Economic Briefing November  2001

Peso weakness continues as uncertainty over Argentina prevails.  The Peso continued its slide in October, owing to the continuing uncertainty surround Argentine solvency. The average monthly exchange rate weakened by a nominal 3.8% in October compared to September.  Over the past twelve month the Peso has lost a fifth of its value against the US$ in nominal terms and 15.2% in real terms.  In order to slow the slide of the Peso, the Central Bank intervened in the foreign exchange market.  In October, monetary authorities sold US$ 481.0 million to commercial banks, bringing the total level to US$ 803.0 million since 28 August, the date of its first intervention.  Panellists do not see the Central Bank interventions in the exchange rate market to have lasting effects and have further hiked their year-end exchange rate forecast to 697 Pesos to the US$, compared to 677 Pesos to the US$ last month.  However, private sector analysts and the Central Bank agree that the pace of devaluation will slow as the economic fundamentals improve towards the end of next year.  Consequently, the Consensus sees the 2002 year-end exchange rate at 704 Pesos to the US$, which represents a nominal depreciation of just 1.0%.  The Central Bank interventions have also diminished the level of international reserves, which have dropped by US$ 400 million since the end of August to US$ 14.3 billion by the end of October despite the disbursements provided by the US$ 650 million bond placement in early October (see last month’s edition for details).  Panellists had reflected the impact of the interventions in last month’s forecast, where they have sliced some US$ 250 million of their year-end reserve level forecast.  This month, panellists have further lowered their reserve level forecast by US$ 350 million.

Global slowdown prompts steep decline in exports.  The global slowdown which was well underway prior to September 11 has caused a severe contraction exports. This is likely to worsen as global export demand shrinks further.  In September, the trade balance registered a US$ 239 million deficit, the highest monthly trade deficit since October 1998, as exports plunged at a much faster pace than imports.  Exports contracted 11.4% over the same month last year.  The contraction was most pronounced in mining, particularly copper, owing to the continuous slide in copper prices (see chart).  However, non-copper exports also dropped significantly (-5.4% year-over-year) as buoyant agricultural exports (+49.3% yoy) could not compensate for the reduced demand for Chilean industrial output (-9.0%).  In the third quarter, exports were down 10.7% compared to the same period last year.  Imports also weakened, however at a far lesser rate.  Both, consumer and capital goods, showed double-digit drops in September over the same month last year but the 3.7% year-over-year increase in intermediate goods, which account for two thirds of total imports, lowered the total contraction to 3.0%.  Panellists have further lowered their trade projections and now see export growth this year at just 1.4% and imports growing at 2.0%.  Despite the global softening, panellists remain upbeat about the trade prospects in the coming year.

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.