state of government finances in Chile will facilitate these efforts."

Credit Suisse strategist Carola Sanda agrees, saying: "Chile has ample resources abroad to help finance the cost of its rebuilding efforts.

"Alternatively, it should be in a comfortable position to tap external and/or local debt markets," she adds.

Copper boost

Economists' confidence in Chile's ability to bounce back from the earthquake has been strengthened by the fact its copper mines suffered minimum damage, and soon resumed operations.

CHILEAN ECONOMY
GDP of $169bn in 2008
Current inflation of 1.5%
Interest rate of 0.5%
Unemployment rate of 9.7%

With global copper prices widely expected to rise this year, led by China continuing economic growth and recovery in the US and Europe, this will only further help the speed of Chile's recovery.

"The upshot is that recent events in Chile are without doubt a colossal human tragedy," says Mr Shearing.

"But, for now at least, the implications for the economy and markets are likely to be both limited and short-lived."



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