two months ago, it was conjecture more than anything else. We had very
few statistics referring to the months when things started going
seriously wrong, and not much action either. Since then, figures for
the closing months of 2008 have been coming in, together with opinion
polls, surveys and even some measures. Here is therefore an update.
WHAT THE MACROECONOMIC FIGURES SAY Let us start with the good news,
which will be a short section. Inflation was negative in the last two
months of 2008, so the year ended with a figure of 7.1 % (vs. 7.8 % in
2007), whereas it had been pushing 10 % not so long ago. This in turn
helps those indebted in the indexed UF. Much of this resulted from the
massaging of fuel prices, and the fact that after a sharp fall, the
Chilean peso recovered by over 5 % vs. the U$ in the last two months
of the year. It also means that the 8.2 % average increase in wages in
the years to November actually gives a small increase in real terms.
A word of warning: The reduction in inflation may easily go into
reverse. Importers and shopkeepers had felt uneasy about passing on
the cost of the higher dollar in the weeks leading up to Xmas, and big
ticket sellers such as motor distributors needed to get rid of
overstocking. Once this is out of the way, prices are climbing again.
Personal observations by this analyst in the past week alone, on items
so varied as university fees or shampoo, indicate rises of 15 to 20 %.
Fuel price decreases have already gone into reverse. The residents of
northern Chile have just been told that they can expect a big increase
in electricity bills. The price of foodstuffs, particularly those
based on internationally traded commodities, is also on the up again
(bread prices in Chile are stuck at a record level). International
postal charges went up by 14 % on January 19. Public transport tariffs
in Santiago are also scheduled to be raised. In this context, the
latest inflation estimate for 2009 (3.1 %) appears optimistic. The
Central Bank of Chile, notwithstanding the award of "best in the
region" recently granted upon its president by The Banker magazine, is
notorious for getting its forecasts wrong, even in "normal" times. A
new inflation index is to be introduced in coming months.
The rest is all bad news, which may explain why Ms. Bachelet decided
to give the Davos meeting a miss. Not getting the usual accolades
reserved for miracle workers may be too frustrating. "The best
ambulance driver" award is not really what the country's leaders are
accustomed to receive. The Central Bank's IMACEC activity index,
which tracks over 90 % of GDP, rose by just 0.1 % in November, a 10
year low. Full-year figures are due on February 5. Industrial
Production fell by 5.7 %.
Though the jobless figure as of November marked only a small rise on
last year (+ 0.2 at 7.5 %), massive redundancies are on the way and
even official declarations hit at reaching a double digit figure later
this year. 10,000 jobs have been lost so far in mining alone, mainly
in the small and medium-sized operations that are not profitable at
current metal prices. However, larger mines have now joined the trend,
with BHP Billiton just announcing 2,000 redundancies. The building
industry, a major employer, is on its knees. During October, total new
construction surface authorisations plunged by nearly 45 %, and the
partial figure for November (housing only) mark a 59 % drop.
Greater Santiago property sales were down 34 % in the last quarter,
and 55 % in Concepcion, the country's third largest conurbation.
Year-end figures for unemployment will be available at the end of this
Other labour intensive sectors are also shedding staff. The salmon
industry, already hit by an almost insurmountable virus, is also
facing a drop in demand. The same goes for wine, with November exports
down 11.7 % in volume and 16.4 % in value.
Electricity consumption in 2008 dropped by 0.8 %, the first negative
result in 26 years, whereas overall energy consumption was down 0.4 %.
With the fall in fuel prices, one wonders how much enthusiasm shall
remain from the nuclear energy lobby (even if most of them are
mercenary). There is also a surplus of gas in Bolivia, which despite
denials might be triangulated to Chile through Argentina, at a
fraction of the cost of LPG from the two plans now being built on the
central and northern coasts.
