Chile Forecast

Country Forecast

Chile

August 2008
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Chile 1

Contents

2 Chile—highlights
2 Political outlook
2 Demographic outlook
2 Business environment outlook
3 Economic outlook
3 Market opportunities
3 Long-term outlook

4 Fact sheet

5 Political forecast
5 Political forces at a glance
5 Political stability
6 Political and institutional effectiveness
7 Election watch
8 International relations

10 Demographic assumptions

12 Policy and business outlook
13 Macroeconomic environment
17 Policy towards private enterprise and competition
17 Policy towards foreign investment
18 Foreign trade and exchange controls
19 Taxes
19 Financing
20 The labour market
21 Infrastructure

22 Economic forecast
22 International assumptions
23 Economic growth
26 Wage and price inflation
27 Exchange rates
27 External sector
29 External debt

31 Market opportunities
31 Market outlook

34 Long-term outlook
34 The long-term outlook

39 Data summary

45 Data sources and definitions

46 Guide to the business rankings model

47 Indicator scores in the business rankings model

Country Forecast August 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008

2 Chile

Chile—highlights
Political outlook • The president, Michelle Bachelet of the centre-left Concertación de Partidos
por la Democracia (Concertación) coalition, will not be eligible to stand for re-
election in December 2009. At present, Sebastián Piñera of the centre-right
opposition Alianza por Chile (Alianza) coalition is favourite to win the
presidency, which would end 20 years of Concertación rule. Regardless of the
election result, Chile will remain politically stable, with an approach to politics
that is mostly pragmatic and co-operative. Although the Economist Intelligence
Unit expects Chile to remain among the most stable countries in the region,
tensions within, as well as between, the two dominant coalitions are increasing.
There is public trust in Chile’s democratic institutions, and a smooth transition
of power can be expected in 2010. In addition, with broad policy consensus we
are confident that policy continuity will be maintained in the approach to, and
after, the presidential and congressional elections of December 2009.
Demographic outlook Population (m) 2002 2007 2012
Total 15.7 16.6 17.4
Male 7.8 8.2 8.6
Female 7.9 8.4 8.8

Period averages (%) 2003-07 2008-12
Population growth 1.1 1.0
Working-age population growth 1.6 1.2
Labour force growth 2.6 1.7

• At 16.6m Chile has a small population, which is growing at a slower rate
than most of its regional neighbours. It also has an older demographic profile
than most, with those aged 65 and over now accounting for 8.5% of the total
population. The labour force is forecast to grow at an annual average 1.7% in
2008-12. Health indicators are comparable with those in OECD economies, and
will continue to improve owing to the recent introduction of a universal
healthcare system.
Business environment outlook Value of indexa Global rankb Regional rank c
2003-07 2008-12 2003-07 2008-12 2003-07 2008-12
7.83 7.97 19 20 1 1
a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia, Costa
Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela.

• Chile was the most attractive business location in Latin America in the
historical period (2003-07) and will remain so in the forecast period (2008-12).
Chile’s strengths will remain a commitment to free enterprise and competition, a
very open foreign investment regime (for which it ranks third in the world in the
forecast period), its strong fiscal position, sophisticated capital markets and
growing network of free-trade agreements (FTAs). However, several factors will
weigh on Chile’s attractiveness as a business location, principally rigidities in
labour legislation and deficiencies in average education levels. Structurally,
Chile’s score suffers from the small size of its domestic market. This is mitigated
to an extent by its network of FTAs that means that over 85% of Chile’s trade is
now conducted on a preferential basis.


Chile 3

Economic outlook 2007 2008 2009 2010 2011 2012
Real GDP growth (%) 5.1 3.6 3.8 4.4 4.4 4.3
Consumer price inflation (av, %) 4.4 8.4 6.2 3.7 3.1 3.0
Budget balance (% of GDP) 8.8 8.7 4.9 1.8 1.2 1.1
Current-account balance (% of GDP) 4.4 -0.1 -0.7 -2.7 -2.0 -1.4
Money market rate (av; %) 6.0 7.1 6.3 5.6 5.5 5.5
Exchange rate Ps:US$ (av) 522.5 491.0 559.7 586.7 601.1 615.7

• GDP is forecast to grow at an annual average of 4.1% in 2008-12, below the
rate of 5% posted in 2003-07. Domestic demand will drive growth, with strong
investment growth offsetting a net negative contribution from foreign trade.
Investment will be strongest in mining, infrastructure, energy, forestry,
telecommunications and agro-industry. Although set to ease from the highs of
2005-08, continued high copper prices will support fiscal surpluses. After
exceeding its 3% target (plus or minus 1 percentage point) in 2007-09, inflation
will return to target in 2010-12. The current account will move into deficit in
2008, owing to narrowing trade surpluses and higher income deficits.
Market opportunities 2007 2008 2009 2010 2011 2012
GDP (US$ bn at market exchange rates) 163.9 194.1 183.5 186.0 194.6 204.1
GDP per head (US$ at market exchange
rates) 9,876 11,576 10,839 10,879 11,279 11,726
Personal disposable income (US$ bn) 77.3 89.5 78.5 77.4 79.3 81.2
Household consumption (US$ bn) 89.6 105.3 98.6 99.9 103.5 106.9
Household consumption per head (US$) 5,400 6,280 5,820 5,840 6,000 6,140

• Chile has a relatively small market, with a population of 16.6m in 2007,
and GDP per head of US$9,876. It is the most stable Latin American economy,
owing to decades of sound monetary and fiscal policies; together with pro-
market microeconomic policies, this has turned it into the fastest-growing
economy in the region in the past three decades. There remain large income
inequalities among the population, but these are now starting to even out and
we forecast continued improvements in poverty and equality indicators.
Long-term outlook 2008-10 2011-20 2021-30 2008-30
Growth and productivity (% change; annual av)
Growth of real GDP per head 2.9 3.7 3.5 3.5
Growth of real GDP 3.9 4.4 4.0 4.2
Labour productivity growth 1.6 3.7 3.7 3.4

