Risk assessors highlight Chile’s ability to handle reconstruction

While the Chilean economy will suffer significantly in the coming months, recovery efforts and the country’s macroeconomic stability allow a solid recovery to be forecast for the medium term.

Risk assessors and reconstruction
Reconstruction efforts will probably reanimate economic activity

There is consensus among investment banks and international risk assessors that it is still too soon to evaluate the full impact of the 27 February mega-earthquake and tsunami on the Chilean economy. While these institutions agree that Chile’s economic growth will be affected initially, they have also estimated that the reconstruction work itself will lead to financial recovery in the medium term.

Thus, the US investment group Goldman Sachs has projected that recovery in Chile following the earthquake will be “V” shaped. “The physical damage and the interruptions caused by the earthquake will affect activity in March and in the second quarter of 2010, but we expect that the gradual resumption of activities and reconstruction will cause a strong recovery during the second half of 2010 and in 2011,” the company stated in a report published last Friday.

With these estimates in hand, the company lowered its forecast for real Chilean GDP from 5.2% to 4.5%, while inflation is expected to be around 4% by the end of the year.

“The problems caused by the earthquake will probably add inflationary pressure on the supply side over the next couple of months. It is likely that inflation will return to within the target range sooner than expected.”

The fact that the Central Bank has maintained its monetary policy contributes to this positive outlook, as it will allow the pace of reconstruction to be kept up while at the same time permitting planned fiscal expansion to be financed with “part of the Treasury’s savings in the Sovereign Fund and a mix of internal and external loans on international capital markets and in multilateral agencies.

In addition, Goldman Sachs anticipates that the Chilean peso will continue to be an “attractive currency for financing other exchange operations,” all of which will be supported by the decision to expand fiscal spending properly backed by the arrival of foreign capital.

Lastly, the report highlights that additional debt should not affect the country’s risk rating, due to “the country’s institutional and macroeconomic strength to handle this adversity.”

Standard & Poor agrees with this assessment, affirming that there will initially be “a major blow to growth – and the recovery that was beginning – during the first half of the year, but reconstruction efforts will probably reanimate economic activity.

According to the report prepared by the company, Chile’s credit rating “should remain relatively stable in the short term,” a situation that explains its decision not to modify, for now, its estimate that real GDP growth in 2010 will be 5%, which has been calculated based on “resurging internal as well as external demand.”

The institution also highlights Chile’s low debt burden, which opens up “room to increase spending on reconstruction efforts,” and which will also allow the country to absorb “any potential financial loss without affecting its solvency. The Chilean Government’s policy history has afforded it ample fiscal and monetary flexibility to respond to the internal crisis, as it was able to do in 2009, amid the global recession,” the document concludes.