Retail sales in November grew by just 0.5 %, but big ticket items are
being hard hit, despite the offers. In the last quarter of 2008, truck
sales dropped by 29 %, and in December alone, passenger vehicle sales
dropped by 41 %. Major retailers have cancelled up to U$ 1.5 bn of new
The summer tourist months appear to be strong, as many Chileans are
staying at home due to the exchange rate and fears on their future,
whereas Argentine tourists are arriving in droves, with Chilean
inflation being a quarter of theirs, compounded by the fact that the
fall in the Argentine peso was only a third of the Chilean one. The
authorities are doing their best to discourage this small (and
temporary) ray of sunshine, by offering such a poor border crossing
service for Argentine motorists that some are experiencing delays of 8
to 10 hours just to complete formalities. Even if you managed to make
it to the Pacific coast, you would find out that 75 lifeguards in Viña
del Mar had gone on strike because of low pay, the absence of proper
contracts and the lack of suitable equipment to carry out their job.
High-end and adventure tourism, in which Chile had been trying of
carving a market niche, is bound to suffer most. There are already
substantial cancellations from Santiago stopover tourists that embark
or disembark from cruises in Valparaiso and overnight in the capital.
It is only marginally better at the airport where queues are
increasingly reminiscent of Miami airport's International Terminal in
the 1980's. Despite aggressive marketing and discounted fares,
normally unheard of in high season, there are empty seats on most
outgoing flights (particularly in business class, where I saw, through
the curtain, an entirely empty cabin on one European airliner), and
overall figures are headed down wards. Sales of tickets for domestic
intercity buses fell by 20 % in the first fortnight of January.
THE EXTERNAL SECTOR As expected, the trade surplus for 2008
deteriorated sharply (- 57 % at U$ 10.16 bn), but this was due as much
to the profligacy of imports (+ 31 % at U$ 57.63 bn, of which 27 % was
fuels), than the drop in copper (-9.2 %). Overall exports were flat (+
0.2 % at U$ 67.89 bn of which 50.3 % was copper).
External reserved nevertheless managed to increase by 37 % to U$ 23.16
bn as of end December. We have external debt figures to November,
which shows a total of U$ 66.58 bn, of which U$ 47.42 bn is owed by
the non-bank private sector. Of the latter amount, U$ 13.75 bn is
payable within a year.
I continue to maintain that this high level of private external debt,
by companies selling either in pesos, or in dollar-denominated
commodities whose prices have plunged, is an Achille's heel of the
Chilean corporate sector. It should also have a much larger effect on
pushing the peso down, than the inflow from the timid recovery
measures, or foreign investment.
The peso ended 2008 at 641.50 per U$, which translates into a 21.6 %
real terms increase for the dollar. However, I fear that the
authorities have started playing games with the exchange rate again in
the first weeks of 2009. If not they, then we are once again prey to
the huevadas of Chilean economists. One argument for the dollar's
recent downward adjustment (in reverse order of what is happening on
international markets) is that "capital inflows" will push the peso
up? Yeah? Do you think the Ibañez family are going to take Wal-Mart's
billions and go from one exchange house to the other in Paseo Ahumada
to change them into pesos in tranches of U$ 10,000? Another argument
is about the "repatriation" of fiscal surpluses in order to pay for
the recovery plan. I shall deal with that one further down in this
FINANCIAL MARKETS The Santiago Bolsa, measured by the dollar
variation of its blue-chip (a misnomer?) IPSA index, lost nearly 40 %
last year, though it has recovered around 7 % so far in 2009.
The pension funds lost 22.5 % of their assets on average in 2008,
though for those in all equity-funds (what sort of supervisor allows
people to be in a pension fund entirely invested in equities, for
God's sake?), lost over 40 %. I suppose they could have done worse,
such as invest with Madoff through Banco Santander.