• There is consensus on the maintenance of a liberal market economy and
the need to pursue prudent monetary and fiscal policies, which will provide a
basis for continued steady long-term economic growth. A wide network of
bilateral FTAs has further helped Chile to attract foreign direct investment (FDI),
diversify its economy and offset the small size of its own market. Structural
reform, through both deregulation and more efficient regulatory regimes, will
strengthen Chile’s position as one of the region’s leading investment locations.
We forecast that average annual GDP growth will reach 4.4% in 2011-20,
moderating to 4% in 2021-30. The capital stock will continue to grow and
investment will rise as a share of GDP. As growth in the working age population
slows, the increase in the amount of labour will slow and growth will become
more dependent on productivity gains.
Editors: Martin Pickering (editor); Robert Wood (consulting editor) Editorial closing date: August 3rd 2008
All queries: Tel: (44.20) 7576 8000 E-mail: london@eiu.com Next report: Full schedule on www.eiu.com/schedule


4 Chile

Fact sheet
Annual data 2007 a Historical averages (%) 2003-07
Population (m) 16.6 Population growth 1.1
GDP (US$ bn; market exchange rate) 163.9 b Real GDP growth 5.0
GDP (US$ bn; purchasing power parity) 230.6 b Real domestic demand growth 7.4
GDP per head (US$; market exchange rate) 9,876 Inflation 2.9
GDP per head (US$; purchasing power parity) 13,896 Current-account balance (% of GDP) 2.3
Exchange rate (av) Ps:US$ 522.5 b FDI inflows (% of GDP) 6.6
a Economist Intelligence Unit estimates. b Actual.

Background: In the December 1988 referendum, mandated under the 1980 constitution, the then military ruler,
Augusto Pinochet, failed to obtain the majority that would have enabled him to remain in office for a further eight years.
Democratic presidential and congressional elections were held in December 1989, when the candidate of the centre-left
coalition, Concertación de Partidos por la Democracia (Concertación), Patricio Aylwin, was elected president for four years.
Concertación candidates have won the three subsequent presidential elections, the latest being Michelle Bachelet of the
Partido Socialista (PS), who took office in March 2006 for a four-year term.

Political structure: The political system is presidential, with a bicameral legislature that comprises a 38-seat Senate (the
upper house) and a 120-seat Chamber of Deputies (the lower house). The constitutional presidential term is four years and
immediate re-election is not allowed. The judiciary is nominally independent, but in practice the executive exerts influence
through the nomination of temporary judges and the control of promotions to the Supreme Court. Monetary policy is in
the hands of an autonomous Central Bank. Chile has 13 regions, 51 provinces, and 343 municipalities.

Policy issues: There is strong consensus on the desire to deepen integration into the world economy and maintain a liberal
market economy and prudent fiscal and monetary policies. Policy differences between the two major coalitions tend to be
a matter of degree rather than substance. The most heated differences centre on the labour regime and the electoral system.
A major reform is under way to improve the transparency and efficiency of the civil service. The public healthcare and
education systems have received substantial additional resources since 1990, with good improvement in healthcare but
only modest improvements in education.

Taxation: Corporate income tax is paid in two stages. Declared profit is subject to a 17% first-category income tax (FCIT).
When profit is distributed to shareholders or partners, companies pay 35%, minus the FCIT credit. Tax on dividends and
interest payments to non-banks is levied at 35%. Royalties and fees transferred abroad are subject to a withholding tax of
20%. The value-added tax (VAT) rate is 19%.

Foreign trade: Chile!s general import tariff rate is 6%, but its trade-weighted effective average tariff rate is below 2%, owing
to tariff preferences granted through trade accords, most importantly free-trade agreements (FTAs) with the EU, the US,
Canada, Mexico, South Korea, China and Japan. In 2007 exports reached US$68bn and imports US$44bn in fob terms.

Major exports 2007 % of total Major imports 2007 % of total
Copper 55.5 Intermediate goods 57.4
Cellulose 4.5 Consumer goods 19.2
Fresh fruit 4.1 Capital goods 15.3

Leading markets 2007 % of total Leading suppliers 2007 % of total
China 14.8 US 15.5
US 12.4 China 10.4
Japan 10.5 Brazil 9.6
Netherlands 5.8 Argentina 9.2


Chile 5

Political forecast
Political forces at a glance Government: Michelle Bachelet, of the Partido Socialista (PS), one of four
parties in the ruling centre-left coalition, the Concertación Democrática
(Concertación), was elected president in a second-round run-off on January 15th
2006 and started a four-year term of office on March 11th 2006. The
Concertación achieved a twin congressional majority at elections in December
2005, which it has since lost, owing to defections to independent benches in
both the Senate and the Chamber of Deputies.
Next elections: Nationwide municipal elections on October 25th 2008;
presidential and congressional elections on December 12th 2009.

Parliamentary forces, July 2008
(no. of seats)
Senate Chamber of Deputies
Concertación Democrática 18 57
Partido Demócrata Cristiano (PDC) 5 16
Partido por la Democracia (PPD) 2 19
Partido Socialista (PS) 8 15
Partido Radical Social Demócrata (PRSD) 3 7
Alianza por Chile 16 53
Unión Demócrata Independiente (UDI) 9 33
Renovación Nacional (RN) 7 20
Independents 4 10
Total 38 120

Political stability Threats to political stability in Chile will remain low compared with most other
countries in the region, although a period of party political change appears to
be under way, which will make the political environment less stable in the
outlook period than in 2003-07. Since its return to democracy in 1990 Chile has
been very stable politically, helped by a collective will to form a mature and
effective democracy, and by a stable two-coalition structure that has fostered a
pragmatic and co-operative approach to politics. Ample common ground on
policy issues between the Concertación and the opposition centre-right Alianza
por Chile (Alianza) coalition has also been beneficial. Although the Economist
Intelligence Unit expects Chile to remain among the most stable countries in
the region, the two dominant coalitions are losing public support, and a third
coalition is being formed by disaffected members of the Concertación, which
might also be able to draw support from centrist forces within the Alianza. The
outlook period is likely to see a changing party political environment, and
although we remain confident that political stability will endure and that any
transfers of power would be orderly, inter-party relations are likely to be more
fraught than in the historic period. The risk to policy predictability will remain
low, as there remains broad consensus on economic policy.
A new coalition will gradually take form Since the end of 2006 divisions within the Concertación have widened and are
leading to a shift in the party political structure that will be fluid at least until
the 2009 elections. Since late 2006, following expulsions from two of the four
partiesquot;the Partido por la Democracia (PPD) and the Partido Demócrata
Cristiano (PDC)quot;that make up the Concertación, disaffected deputies have


