Chile: Keeping the Argentine Bug at Bay

Chile hasn't caught the Argentine flu. True, Chile's peso, free-floating since 1999, has felt the chills from Argentina's debt crisis, but the contagion stops there. Its stock market has been much less volatile than those of its neighbors, and it has little foreign-debt exposure. Chile's tough fiscal discipline helps, and its economy is outpacing those in nearly all of Latin America.

Indeed, Chile's slowdown, which began last year, may be bottoming out, based on unexpectedly strong June data on economic activity and retail sales. After growth of 5.4% for all of 2000, real gross domestic product in the second quarter grew 3.4% from a year ago, close to the first quarter's showing, and the pace is set to quicken a little.

However, any pickup will not come as fast or as strongly as the June data implied: Those data got a boost because June, 2001, had an extra working day and an extra weekend compared with June, 2000. July retail sales turned soft again. Unemployment stood at 9.6% in June, and the economy is not strong enough to support job growth beyond temporary government programs.

Still, second-half economic fundamentals look firmer. The central bank has cut interest rates five times this year, by a total of 1.5 percentage points. The weak peso will limit further cutting, but the government has budgeted a 5% increase in real outlays this year, and with legislative elections due in December, the government is talking about cuts in income taxes, with revenue losses made up by higher corporate rates.

Exports will get support from the 20% drop in the Chilean peso since last year--about 12% since June. The peso's drop also reflects the global slowdown and the sharp drop in the price of copper, a crucial export. Only about 4% of Chile's exports go to Argentina, while nearly 60% go to Asia and Europe. Despite the peso's weakness, inflation is expected to slip a bit this year, from 3.8% in 2000.

Economists expect Chile to grow 3%-3.5% this year and 4.5%-5% next year. That would likely cap the best three-year performance in Latin America.

By James C. Cooper & Kathleen Madigan

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