We have banking sector results up to November, and they show assets of
U$ 160 bn, loans of U$ 106bn and 11-month earnings of U$ 1.44 bn (no
comparable figures due to a change in accounting systems). Past due
loans are put at just 0.95 % with a Return on Equity of 15.9 %. Equity
amounted to U$ 9.9 bn. The system is comfortable in terms of its
exposure to foreign banks, as it owes them U$ 12.12 bn but only has
lent out U$ 1.31 bn. If the interbank lines are not renewed, there
could in theory be a problem, but considering the overwhelming
importance of foreign bank branches, it is an unlikely scenario as
there must be much incestuous cross-transactions. Derivatives appear
as U$ 13.32 bn in assets and U$ 11.33 bn as liabilities.
Though one cannot rule out individual problems (one small bank linked
to a retail group has had to receive a U$ 22 million capital injection
from its owners), Chilean banking sector is reaping the benefits of
conservatism (unless there is, as some people think, some submerged
iceberg or two somewhere there). It is now becoming even more prudent,
as two thirds of institutions report tighter lending conditions (I
wish the offers of credit popping up on the website of Santander,
telling me I am pre-approved, would also end). The Central Bank, in a
rare fit of candidness, declared that if the crisis reaches "Asian"
levels (such as in 1998), 28 % of households may have difficulties in
servicing their existing debt.
High indebtedness is not new in Chile, and it was bound to unravel if
the gravy train slowd down or stopped completely. Already, figures to
September showed a 40 % increase in late payments in the chain.
Non-bank credit cards past due proportion (they are less regarding on
credit rating when handing them out) had gone up from 19 % (already
high) in the first quarter of 2008 to 20.8 % in the third quarter, and
the crisis had not really started. Household debt increased from 33.4
% of disposable income in 2003 to 60.2 % in 2008. I rest my case.
The Central Bank reduced its intervention rate by one full point to
7.25 % (equal to inflation) on January 8, and announced that it may
pursue an "aggressive" policy of further cuts. The textbook economists
immediately applauded that totally empty move. In a country where
credit costs the end borrower between 20 and 200 % p.a., such a cut is
about as significant as that of circumcising an elephant to make the
I do not know how much I have written on this matter over the years,
but nobody wants to understand, or even listen, so absorbed they are
by the monetarist teachings of some Litvak (OK, Ukrainan maybe) Ivy
League university professor, that you manage demand through monetary
policy. Chinganse, imbeciles..Even if you bought the "classical"
theory, banks have increased their spreads on whatever loans they are
still making, by more than the fall in base rate, so borrowing through
them is more expensive, not less.
THE REACTIVATION PACKAGE We are now less than 11 months away from
election time, and even accepting the possibility of "distraction"
candidates in the first round, it will probably boil down to a contest
between former president Eduardo Frei (1994-2000) and former candidate
Sebastian Piñera, with the latter still looking a winner.
The ruling Concertacion may be panicky enough to pull all the stops,
or at least more stops, but the U$ 4 bn package announced on January 5
is hardly the stuff of legend. A full quarter of that is a
"recapitalisation" of state mining group CODELCO, and though we do not
know on what it will be spent, it is not exactly a major job creation
scheme. Work subsidies, the temporary elimination of stamp duty, and
the bringing forward of tax reimbursements do not excite many people
either. Public work programmes, subject to umpteen permits and
discussions, are so slow to actually get off the ground in Chile that
one wonders if many of them will even start this year.
The only concrete measure is the March subsidy of some U$ 64 to a
number of special benefit receivers, and all families receiving child
benefit (where the amount will be paid for each child). Better than a
kick up the arse, but if you read my previous papers on the history of
these subsidies, either they are not paid at all (such as Energy
minister Tokman's false promises on electricity bills), or most of the
expense is initially financed by the employer himself, who then has to
wait months to be reimbursed, whilst the Treasury is sitting on the
money. To the extent that there is money a plenty (even with copper at
U$ 1.50, remember it averaged U$ 1.08 in the first three post-Pinochet
governments), it may not even be necessary to touch the funds abroad
(hence the stupidity of the argument justifying the recent strength of
A mid-December survey by the respected CEP think tank turned up 42 %
who thought that the economy was "bad" or "very bad". The Business
Confidence index is at its lowest level since it was introduced in
November 2003. The Central Bank still estimates that the economy will
grow between 2 and 3 % this year. As things stand this week, they are
the only people to believe it.