6 Chile

moved to independent benches and a new coalition comprising these
independents is being formed. The PPD members have formed a new political
movement, ChilePrimero (CH1), which is loosely taking on board the PDC
departees, along with the small Partido Regionalista de los Independientes
(PRI). The ultimate composition of an eventual third coalition remains unclear:
CH1 is strongly in favour of a market-oriented economic policy and the former
PDC members (dubbed the colorines) favour more populist solutions. They
coexisted fairly well within the Concertación, and might also do so in a new
coalition, but in the long term the new coalition!s stability is not assured.
Election years of 2008 and 2009 bring The Concertación will come under more strain during the municipal elections
increased risk of political instability of 2008 and the presidential and congressional elections of 2009 as its various
parties vie for places on candidate lists and to provide the coalition!s choice of
presidential candidate. The PDC is unhappy at having its presidential candi-
dates overlooked by the other Concertación parties since 1994, when Eduardo
Frei became president, and if it is overlooked again for the 2009 election, a split
within the Concertación cannot be discounted. Such disquiet in the ruling
coalition would not be new and has been weathered before with scant effect
on stability. However, potential intra-coalition tensions, combined with the
public’s perception that the government has been poor at handling violent stu-
dent demonstrations in 2006-08 and a public transport debacle in 2007, have
already exacted a political cost. Although Ms Bachelet retains approval ratings
of around the 50% mark (down from 60% following her inauguration, but up
from under 40% in 2007), public identification with both main political
coalitions is low, at 23% for the Concertación and 14% for the Alianza in mid-
2008. With public disillusionment at party politics on the rise, the election
years of 2008 and 2009 are likely to bring increased political uncertainty.
Despite these potential difficulties and the likelihood of further political
demonstrations that have the capacity to turn violent, there is public trust in
Chile’s democratic institutions, and a smooth transition of power can be
expected in 2010. Sebastián Piñera of Renovación Nacional (RN, one of the two
Alianza parties) is currently favourite to win the presidency in 2010-14, which
would mean the first change in government for 20 years. However, given the
broad policy consensus in Chile, we are confident that policy continuity will be
maintained in the approach to, and after, the presidential and congressional
elections of December 2009.

Political and institutional Chile will continue to have a technically competent government able to
effectiveness formulate and implement coherent policies, and Chile’s political framework
will strengthen in the forecast period as the implementation of the civil service
reform approved by Congress in 2003 gathers pace. The reform is gradually
increasing meritocracy in the civil service, with civil servants accountable to an
independent civil service directorate. The reform, which aims to model the civil
service on international best practices, proceeded slowly under the previous
government and has remained on the slow track under Ms Bachelet, but it is
likely to accelerate in the coming years and be completed on schedule in 2010.
The Concertación no longer enjoys a majority in either house, meaning that
laws requiring a simple majority, such as changes in the tax and labour regimes,


Chile 7

and laws requiring organic constitutional laws (which require a four-sevenths
majorityquot;at least 66 deputies and 22 senators), or laws interpreting or
modifying the constitution (which require either a three-fifths or two-thirds
majority) will need to be agreed by consensus. Chile’s recent history of
constructive politics has led to consensus being reached on issues that require
special majorities, and we expect this good level of political effectiveness to be
maintained over the forecast period.
Government efficiencies will improve The replacement of political nominees by qualified technocrats at the head of
from an already good position all the agencies executing government programmesquot;and their accountability to
an independent civil service directoratequot;will yield a gradual rationalisation of
government procedures and greater efficiency. It will also reduce fraudulent use
of public funds, which have been an increasing problem under Concertación
governments. The transparency and efficiency of government operations will
also be increased by the unification since 2005 of the procurement methods of
all government institutions (which used to be agency-specific), and the publica-
tion of all tender conditions and results through an official procurement website.

Election watch Municipal elections are due in October 2008 and presidential and
congressional elections in December 2009. The Concertación was unable to
agree on a common list of candidates for councillors for this year!s municipal
elections and will fight this election with two separate candidate lists. The
contest between the two lists will be bitter, which will make it hard for them to
agree on a common congressional list for the 2009 elections. The
Concertación’s electoral chances will be further damaged by the competition of
the centrist factions that have left the PDC and the PPD since the end of 2007.
These factions have regrouped as the Partido Regionalista Independiente (PRI)
and Chile Primero (CH1) respectively, and the two will present a common list
for the municipal elections. In addition, although an electoral alliance between
the Concertación and the extreme left might help to mitigate potential losses in
the municipal elections, it represents a leftward drift that will facilitate the
capture of the centre-ground in the 2009 elections by the Alianza. These factors,
allied with increased public disillusion with the coalition, currently point to a
victory for the opposition Alianza in the presidential vote. There is a risk of a
split in the ruling coalition as the PDC considers the next presidential candidate
should come from its ranks, while the PS and PPD argue that they should
choose whomever is most able to win the presidency.
Polls point to a victory for the Alianza in Although the Alianza has failed to take advantage of the divisions within the
the 2009 presidential election Concertación and its falling public standing, it is showing greater unity than the
Concertación and in Mr Piñera has a presidential candidate that opinion polls
now suggest would beat any of the main Concertación presidential hopefuls in
an eventual run-off second-round election. Given Chile!s presidential system, a
second-round run-off vote is likely. To win in the first round of votes a
candidate would need 50% plus one vote, which is unlikely, particularly given
the probable entrant of a candidate from the new centrist coalition. The
congressional result is likely to lead to close parity between the Concertación
and Alianza in both the Chamber of Deputies (the lower house) and the Senate
(the upper house), as has been the case since 1990. Chile!s “binominal” (two-
seat) electoral system for congressional elections requires more than two-thirds


