The Impact of the Attacks on the Chilean Economy 

1.  Direct exposure U.S. limited ...  With 17.4% of total exports directed to the United States (the second lowest percentage in the region) Chile is less affected by the expected downturn in the U.S. economy in the wake of the 11 September attacks than its regional peers.  

2.  … but exposure to global economy significant.  However, while Chile is well diversified in the geographical distribution of its trade flows, it is an open economy.  In fact, exports account for 43.0% of GDP, placing Chile in the number one spot with regards to economic openness in Latin America.  As a consequence, Chile will not only bear the direct impact of reduced demand from the United States but will also suffer from the ensuing global softening. 

3.  Commodity prices stable but erosion likely in the wake of the global downturn.  The global slowdown will also bring about lower demand for commodities and hence lower commodity prices.  Copper accounts for 40.5% of Chile’s total exports.  Since 10 September, copper prices have dropped only 0.8%.  While this represents merely a continuation of the general downward trend in copper prices since October last year, the global slowdown renders a reversion of this trend in the short term rather unlikely.  Instead, lower global demand will continue to whittle down the price of Chile‘s main commodity. 

4.  Decline in US arrivals unlikely to have pronounced impact beyond tourism industry.  According to the World Tourism Organization (WTO), international tourism receipts accounted for 2.5% of total Chilean output in 2000.  While this is above the 2.0% average for Latin America US tourist arrivals from the United States represent only 7.6% of the total compared to 14.3% for Latin America (1999 data).  Thus the fallout in US travellers to the country will have a limited impact in the industry and is unlikely to represent a noticeable share in the economy as a whole.  

5.  Capital flows may be drying up but Chile’s good rating permits continued access to capital markets.  Capital flows to emerging markets will dry up as investors will once again play the “flight-to-quality” game.   In Chile, capital inflows have lost the significance they had in the early to mid 1990s, when they constituted up to 10% of GDP.  Since 1999, this number has fallen to below one percent.  Moreover, while lower capital flows may also affect Chile, the country’s investment grade rating will shield the economy somewhat from the worst.  In fact, the government has just confirmed that it plans to go ahead with the issuance of a US$ 650 million bond in international capital markets this year.   

6.  Falling oil prices should boost trade surplus.  After rising briefly in the immediate aftermath of the attacks, oil prices have dropped sharply to levels significantly below those prevailing before 11 September.  As a net importer of oil – in 2000 oil accounted for 11.0% of total imports -- Chile profits from falling oil prices and the trade balance should reflect this. 

7.  Interest rates stable.  Since the Central Bank orients monetary policy on core inflation, which excludes the volatile oil price, the drop in oil price, which will be reflected in headline inflation, should not instigate the Central Bank to loosen its stance.  However, led by the US Federal Reserve Board, monetary authorities around the world have embarked on an aggressive campaign to provide financial markets with abundant liquidity in the short-term.  This more accommodating attitude should pervail as Central Banks try to mitigate the detrimental impact of the US attacks.  The Chilean Central Bank, which has already lowered its benchmark rate considerably this year, will at least abstain from tightening again, despite the significant rise in inflationary pressures of the recent past.  Rather, officials are likely maintain a ‘wait and see’ stance and may even decide to further lower interest rates, if the damage on the Chilean economy proves more notable than anticipated.    

Outlook worsens on attack impact
The net effects of the 11 September attacks on the Chilean economy are clearly on the downside.  Consequently, panellists have revised their growth projections for the last quarter this year downward.  Combined with a more pessimistic assessment of the just finished third quarter, the growth forecast for 2001 dropped another 0.1 percentage point over last month.  Increased pessimism is more pronounced in next year’s forecast, which has been revised downward by 0.5 percentage points since last month.  Given that Consensus Forecast projections have been marked down continuously since the beginning of the year, it is difficult to discern to what extent the latest cutbacks to growth forecasts are attributable to the consequences of the terrorist attacks and to what extent they simply reflect a continuation of the downward adjustments.  However, when comparing this month’s downward revision to the trend, it is fair to assume that at least half of the cutback in next year’s growth is due to attack-related effects.

Inflationary pressures picking up despite the downturn in domestic demand
In spite of the slump in economic activity, prices experienced yet another sharp surge in September.  According to INE, consumer prices increased 0.73% in September, following the 0.8% price spike observed in August.  Transportation and housing were the main drivers behind the September price surge.  As a result, the annual inflation rate inched upward a notch to 3.9% from 3.8% in August.  The core inflation index added 0.51%, which took the annual rate from 3.5% in August to 3.6%.  Panellists have hiked their year-end inflation forecast since last month in the light of the renewed surge in consumer prices. 

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Chile.  For more details please click here.

For five-year forecasts, please click here.