Chile - Economic Briefing January 2002

Opposition Gains as Support for Government Wanes (continued)

Exchange rate continues to strengthen and interest rates remain stable as contagion from Argentina is absent

After having suffered from the Argentina-related uncertainty throughout most of 2001, the actual announcement of default and devaluation in Argentina did not trigger any further negative consequences in the Chilean markets.  On the contrary, the Peso continued to strengthen from the all time high of 717 to the US$ at the end of October last year, and firmed to 676 Pesos to the US$ on 11 January, which represents an appreciation of 6.0% in nominal terms since the end of October.  Despite the year-end rally, the Chilean Peso lost 12.7% of its value against the US$ in 2001, the highest nominal depreciation in one year observed in a decade.  Panellists expect more Peso stability this year.  Interest rates also remained stable as the Argentina crisis unfolded and the average rate for 90-day Central Bank paper rose only marginally from 6.44% in November to 6.51% in December.  Given expectations of a more moderate economic expansion this year, interest rates are likely to remain low throughout the year, according to this month’s forecast.  In fact, on its monetary policy meeting on 10 January 2002, the Central Bank board decided to lower the monetary policy interest rate by 50 basis points to 6.0%.

Government coalition loses majority in Senate but maintains control of Lower House

The 16 December elections confirmed the governing center-left coalition Coalition for Democracy (Concertación de Partidos por la Democracia) as the strongest political force but significantly strengthened the opposition block, Alliance for Chile (Alianza por Chile).  The election affected 120 members of the Chamber of Deputies and half of the 38 elected members of the Senate.  The Concertación lost control of the Senate and the Concertación ‘s majority in the Chamber shrank from 22 to just five seats.  Within the governing coalition, the Christian Democrats (PDC Partido Demócrata Cristiano), lost most votes, but this was partially compensated by gains for the Party for Democracy (PPD, Partido por la Democracia) and the Socialist Party (PS, Partido Socialista).  The opposition Alianza gained 7 seats in the lower house.  Within the opposition block, the right-wing Independent Democratic Union (UDI, Unión Demócrata Independiente) emerged as the true winner of the elections, adding eleven seats and confirming the strengthening trend observed in past elections.  The UDI has profited from the popularity of its leader, Joaquín Lavín Infante.  The Mayor of central Santiago had been a close competitor in the 2000 presidential elections and is seen as a strong contender in the 2005 presidential elections.

Lagos reshuffles cabinet to stem dropping popularity

On 7 January, President Ricardo Lagos announced changes in his cabinet to revive popular support for his centre-left coalition.  In total, Lagos appointed seven new ministers.  However, most of Lagos' appointments already held government posts.  Four prior ministers lost their jobs, while two took other posts within the cabinet.  The most surprising decision was the appointment of former health minister Michelle Bachelet Jeria as defence minister, the first Socialist on this post since the government of Salvador Allende.  In addition, Bachelet is the first woman to hold the defence portfolio.  Former defence minister Mario Fernández Baeza moved to assume the chief of staff position, a critical appointment given the government’s reduced majority in the legislature.  The recently created super-ministry of economy, energy and mining was split again into two entities.  Jorge Rodríguez Grossi will remain at the helm of the reduced ministry of economy and energy and cabinet newcomer Alfonso Dulanto Rencoret will assume the mining ministry.  Cecilia Pérez Díaz replaces Alejandra Krauss as planning minister, while Javier Etcheberry Celhay replaces Carlos Cruz as head of the ministry of public works and telecommunications. 

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.