8 Chile

of the vote in any constituency to gain both seats, making it difficult for a
coalition to win a large congressional majority.
Key players to watch

Michelle Bachelet
A member of the Partido Socialista (PS) and a former minister for health (2000-01) and defence (2004-05), Ms Bachelet is
Chile’s first female president. She was inaugurated in March 2006 for a four-year term. Although she has the common
touch and proved immensely popular in her election campaign, she had a troublesome first two years in power, facing
criticism for her perceived weakness in office. Ms Bachelet has honoured her campaign pledges to maintain sustainable
fiscal policies and eschew populism. She chose a technocratic cabinet with a strongly pro-market flavour, and has been
pursuing a pragmatic programme with an emphasis on energy security, furthering equal opportunities and raising Chile’s
levels of social protection.
Sebastián Piñera
After overtaking the presidential candidate of the Unión Demócrata Independiente (UDI), Joaquín Lavín, in the first round
of the presidential election in December 2005, Mr Piñera was defeated by Ms Bachelet in the presidential run-off election.
Although he lost, he won a creditable 46.5% of the vote, leaving him well placed to mount a strong challenge in 2009. A
hugely successful entrepreneur, Mr Piñera has strong political ambition. There is little love lost between him and the UDI,
but he has full control of his centre-right Renovación Nacional (RN).

Soledad Alvear
Having been defeated by Ms Bachelet in 2005 for the presidential nomination of the centre-left coalition, Concertación
Democrática, Ms Alvear was elected as senator for the capital, Santiago, and went on to win the presidency of the Partido
Demócrata Cristiano (PDC) in 2006, positioning herself as her party’s likely candidate to vie for the Concertación’s
nomination for the 2009 presidential election. A lawyer by training, Ms Alvear was an effective minister of justice in the
late 1990s, shepherding through the legislature a major reform of the country’s penal justice system. She served as minister
of foreign affairs under Ricardo Lagos, completing negotiations for free-trade agreements (FTAs) with the EU, the US, South
Korea and the European Free-Trade Association (EFTA).

Ricardo Lagos
Helped by record copper prices and the completion of major improvements in transport infrastructure, Mr Lagos ended his
presidential term in 2006 with his popularity at high levels. However, Mr Lagos was held responsible by many for the poor
planning behind the botched launch of Transantiago, an integrated public transport scheme for the capital, and his stock
has also fallen following the disclosure of corruption scandals under his government. Previously a favourite to regain the
presidency in 2010-14, he is not now assured of winning the Concertación’s nomination, but would prove a heavyweight
candidate were he to be selected.

International relations Relations with many of Chile’s regional neighbours will remain difficult.
Although efforts will be made to improve them by furthering economic co-
operation and facilitating crossborder trade and investment flows, tensions will
remain. Chile and Bolivia signed a peace treaty in 1904 settling all bilateral
border issues, but since 1978 Bolivia has disputed that treaty, demanding
sovereign access to the sea. Chile has expressed its willingness to grant Bolivia
access to the sea and strengthen bilateral co-operation without reopening
sovereignty issues that it considers were settled a century ago.
Relations with Peru have warmed since the election of a social democrat,
Alan García, as president in that country in 2006. Crossborder trade and
investment flows have increased strongly since an economic co-operation
agreement came into force in 1998. Mr García is seeking to ease a simmering


Chile 9

maritime border row with Chile by taking the dispute to the International
Court of Justice (ICJ) in The Hague.
Relations with Argentina have been damaged since 2004 when it started to cut
natural gas exports to Chile in violation of guarantees in a bilateral gas treaty
signed in 1995. But bilateral relations have remained reasonably amicable and
the two countries have continued to negotiate rather than resort to
international tribunals. However, Argentina continued to cut gas supplies (to
less than 5% of contracted supply in the first half of 2008), undermining Chile’s
energy security, making this a policy priority for the government. Although
Chile is accelerating investment in alternative energy sources, it might still face
an energy crisis in the early half of the outlook period.


10 Chile

Demographic assumptions
Demographic profile
2002 2007 2012
Population (m)
Total 15.7 16.6 17.4
Male 7.8 8.2 8.6
Female 7.9 8.4 8.8
Age profile (% of total population)
0-14 26.9 24.1 22.0
15-64 65.6 67.4 68.2
65+ 7.5 8.5 9.8
Young-age dependency ratio 0.41 0.36 0.32
Old-age dependency ratio 0.11 0.13 0.14
Working-age population (m) 10.3 11.2 11.9
Urbanisation (% of total) 86.6 88.2 89.6
Labour force (m) 6.3 7.2 7.8

Period averages 2003-07 2008-12
Population growth (%) 1.1 1.0
Working-age population growth (%) 1.6 1.2
Labour force growth (%) 2.6 1.7
Crude birth rate (per 1,000) 15.5 14.5
Crude death rate (per 1,000) 5.8 6.1
Infant mortality rate (per 1,000 live births) 8.8 7.8
Life expectancy at birth (years)
Male 73.3 74.3
Female 80.0 81.0
Average 76.6 77.5
Sources: International Labour Organisation (ILO), labour force projections; Economist Intelligence Unit estimates and forecasts;
national statistics.

