CHILE: Picking up the pieces

The Piñera government aimed to boost productivity. But the sheer scale of reconstruction needed after the earthquake may postpone longer-term plans

  • By Ruth Bradley
  • 22 Mar 2010
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Faced with the devastation wreaked by the earthquake that struck in the early hours of February 27, Chile has been left a poorer country. With hundreds dead and thousands displaced, and as much as 8% of the nation’s physical assets in ruins, rebuilding will be protracted, extensive – and expensive.

Yet despite the tragedy, the Andean nation was spared the worst: for one of the world’s largest earthquakes in more than a century, the death toll was relatively low – a tribute to high building standards.

The disaster also found the country on a sound economic footing for the long haul of recovery. The IMF noted in March that “Chile’s strong economic fundamentals, the result of many years of sound policies, will serve the country well as it responds to the tragedy.”

The drive for recovery will fall to Sebastián Piñera, a centre-right businessman and former senator, who took office as Chile’s president on March 11. Replacing the centre-left Concertación coalition that governed Chile for the previous 20 years, Piñera promised that, by invigorating economic growth, he would put Chile on track to achieve its aim of becoming a developed country by 2018, with an income similar to that of Portugal today.

Piñera, a Harvard-trained economist, believes that, after its rapid expansion in the 1990s, Chile had been “sleeping a siesta”. And, before the February 27 earthquake, his plan was to wake it up to stronger growth, driven by higher productivity and more efficient government.

After the economy’s estimated 1.7% contraction last year, activity was fast regaining momentum, with consensus local forecasts pointing to a 4.5% year-on-year expansion in the first quarter. Now, disruption of activity by the earthquake means it may suffer a double dip, warns Alberto Ramos, senior economist at Goldman Sachs.

Copper mining, by far Chile’s largest export sector, was unaffected because it takes place mostly in the unscathed north of the country. But its forestry industry, which produces the pulp, paper and wood that add up to its second most important export, is located mainly in the worst-hit areas of the south. Damage to plants, as well as to roads and ports, has caused a production stoppage that is initially expected to last at least a month.

Growth over the whole year may be affected, says Leonardo Suárez, senior economist at LarrainVial, a local investment bank. In the immediate aftermath of the quake, it cut its previous projection from 5.4% – ahead of a local consensus of 4.9% – to 5.0%.

Others, however, have raised their forecasts. JP Morgan, for example, has increased its projection to 5.5%, up from a pre-quake 5%. “There’ll be a drop for a couple of months but we expect reconstruction to start kicking in during the second half,” says executive director Vladimir Werning.


The earthquake has, indeed, created new opportunities for the private investment that the government had tipped to be the motor of growth over its four-year term. “It’s a setback, of course, but we expect the private sector to be quite responsive,” says Werning.

Manufacturers report that insurance – an estimated 90% of which is reinsured abroad – will cover a large part of the cost for the damaged infrastructure as well as the lost business. That is also the case for roads and airports, built and operated by private companies under a concessions programme launched in the mid-1990s.

The central bank may also provide a helping hand. It had been expected to start tightening monetary policy in the second quarter but, despite a likely short-term spike in inflation due to transport-related supply difficulties, may hold its benchmark interest rate at 0.5% for longer.

Chile is in a strong fiscal position. It is one of the world’s few net sovereign creditors, with central government debt a low 6% of GDP and, as of early March, over $11 billion is held in a counter-cyclical sovereign wealth fund, the Economic and Social Stabilization Fund (FEES), built up during the 2003–08 boom in copper prices.

As a result, it should be able to raise money at attractive rates in the local or international debt markets. It will also receive assistance from multilateral organizations.

There is, however, concern about the impact of reconstruction on Chile’s traditional fiscal discipline.

President Piñera had promised that, in line with a fiscal rule in force since 2001, he would maintain a “structurally balanced” programme – that is, spend only the revenues the government would have received if the economy were growing at its medium-term potential, and copper prices were at their expected average for the next 10 years. Now, with reconstruction as his justification, he will be able to increase spending without being seen as profligate.

“I wouldn’t be particularly worried to see the sovereign wealth fund emptied and Chile become a small net borrower,” says Ramos. “I expect the fiscal situation to remain solid, but we do still have to see how responsible the government is.”

There is also another important risk, says Werning. As insurance claims and foreign financing start to flow in, they will put pressure on the exchange rate, tending to strengthen the peso – bad news for the competitiveness of the export industries that account for around a third of the country’s GDP.

Resources are, moreover, only as good as the way in which they are mobilized, says Esteban Jadresic, senior economist at Moneda Asset Management and a former director at the central bank. “That is why developed countries recover more quickly from disasters than less developed ones,” he says.


Still, the general view among analysts is that, beyond the short-term dip in activity, reconstruction will put extra medium-term wind behind the economy’s sails. Before the earthquake, local forecasts for growth in 2011 had averaged 5%, but were subsequently revised to 6% and even 7%.

That would, however, mean that the economy would be growing well above its potential. Even before the loss of a significant part of its capital stock, this was estimated at just 4.2%.

“The slack after last year’s recession means that this shouldn’t be a problem for a couple of years,” says Werning.

But what of the longer term? At Goldman Sachs, Ramos is optimistic. He estimates that reconstruction can be completed in two to three years and should leave Chile with a more modern, technologically advanced and efficient production structure than it would otherwise have had.

Jadresic is also sanguine. “I don’t expect a persistent effect on Chileans’ standard of living,” he says.

But there are some hidden risks. One of the main pre-earthquake aims of Piñera’s government was to increase the economy’s productivity. In comparison to the 1990s, when it was boosted by structural reforms, including the privatization of state enterprises, and the development of new industries like fruit farming, productivity has been dropping since 2006.

The government’s plans to reverse this trend include reforms in education, public healthcare and labour legislation from which it may now be sidetracked. “They’ll have to worry about whether children have schools, not what pupils attain inside them,” says one former government official.

The risk is that, in this case, it would achieve high growth itself – but without increasing future growth capacity. The earthquake does, however, provide the government with an unexpected opportunity to shine.

Piñera said he would like to be remembered as the president who restored a culture of “doing things well” in Chile. He won’t be short of a chance to show that he can do so. The measure of his success – or failure – will be whether, despite a huge setback, he can still leave Chile poised to become a developed country by 2018.

  • By Ruth Bradley
  • 22 Mar 2010

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Jul 2017
1 Citi 244,235.70 910 8.87%
2 JPMorgan 223,767.95 1021 8.13%
3 Bank of America Merrill Lynch 211,276.97 750 7.68%
4 Barclays 166,062.82 634 6.03%
5 Goldman Sachs 162,877.27 537 5.92%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Jul 2017
1 HSBC 25,202.67 100 7.14%
2 Deutsche Bank 25,125.19 81 7.12%
3 Bank of America Merrill Lynch 21,836.07 58 6.18%
4 BNP Paribas 18,395.95 105 5.21%
5 Credit Agricole CIB 18,048.72 104 5.11%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Jul 2017
1 JPMorgan 12,578.87 55 8.17%
2 Citi 11,338.07 71 7.36%
3 UBS 10,682.06 44 6.93%
4 Goldman Sachs 10,419.53 53 6.76%
5 Morgan Stanley 10,194.88 57 6.62%