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 nations physical assets in ruins,
rebuilding will be protracted, extensive and
Yet despite the tragedy, the Andean nation was spared the
worst: for one of the worlds 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 Chiles 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 Chiles 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
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
After the economys 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 Chiles 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%. Therell be a drop for a couple of
months but we expect reconstruction to start kicking in during
the second half, says executive director Vladimir
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. Its 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
worlds 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 200308 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 Chiles traditional fiscal
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
I wouldnt 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
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
Still, the general view among analysts is that, beyond the
short-term dip in activity, reconstruction will put extra
medium-term wind behind the economys 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 years recession means that
this shouldnt be a problem for a couple of years,
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 dont expect a
persistent effect on Chileans standard of living,
But there are some hidden risks. One of the main
pre-earthquake aims of Piñeras government was to
increase the economys 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
The governments plans to reverse this trend include
reforms in education, public healthcare and labour legislation
from which it may now be sidetracked. Theyll have
to worry about whether children have schools, not what pupils
attain inside them, says one former government
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 wont 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.