Population growth will continue to slow Chilean population growth averaged 1.1% per year between 2003 and 2007,
increasing the total population to 16.6m, according to the Instituto Nacional de
Estadísticas (INE, the national statistics institute). According to INE!s projections,
the rate of population growth will continue to decline, to 1% in 2008-12, when
the population is forecast to reach 17.4m. The rise in the old-age dependency
ratioquot;the proportion of the population above working agequot;will be more than
offset by a decline in the young-age dependency ratio in 2008-12, meaning that
the proportion of people of working age will rise, from 67.8% in 2007 to 68.7% in
2012. The growth rate of the population is falling partly as a result of changing
lifestyles. The birth rate has been falling steadily since 1989 (from 23.6 per 1,000
people to 15.6 in 2003), and is not forecast to rise in the outlook period.
With life expectancy estimated at 78.3 years in 2005 (81.3 years for women and
75.3 for men) and infant mortality down to 8 per 1,000 live births in 2005,
Chile’s basic health indicators are similar to those of OECD countries. This is
mostly a result of well-focused maternity care and high nutrition and sanitary
standards. By the end of 2003 coverage of drinkable water reached 99.6% of
urban households, and 94.7% were served by the sewerage network. The water
utilities have a statutory obligation to purify at least 98.4% of all liquid waste in
their areas of responsibility from 2010. Cholera and measles have long been


Chile 11

eradicated, and fewer than 2% of all deaths are associated with enteric,
transmittable diseases owing to regular vaccination campaigns and good
sanitation and environmental protection standards.
Health indicators are good and Similarly, only 2.9% of children up to six years of age suffered from malnutrition
improving in 2006 according to figures from the Ministry of Health, but 22.8% were
overweight. Public healthcare policies will maintain their emphasis on disease
prevention, including information campaigns focused on sectors at risk. This
has helped to keep recent global epidemics under control.
HIV-AIDS mortality rose from 0.5 per 100,000 inhabitants in 1990 to 2.1 in 1995
and 2.4 in 2005; transmission is mostly sexual (93%). To stem this rising HIV-
AIDS mortality rate and prevent the spread of this disease, the authorities carry
out regular information campaigns in schools and the media, and organise
occasional distributions of free condoms. Since 2003 all AIDS sufferers have
been provided with three-drug therapy free of charge within the public
healthcare system, and HIV-AIDS was included among the 25 illnesses initially
covered by a system of universal healthcare access, Acceso Universal con
Garantías Explícitas (AUGE, universal access with explicit guarantees) from its
formal launch in 2005. The AUGE aimed initially to cover 80-100% of the costs
of healthcare services for 56 medical conditions, including many of the most
expensive illnesses to treat. The insurance policy is sold at a fixed price,
regardless of age or gender, and guarantees a maximum waiting time for
medical attention for each condition. By 2007 all of the 56 identified illnesses
were covered by AUGE guarantees, and by mid-2008 over 5m patients had
made use of the AUGE guarantees since the launch of the system.


12 Chile

Policy and business outlook
Business environment rankingsa
Value of indexb Global rank c Regional rankd
2003-07 2008-12 2003-07 2008-12 2003-07 2008-12
Overall position 7.83 7.97 19 20 1 1
Political environment 7.8 7.8 19 20 1 1
Political stability 8.5 8.1 16 18 1 2
Political effectiveness 7.1 7.4 20 19 1 1
Macroeconomic environment 8.9 8.6 7 10 1 1
Market opportunities 6.0 5.9 50 51 6 4
Policy towards private enterprise &
competition 8.8 8.8 7 9 1 1
Policy towards foreign investment 9.1 9.6 6 3 1 1
Foreign trade & exchange controls 9.1 9.6 9 4 1 1
Taxes 7.4 6.9 13 24 1 1
Financing 8.5 8.5 19 22 1 1
The labour market 6.7 6.9 30 32 3 4
Infrastructure 6.1 7.3 41 32 1 1
a See Guide to the business rankings model at the end of this report. b Out of 10. c Out of 82 countries. d Out of 12 countries: Argentina, Brazil,
Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela.

Chile will remain the top-ranked country According to the Economist Intelligence Unit’s business environment rankings,
in the region Chile will remain the most attractive business location in Latin America in the
forecast period (2008-12). Chile’s overall score rises slightly between the historic
period (2003-07) and the outlook period, owing mainly to improvements in the
country’s political effectiveness as a result of ongoing reforms in the civil
service, as well as in its information and communications infrastructure and
continued progress in trade liberalisation. However, this is not sufficient to
prevent Chile’s global ranking from falling from 19th to 20th as other countries
make more rapid progress. In addition, the improvements will be partly offset
by a deteriorating macroeconomic environment (mainly the result of higher
inflation) although Chile will still remain highly ranked in this category, and a
deterioration in political stability owing to increased tensions within the
government and between the government and opposition.
Chile’s major strengths as a business location will remain a favourable attitude
to free enterprise and competition, a very open foreign investment regime (for
which it ranks third in the world in the forecast period), a strong fiscal position,
sophisticated capital markets and an extensive and growing network of free-
trade agreements (FTAs). Chile!s energy and transport infrastructure will
improve over the outlook period, raising the country from 42nd to 31st place in
our global rankings for this category. However, several factors will weigh on
Chile’s attractiveness as a business location over the next five years, principally
rigidities in labour legislation, deficiencies in average education levels and its
dependence on copper as an export product. Structurally, Chile’s score suffers
from the modest size of its domestic market (its population is just 16.6m). This is
mitigated to an extent by the country’s network of FTAs that means that over
85% of Chile’s trade is now conducted on a preferential basis.


Chile 13

Chile's business environment at a glance

Policy towards private enterprise and competition
2008-09: Concessions, rather than outright privatisations, remain the norm and include hospitals, prisons, urban drainage,
irrigation, dams and highways. Reform of the civil service picks up speed.
2010-12: Strengthening of transparency in public procurement and regulatory proceedings. Civil service reform starts to
yield results in terms of efficiency.
Policy towards foreign investment
2008-09: Liberal regime enhanced by further bilateral investment protection and double-taxation treaties.
2010-12: Network of double-taxation and investment protection accords widens further.
Foreign trade and exchange controls
2008-09: Further expansion of comprehensive network of free-trade agreements (FTAs). Liberal trade regime and free
capital flows.
2010-12: Negotiations on new FTAs continue.
Taxes
2008-09: Cut in tax on financial transactions.
2010-12: Possible elimination of the stamp tax on credit. Strong fiscal management continues to protect against ad hoc
tax measures.
Financing
2008-09: Relatively deep and liquid financial markets, good access to long-term finance. Additional tax incentives foster the
risk capital industry. Reform of the pensions system.
2010-12: Further measures to facilitate financing to small businesses, particularly new ventures.
The labour market
2008-09: The government looks into labour reform, possibly in line with the successful Danish model, which provides
both flexibility and strong social support.
2010-12: Liberalisation of working arrangements. Gradual introduction of performance-related pay and bonuses in the
public sector.
Infrastructure
2008-09: Accelerated investment in electricity generation and in Chile!s highway network. Wastewater treatment to reach
over 90% of all liquid waste by end-2009, up from 75% in mid-2006.
2010-12: Continued upgrading of transport and social infrastructure through concessions.

