Fundamentals of the Chilean Economy Central Bank of Chile October 2002

2 Fundamentals of the Chilean Economy Macroeconomic and Financial Stability External Sector Strength Microeconomic & Institutional Strength Financial System Strength Monetary Strength FiscalStrength

4 Chile: Nominal Exchange Rate (CLP/USD) spot central parity ceiling floor

5 Chile: Monetary Policy Interest Rate (%) * Before June 1995: PRBC 90 days rate Nominal Int. Rate CPI-adjusted Int. Rate CPI-adjusted MPR Overnight Rate * -0,5 1,5 3,5 5,5 7,5 9,5 11, ,5 3,5 4,5 5,5 6,5 7,5 8,5 9,5 10,5 11,5 12,5 Nominal MPR

6 Chile: Real Exchange Rate (index, 1986=100)

7 Chile: Long-Term Int. Rate: Central Bank Instruments (%) CPI-adjusted Sept-02 Oct-92Abr-93Oct-93 Abr-94 Oct-94Abr-95Oct-95Abr-96Oct-96Abr-97Oct-97Abr-98Oct-98 Abr-99 Oct-99Abr-00Oct-00Abr-01Oct-01Abr-02 PRC 8 years PRC 20 years

Fiscal Strength

9 Fiscal Balance: Average (% GDP) Argent. Brazil Chile Colombia Czech Rep. Hungary Israel Korea Malaysia Mexico Peru Poland Thailand Latin America Countries Other Emerging Economies

10 Public Debt 2001 (% GDP; Source: Moody´s and Ministry of Finance) Argent. Brazil Colombia Mexico Peru Chile S. Korea Malaysia Thailand Poland Czech Rep. Hungary Israel Latin American Countries Other Emerging Economies

11 Chile: Fiscal Balance (% GDP) (e) structural actual

Financial System Strength

13 Chile: Banking Solvency Indicators (%) (jun) Basel Indicator Non Performaning Loans minimumrequired

14 Argentina Thailand South Korea Japan Malaysia Mexico Brazil Chile Hong Kong Italy Australia Germany France UK US Spain Netherlands (15, amount 76) Ranking of Banking Strength (Source: Moody´s, july 2002) stronger less strong

15 Chile: Financial Savings by Institutional Investors (% GDP) pension funds insurance companies mutual funds

16 Chile: Domestic Corporate Bond Market (USD billions) (total outstanding) (Issuance) ,0 0,5 1,0 1,5 2,0 2,5 3,0 outstanding issuance

External Sector Strength

18 Chile: Total Exports Volume (index 1990=100)

19 Chile: Exports by Sector (% total exports) Mining Industry Agriculture 1980

20 Chile: Distribution of Merchandise Exports (January-August 2002) USA: 20% Latam: 21% EU: 20% UK: 5% China: 7% Japan: 11% Rest of Asia: 12% Others: 4%

21 Chile: Current Account Deficit (% GDP) forecast

22 Chile: Cumulative Investment Abroad (% GDP)

23 Net International Reserves (% Short Term Debt + Amortizations) Argentina Brazil Colombia Mexico Peru Chile Korea Malaysia Thailand Poland Czech Rep. Hungary Latin American Countries Investment Grade Countries

24 Sovereign Spreads (basis points, September 2002) 0 6,000 7,000 Argent. Brazil Colom. Mexico Peru Chile S. Korea Malaysia Thailand Poland Hungary Israel Latin American Countries Investment Grade Countries

Microeconomic & Institutional Strength

26 Argentina Mexico Brazil Thailand Italy Japan Czech Rep. S.Korea Malaysia Spain France Chile U. Kingdom Germany Australia Hong Kong USA (19, amount 49) Competitiviness Ranking 2002 (Source: International Institute for Management Development) + compet. - compet.

27 Brazil Malaysia Mexico France Spain Italy S.Korea Argentina Czech Rep. Thailand Germany Chile Australia UK US Hong Kong (9, amount 156) Economic Freedom Index 2001 (Source: The Heritage Foundation) + freedom -freedom

28 Thailand Argentina Mexico Rep. Checa Brazil Korea Malaysia Italy France Spain Germany Chile USA U. Kingdom Australia (17, amount 102) Corruption Index (June 2001; Source: Transparency International) - corrupt. + corrupt.

Macroeconomic Stability

30 Chile: GDP, (billions of 1996 Chilean pesos) (e)

31 Chile: GDP Growth (Annual %) average

32 Chile: Inflation and Targets (annual %)

Recent Structural Reforms

34 Bilateral and Multilateral Negotiations: Further Trade Integration General Import Tariff (%) Free trade agreement with EU Currently negotiation Free Trade agreements with the US, EFTA, Korea WTO, FTAA

35 Capital Markets Reforms: Central Bank Elimination of all remaning foreign exhange restrictions Substitution of nominal MPR for CPI-adjusted MPR Streamlining of debt issued by the Central Bank

36 Capital Markets Reforms: legal changes New corporate governance and tender offer regulation Elimination of capital gains tax on liquid stocks and reduction of withholding tax on interest from 35 to 4% on local bonds for foreign investors Increased flexibility for allocation of personal savings

How to Reduce Growth Volatility?

38 GDP Growth (Annual %)

39 Terms of Trade (index 1990=100)

40 Chile: Exports by Sector (% total exports) Mining Industry Agriculture 1980

41 How to Reduce Growth Volatility? Fiscal policy based on rules. Inflation-targeting monetary policy (nominal anchor) Flexible exchange rate policy (interest rate stabilization)

42 Inflation and Targets (annual %)

43 How to Reduce Growth Volatility? Copper and oil compesatory funds Saving guaranteed by Pension Funds Banking and no banking finance Other Factors:

44 Chile: Financial Savings by Institutional Investors (% GDP) pension funds insurance companies mutual funds

45 Chile: Domestic Corporate Bond Market (USD billions) (total outstanding) (Issuance) ,0 0,5 1,0 1,5 2,0 2,5 3,0 outstanding issuance

46 Fundamentals of the Chilean Economy Macroeconomic and Financial Stability External Sector Strength Microeconomic & Institutional Strength Financial System Strength Monetary Strength FiscalStrength

Fundamentals of the Chilean Economy Central Bank of Chile October 2002