In good Chilean spirit, employers are of course using the crisis to
exercise even more than the usual blackmail on staff, threatening them
with dismissal if they do not behave, restricting or cancelling wage
increases. They are also lobbying against reforming any legislation
improving pay and working conditions, as we witnessed again last week.
One conservative deputy, obviously frustrated because the Argentine
embassy has stopped organising the orgies on its top floor he used to
attend years ago, thundered against one piece of legislation "wages
are not fixed by law". Even executive pay is reported to be down.
The thieves still abound. Social Security contributions are still
being stolen (only 40 people from an estimated universe of 100,000
employers, used the special credit line set up by Banestado to pay
their contribution arrears, which in fact were not theirs at all but
part of the gross salary. Chile even had its own sub-tropical Madoff
scheme. Chilean "promoters" went around Spain and collected U$ 15
million from 120 Spanish private and institutional investors,
promising to invest it in "property schemes". There were no projects
and it was all a fraud. A leading TV personality ran up debts of
several hundred thousand dollars and escaped to Israel, the ultimate
refuge of the professional scoundrel. The head of the Economic Faculty
of one of the country's leading universities, who has been
pontificating as a panellist on a leading debate programme, is under a
cloud, after his department was found to be engaged in all forms of
financial irregularities, and the wheels of justice finally caught up
with several retired air force officers and some civilians involved in
a bribery case related to the 1994 purchase of second-hand combat
aircraft from Belgium. A leading opposition congressman, who usually
thunders about "irregularities" in public administration, was found
out owing three months' service charges in the condominium where he
lives with his family. All Ways Dishonest.
INTERNATIONAL EXPOSURE Chile and Argentina were co-hosts of the
expatriated Dakar Rally, after Africa was found to be so dangerous. It
was a mixed result, with several people, both participants and helpers
dying, and despite expectations of a good performance by locals who
knew the terrain, and two Chilean competitors being fined for
cheating, the best-placed local man came in 39th.
The whole show gave a new opportunity for the local press to parade
its arrogant linguistic ignorance. Referring to the overnight
prefabricated camps known as "bivouac", El Mercurio transformed it
Santiago's Municipal Theatre had planned to put on a production of
Tannhauser, but it was cancelled (contrary to expectation, it was not
replaced by the more appropriate Goterdammerung).
FOOTING THE BILL Who is ultimately paying for all the "salvage"
largesse being doled out around the world ? Nearly all the countries
involved had fiscal deficits before all this started, so they shall be
needing to borrow vast amounts in order to bridge an even bigger cap.
What do they do about it? Lower interest rates to virtually nil,
hoping that investors will still lend to them. The situation of banks
is even more ridiculous. To those of us who were prudent enough to
save, they are paying us 85 % less than 4 months ago. To the extent
that the interbank market is mortally wounded, and they themselves
have said (such as in Britain), that they would not pass-on the latest
cuts to borrowers, how are they hoping to fund themselves? One
exception is France, which thinking of smaller savers, has introduced
a special savings account op up to 50,000 Euros paying 6 % tax-free.
L'imagination au pouvoir.
HUEVADA DE LA SEMANA
Goes jointly to Radio Cooperativa and the policeman they quoted on December 15. Referring to the discovery of a torso in a bag, the reporter said "the police are trying to establish if any third party was involved". One can understand that it is possible to cut three of your own limbs with the remaining hand, but how do you then cut the last arm? Oh yes, I know what you are also thinking: "what about the head?". Do not worry, the remains were of a Chilean economist, he did not have any to start with.
I have not as yet undertaken my review of the mailing list, so you are not out of the woods. I shall definitely have to do something to punish Chilean readers (and be sorry about the collateral damage). For over two centuries, my ancestors lived in the land of Hamurrabi, so the king's principles shall be applied.