Macroeconomic environment Value of indexa Global rankb Regional rank c
2003-07 2008-12 2003-07 2008-12 2003-07 2008-12
8.9 8.6 7 10 1 1
a Out of 10. b Out of 82 countries. c Out of 12 countries: Argentina, Brazil, Chile, Colombia,
Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela.

Policy consensus provides a good base In a region characterised in the past by high levels of macroeconomic
for continued stable economic growth instability, Chile stands out as a stable and resilient economy, a trend that will
continue in the forecast period. This was reflected in 2003-07 in an average
inflation rate of 2.9%, an average central government surplus of 4.6%, and
average annual GDP growth of 5%. This macroeconomic stability has resulted
from strong domestic consensus on the need for prudent monetary and fiscal
policies, as well as from 30-year continuity in an economic development model
based on free markets and deepening the country’s integration into the world
economy. The strength in the macroeconomic data since 2004 has also been


14 Chile

underpinned by strong global demand and record high copper prices, which
have strengthened Chile!s public finances and brought the current account into
surplus. Although Chile will remain in the top ten countries in the world in
terms of macroeconomic stability, and first in Latin America, its score in this
regard is set to deteriorate in the forecast period, owing in part to a high rate of
inflation in 2008-09. Nevertheless, Chile will continue to benefit from windfall
government revenue as copper prices are projected to remain historically high.
Most of the windfall will be saved, much in sovereign wealth funds,
strengthening the ability to run countercyclical fiscal policies and bolstering the
macroeconomic environment.
Chile!s very low level of public-sector debt (the central government is a net
creditor and gross public-sector debt is forecast to average just 5.9% of GDP in
2008-12) further enhances Chile!s macroeconomic stability. Although an
inflation-targeting regime was successful in bringing inflation down to OECD
levels in 1999-2006, since the third quarter of 2007 inflation has risen very
strongly (to 9.5% in July 2008), owing to high fuel and food prices, and it is not
expected to return to its target (of 3%, with one percentage point of tolerance
either way) before 2010, reducing growth potential through constraining private
demand and lessening macroeconomic stability. Real interest rates are expected
to rise gradually from their current negative levels, as policy tightens and infla-
tion starts to ease, but are forecast to remain low, helping debt financing costs.
Exchange-rate volatility has fallen as a result of strong foreign-exchange inflows,
but given strong appreciation in 2005-08 and a period of rapid readjustment
likely in 2008-09, exchange rate volatility will continue to present a risk.
The Concertación Democrática (Concertación) government, which will stay in
office until at least 2010, will continue to err towards populism in some of its
microeconomic policies, such as the labour regime, but fiscal management will
remain among the most prudent in the world. If the centre-right Alianza por
Chile (Alianza) opposition wins the 2009 presidential election and forms the
government in 2010-14, we are confident that there would be policy continuity
and would not expect a change in government to lead to a deterioration in
Chile!s economic outlook.
The handling of public funds will be made more transparent as a result of a
gradual replacement of political appointees, with technocrats selected on the
basis of merit in the upper tiers of the civil service, in a process that is
scheduled to be completed by 2010. This institutional modernisation will also
strengthen protection of property rights. Monetary policy will remain in the
hands of the independent Banco Central de Chile (BCC, the Central Bank) and
financial regulations will continue to follow best practice, keeping the local
banking system the most solid in the region.

Fiscal indicators
(% of GDP)
2007 2008 2009 2010 2011 2012
Central government expenditure 18.6 19.5 19.2 19.6 19.7 19.5
Central government revenue 27.4 28.2 24.1 21.4 21.0 20.7
Central government balance 8.8 8.7 4.9 1.8 1.2 1.1


Chile 15

Fiscal policy will remain among the best Fiscal policy: Chile has a long track record of strong public finances, owing to
in the world low public debt levels and a fiscal rule, adopted in 2000, which commits the
government to achieving a structural fiscal surplus. This has kept fiscal policy
among the best in the world, and there is strong consensus over the need to
maintain the current fiscal regime. In 2000-07 the structural surplus was set at
the equivalent of 1% of GDP annually, but the target was relaxed to 0.5% of GDP
in 2008. The structural fiscal accounts measure fiscal revenue at the level it
would reach if GDP growth and copper prices were at their medium-term trend
levels. Given the extraordinarily high copper prices prevailing since 2004, this
policy yielded a record central government surplus of Ps7.6trn (US$14.5bn; 8.8%
of GDP) in 2007. This was a result of central government revenue increasing by
17.3% to a record 27.4% of GDP, propelled by an 5.5% rise in the average price of
copper to US$3.22/lb (up from US$1.30/lb in 2004).
The fiscal rule will allow spending to remain high in the outlook period (to an
annual average of 19.5% of GDP), since the independent committee that
determines the medium-term price assumption for copper continues to forecast
a medium-term price of US$1.37/lb, which substantially underestimates the
forecast price of copper in 2008 (we are forecasting an average price of
US$3.52/lb). Following a central government surplus of 8.7% of GDP in 2008, the
surplus is forecast to ease to 1.1% of GDP by the end of the forecast period as
copper prices ease.
The fiscal rule will continue to provide The fiscal rule has served Chile well. By allowing the government to pursue
stability countercyclical measures, it has helped reduce GDP growth volatility. In 1991-95,
annual GDP growth fluctuated between 5.9% and 12.3%; from 1996 to 2000 it
ranged from -0.8% to 7.8%; and in 2001-06 it was between 2.2% and 6%. The
range of fluctuation is expected to shrink further in future years, to a narrow
band around a mid-point of 4.3%. In addition, under this policy fluctuations in
copper prices now have a much less cyclical effect on both the exchange rate
Copper price and fiscal and economic growth than in the past.
balance
Fiscal balance; % of GDP; left The rules governing Chile’s fiscal policy were tightened in 2006 to make the
scale management of the financial resources resulting from these surpluses more
International copper price;
US$/lb; right scale transparent. Part of these surpluses are being invested in a fund to cover the
12.0 400 government’s minimum pension liabilities, part will gradually recapitalise the
10.0 350
8.0 300
BCC, and the rest is being saved in a Fund for Economic and Social Stabilisation
6.0 250 (FESS) which is investing the savings, mostly abroad, to help prevent excessive
4.0 200
2.0 150
appreciation of the peso. The FESS is forecast to hold US$21bn by the end of
0.0 100 2008 (13% of GDP), and another 1.5% of GDP is held in a pension reserve fund.
-2.0 50
The interest yields of these sovereign wealth funds will constitute a significant
2003
04
05
06
07
08
09
10
11
12

