“Massive self-insurance” ....the steady accumulation of central bank reserves – has prevented Chile from faring worse than it has

TO BE NOTED: From the FT:

"Chile rating upgrade rewards prudence

By Jude Webber in Santiago

Published: April 20 2009 20:38 | Last updated: April 20 2009 20:38

Nothing was to have highlighted Chile’s soaring economic success like the Costanera Center.

Advertising hoardings round the site in the heart of Santiago’s bustling business district are emblazoned with the gleaming image of what was conceived as South America’s tallest tower.

But the cranes are idle, the hammers are silent and the budding 985ft (300m) skyscraper is an abandoned shell, just a quarter complete – eloquent testimony to how the crisis is buffeting even one of the region’s highest flying economies.

Yet despite a succession of gloomy numbers and the widespread expectation that things will get worse before they get better, Chile has pulled off a remarkable feat in the thick of a global recession: it is the only investment-grade country to be upgraded by Moody’s since the crisis began.

“Massive self-insurance” – as central bank president José De Gregorio calls the carefully saved windfall from copper prices that were booming before the crisis, and the steady accumulation of central bank reserves – has prevented Chile from faring worse than it has.

Chile is the world’s top producer of copper and has stashed extraordinary profits from sales of the red metal into two special funds that now give it a $22bn (€17bn, £15bn) war chest. The central bank also has $23bn of international reserves.

Moody’s Investors Service raised its rating on Chilean sovereign debt to A1 from A2 last month, as well as the foreign currency ratings of four major banks.

Economic indicators have made for depressing reading lately. The economy contracted 3.9 per cent in February. According to the central bank’s monthly economic indicator, Imacec, that is its sharpest contraction since May 1999 when it also fell 3.9 per cent. Industrial production fell 11.5 per cent in February, the biggest since 1990. Copper output slid nearly 10 per cent year-on-year in February and export income has plunged – in March alone, revenue from copper, Chile’s biggest export, fell 66 per cent year-on-year.

Rising unemployment – it is now 8.5 per cent and experts forecast it will climb to double digits – sparked protests in Santiago earlier this month.

But the finance minister, Andrés Velasco, says: “I don’t think there’s a single economy in the world where the country’s credit was upgraded and the next day the major banks in the country were upgraded, where between the central bank and the treasury you have almost a third of GDP in liquid assets and where you can pump up fiscal policy and have country risk go down, not up.”

The market greeted the Moody’s upgrade as a well-deserved seal of approval on the cautious policies that, according to Mr De Gregorio, mean “overall recovery in Chile should be faster than in the rest of the world”.

He told the Financial Times: “I’m fairly confident the economy should start returning to normality by the middle of the year.”

However, he also acknowledged that much depended on there being no further serious deterioration in an already bleak world outlook.

Chile’s copper wealth – it produces more than a third of the world’s supply – has not always been a blessing. Mr De Gregorio recalled how Chile used to swing from boom to recession as the copper cycle went up and down.

But its cautious husbandry of that wealth when times were good allowed it to put in place a $4bn fiscal stimulus package in January, worth 2.8 per cent of GDP, as well as make the world’s biggest interest rate cut this year, Mr Velasco notes.

After jacking up its benchmark lending rate last year as it struggled to contain stubbornly rebellious inflation, the central bank has now slashed it by 6.5 percentage points this year to 1.75 to stimulate demand.

The government has introduced reforms to get credit flowing, including boosting seed capital and other financing for small companies and making the lending market more competitive by increasing insurance companies’ ability to lend.

A presidential election in December, in which conservative businessman Sebastián Piñera is leading the opinion polls and the right has its best stab at returning to power since the fall of the Pinochet dictatorship in 1990, is not expected to derail the economic policies that have proved successful.

Officials remain cautiously optimistic. Now they watch to see when the Costanera Center cranes will start moving again.

Copyright The Financial Times Limited 2009"