Chile - Economic Briefing November 2002

Economic Growth Remains Lacklustre Amid Faltering Global Demand  (continued)

Consumer prices surge again in October but core inflation remains contained
In October, consumer prices increased by 0.88%. The October reading was even slightly above the strong 0.84% spike registered in September and also exceeded market expectations of 0.5%. The main driver behind the October price hike were higher food prices and, to a lesser extent higher prices for transport and housing. In particular, prices for fresh fruits and vegetables once again shot upwards by a strong monthly rate of 7.74%, following on the unprecedented monthly rate of 11.46% registered in September. Fuels also experienced a strong 4.53% surge, amid rising oil prices, and thus exceeded the 3.47% increase in September. Since the bulk of the October price increase was concentrated in the so-called "volatile items group", the core inflation index, which excludes these items, advanced at a much more moderate 0.39%. While the core inflation rate was higher than in the preceding month, it is only half the increase in the headline consumer price index. As a result of the diverging indices, in the past two months, the annual rates are also going different directions after moving in tandem for most of the year. Annual headline inflation mushroomed from 2.3% in September to 3.0% in October, whereas the annual core inflation rate remained unchanged at 2.0%. Panellists have lifted their year-end 2002 inflation forecast a notch since last month. The forecast for 2003 was maintained unchanged. Owing to the recent upward trend in consumer prices, the Central Bank has decided to maintain the interest rate unchanged at 3.0% on its monthly monetary policy meeting on 7 November.

Peso strengthens as Brazil uncertainty subsides
In October, the peso was subject to volatile trading, as the phase of political uncertainty emanating from Brazil (?), which had been the main driver for its weakness in the past months, finally drew to an end. After having closed September at 748 pesos to the US$ dollar, the currency weakened to a historic high of 757 pesos to the US$ on 11 October, as the first round of elections in Brazil on 6 October suggested a landslide victory of Lula in the second round. However, as a Lula victory became ever more likely and finally materialized on 27 October by overwhelming majority, markets eased and the peso recovered even more ground than it lost in the first half of the month, closing at 733 pesos to the US$ on 31 October. Despite the favourable development, panellists have raised their exchange rate forecast for December 2002 and, on average, expect no change to the peso value by the end of 2003.

Chile reaches Free Trade Agreement with South Korea
After almost three years of talks, Chile and South Korea successfully concluded negotiations about a Free Trade Agreement in late October. The agreement, which is the first one between a Latin American and an Asian country, is subject to parliamentary approval in both countries and will likely come into effect early next year. The agreement has a wide coverage, as it includes not only trade in goods but also in services and investments. According to the government officials, the accord will exempt 77.5% of Chile’s non-copper exports from all tariffs. Furthermore, the tariff exemption will rise to an 88.4% in the fifth year. In terms of imports from Korea, 66.7% will be free of tariffs upon entry into force of the agreement, with the percentage rising to 83.7% in the fifth year. The agreement opens an important potential market for Chile with a population of 47 million and a Gross Domestic Product of US$ 454 billion. Last year, trade between Chile and South Korea reached US$ 1.1 billion, US$ 563.2 million of which were Chilean exports, while US$ 540 million were imports from South Korea.

 

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.