source of additional revenue for the government. FESS income from asset
Sources: Ministerio de Hacienda; Economist
Intelligence Unit.
returns is projected to reach 1.5% of GDP (from 0.75% currently) by the end of
the forecast period.

Interest rates
(%)
2007 2008 2009 2010 2011 2012
30-89-day lending rate (av) 8.7 12.1 10.1 8.1 8.1 8.1
Long-term interest rate (av) 5.3 6.5 5.8 5.1 5.1 5.1


16 Chile

Monetary policy: The Central Bank will remain a fully autonomous
institution, and will maintain its long-term policy objective of keeping inflation
close to its target of 3% plus or minus 1 percentage point. However, its credibility
has been damaged in 2008 by a sharp rise in inflation (to 9.5% by July), caused
mainly by supply-side factors, following an annual average rate of 2.9% in 2003-
07. Long-term inflationary expectations remain anchored by the monetary
framework, with the rate forecast to return to the 3% target in 2010.
Policy will be tighter in 2008-12 than in Monetary policy will be tighter in the forecast period than in 2003-07, when the
2003-07 international inflation environment was more favourable. The unexpectedly
sharp rise in inflation in the first half of 2008 led the BCC to tighten monetary
conditions sharply in June and July, by 50 basis points each month, to 7.25%.
The BCC had increased its monetary policy rate four times in the second half of
2007 (by 25 basis points each time) to 6% at year-end, and after a 25-point
increase in January it announced that it was adopting a neutral stance.
However, with inflation continuing its firm rise, which had started in the third
quarter of 2007, further increases totalling 75 basis points can be expected in the
second half of 2008. The policy stance is likely to remain hawkish until into
2009, when the BCC is expected to start easing gradually on the assumption
that second-round effects do not materialise and inflationary pressures abate.
Central Bank intervention in 2008 In April 2008 the Central Bank reacted to concern over the costs for the real
weakens the peso economy from the sharp appreciation of the peso since early 2007 and the
resultant loss in export competitiveness. Currency appreciation had accelerated
owing to continued strong foreign currency inflows from the copper windfall,
but also as a result of capital inflows attracted by the widening interest-rate
differential between Chile and the US. The trade-weighted real exchange rate
appreciated by around 10% in the 12 months to March 2008, leading the BCC to
intervene directly in the foreign currency market for the first time in five years.
It announced that by the end of the year it would purchase US$8bn in foreign
exchange through competitive tenders of US$50m a day. To prevent the
resulting monetary emission from fuelling inflation, the operations are being
sterilised through issuing Central Bank paper, a move that is expected to cost in
excess of US$320m. By the end of July the peso had weakened by around 8% in
real terms against the dollar, to Ps494:US$1. After 2008 the BCC is likely to return
to a stance of intervening only to smooth out occasional bouts of volatility.
The current president of the Central Bank is José de Gregorio, who started a
four-year term in December 2007. Mr de Gregorio had served as the vice-
president of the Central Bank since December 2003 and has been on its board
since June 2001. There had been some speculation that he would be more
“dovish” than his predecessor, Vittorio Corbo, since he was in a minority voting
for a larger cut in the intervention rate in March 2007, but the strong action
taken in mid-2008 should help to dispel this and burnish his inflation-fighting
credentials. Although he is a member of the Partido Demócrata Cristiano (PDC),
political allegiances have not played a significant role in monetary policy in the
recent past and are unlikely to do so in future.


Chile 17

Policy towards private Value of indexa Global rankb Regional rank c
enterprise and competition 2003-07 2008-12 2003-07 2008-12 2003-07 2008-12
8.8 8.8 7 9 1 1
Policy will focus on raising the
Chile has long provided one of the emerging world’s most favourable
economy’s overall level of productivity
environments for private enterprise, having maintained a subsidiary role for the
state and a market-oriented economic system for three decades. Following a
large-scale privatisation programme in the 1970s and 1980s, and a more hesitant
one since 1990, Chile has only a small number of companies left in state hands,
including a copper corporation that is the largest company in the country, the
Corporación del Cobre (Codelco). With less scope for improvement than other
Latin American countries, government policy over the forecast period will focus
on raising the economy’s overall level of productivity and providing an
environment in which small businesses can compete more effectively.
• The government will prioritise attracting private investment to
infrastructure projects through build-operate-transfer (BOT) concessions, which
have been used effectively for development of most of Chile’s commercially
viable transport infrastructure. The focus will turn in 2008-12 to upgrades and
maintenance of Chile!s secondary road infrastructure, to the development of
agricultural irrigation systems, and to increase the capacity of the country’s jail
infrastructure. The government will also use BOT concessions to upgrade three
public hospitals in the metropolitan region of the capital, Santiago, by 2009.
• Competition policy will remain stronger than elsewhere in the region. The
independent Tribunal de Defensa de la Libre Competencia (TDLC, competition
tribunal), established in 2004, will accelerate the resolution of competition
disputes and make jurisprudence more consistent and transparent by producing
detailed reasoning explaining its decisions.
Policy towards foreign Value of indexa Global rankb Regional rank c
investment 2003-07 2008-12 2003-07 2008-12 2003-07 2008-12
9.1 9.6 6 3 1 1

