HOW CHILE IS COPING WITH THE CRISIS And what individual actors are up to..

When I first wrote about the impact of the crisis on Chile, just over

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

month.

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

investment projects.

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

paper.

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

animal lighter.

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

the peso).

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

into "Vivac".

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.