Chile's foreign investment regime will Chile’s liberal foreign investment regime is based on the principle of non-
rank third in the world in 2008-12 discrimination between local and foreign investors, which is enshrined in the
constitution. Foreign investors benefit from additional protection owing to the
fact that the country is a signatory of the Washington Convention of 1965 that
created the International Centre for Settlement of Investment Disputes (ICSID).
This reduces the insurance premiums charged for non-commercial risks by both
multilateral insurers, including another World Bank subsidiary, the Multilateral
Investment Guarantee Agency, and official insurers such as the US
government’s Overseas Private Investment Corporation.
To increase its attractiveness as an investment platform, Chile passed a law in
2002 that grants foreign investors tax-free status on earnings from their foreign
operations, and authorises the government to offer practical support for the


18 Chile

transfer of their regional headquarters to Chile. The country will also continue
to widen its network of double taxation treaties.
• The establishment of a copper mining tax in 2006 will not significantly
impair Chile’s attractiveness as an investment location. Even with the tax, Chile
will remain the world’s top destination for copper mining investment. This is
because most other mining countries have more stringent tax regimes, and few
of them will offer a comparable political and economic stability or such a vast
mineral wealth in close proximity to the sea.
• The government is planning to send to Congress a third capital market
reform before the end of 2008. Known as MK3, it will include administrative
and legislative measures designed to facilitate foreign investment in the local
financial market and position Chile as an exporter of some financial services.

Foreign trade and exchange Value of indexa Global rankb Regional rank c
controls 2003-07 2008-12 2003-07 2008-12 2003-07 2008-12
9.1 9.6 9 4 1 1

Trade policy will continue to focus on Chile’s trade regime is among the most liberal in the world, with a trade-
expanding the network of FTAs weighted average effective import tariff rate below 1% (from 2008) as a result of
Chile’s large and expanding network of FTAs. The country’s most important
existing FTAs are those signed with the EU (which became operational in 2003),
one with the US (2004), one with China (2006) and one with Japan (2007).
Chile also has FTAs with South Korea; the countries of the European Free-Trade
Association (Iceland, Liechtenstein, Norway and Switzerland); Canada; Central
America and Mexico. It has less comprehensive trade agreements with most
other countries in Latin America, as well as with India, New Zealand, Singapore
and Brunei. These agreements give Chile a potential market of 4bn people, with
over 85% of its trade now conducted on a preferential basis. Chile also offers an
unusually narrow import tariff dispersion, ranging from 0% to 6%, with only
three products benefiting from special regimesquot;sugar, wheat and oilseedsquot;that
will be phased out gradually in a process scheduled to be completed in 2015.
The Chilean peso has been floating freely since September 1999, and the few
remaining exchange restrictions affecting capital or trade flows were eliminated
in 2001.
• Chile has one of the world’s largest networks of bilateral and multilateral
trade agreements, and trade policy will continue to focus on deepening its
integration into the global economy. It is likely to conclude FTAs with Australia,
Ecuador, Malaysia, Thailand and Vietnam in the forecast period and might also
reach an FTA with Turkey.

Taxes Value of indexa Global rankb Regional rank c
2003-07 2008-12 2003-07 2008-12 2003-07 2008-12
7.4 6.9 13 24 1 1

The tax regime will remain relatively Chile’s tax regime is relatively simple and stable. Inflation adjustments have
simple and stable been part of the tax code since 1975, and reporting rules are regularly updated


Chile 19

in the interest of transparency. There are no particular tax advantages to
organising through a corporation rather than a branch. But there are advantages
to investing through a corporation rather than as an individual, since the tax
burden is lower for the former. In an effort to encourage private savings and
investment, corporate income is assessed in two stages. When the income is
accrued, it is liable for a first-category tax of 17%. In a second stage, that part of
the profits distributed to shareholders or partners, or repatriated to a parent
company abroad, is subject to a 35% additional tax for which the first-category
tax serves as a tax credit.
• The country’s tax take will continue to rise in the forecast period. This will
be mainly as a result of continued economic growth and a reduction in tax
evasion as efficiencies increase following the replacement of printed invoices by
electronic ones, a process that has been ongoing for several years, and is now
almost complete. This is ending tax-evasion schemes based on false invoicing,
since they are increasingly easy to detect by the Servicio de Impuestos Internos
(SII, the tax authority), through computerised cross-checking. The SII
automatically receives copies of all digital invoices issued, enabling the detection
of irregular transactions.
• A stamp tax on most documents, contracts, promissory notes, invoices and
receipts applying to both foreign and domestic credits will continue to be
reduced. It was levied until end-2006 at 1.608% per year, falling to 1.5% in 2007
and 1.35% in 2008. It will fall to 1.2% in 2009, the rate at which it was levied in
1998, and the government might then look to remove it completely.

Financing Value of indexa Global rankb Regional rank c
2003-07 2008-12 2003-07 2008-12 2003-07 2008-12
8.5 8.5 19 22 1 1

Conditions will tighten, but companies Chile’s financial sector is among the most liquid and sophisticated in emerging
will retain access to financing markets. There is ample access to short-term funding through overdrafts,
supplier credit, bank loans, discounting of trade bills, factoring and commercial
paper. In addition the Chilean banking system had zero exposure to the US sub-
prime crisis, which has weakened many other countries! banking systems.
Nevertheless, with international and domestic credit conditions in 2008-12 set
to be tighter than in recent years, financing conditions will not be as favourable
as in 2003-07. Nonetheless, the growth potential of Chilean banks is good,
given the strength of their balance sheets. The banks’ average ratio of capital
and reserves to risk-weighted assets was 12.6% at the end of February 2008,
well above the minimum of 8% established by banking regulations and
recommended by the Basel accord. All banks in the Chilean system had Basel
ratios in excess of 10% at the end of 2007.
• Chilean companies with solid credit ratings will continue to have ample
access to long-term finance through leasing and large companies will retain
access to a variety of other options, such as stock issues, bonds and bank loans.
Blue-chip businesses will continue to have access to long-term funding locallyquot;
through bank loans with maturities of up to seven years, or local bond issues


Chile Forecast

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