1. Fundamentals of the Chilean Economy Central Bank of Chile October 2002

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

4. 4 Chile: Nominal Exchange Rate (CLP/USD) 250 350 450 550 650 750 90919293949596979899000102 spot central parity ceiling floor

5. 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 90 91 929394959697 98 99 00 0102 2,5 3,5 4,5 5,5 6,5 7,5 8,5 9,5 10,5 11,5 12,5 Nominal MPR

6. 6 Chile: Real Exchange Rate (index, 1986=100) 70 80 90 100 110 120 8687888990919293949596979899000102

7. 7 Chile: Long-Term Int. Rate: Central Bank Instruments (%) CPI-adjusted 2 3 4 5 6 7 8 9 10 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

8. Fiscal Strength

9. 9 Fiscal Balance: Average 1992-2001 (% GDP) -10 -8 -6 -4 -2 0 2 Argent. Brazil Chile Colombia Czech Rep. Hungary Israel Korea Malaysia Mexico Peru Poland Thailand Latin America Countries Other Emerging Economies

10. 10 Public Debt 2001 (% GDP; Source: Moody´s and Ministry of Finance) 0 20 40 60 80 100 120 Argent. Brazil Colombia Mexico Peru Chile S. Korea Malaysia Thailand Poland Czech Rep. Hungary Israel Latin American Countries Other Emerging Economies

11. 11 Chile: Fiscal Balance (% GDP) -2 0 1 2 3 90919293949596979899000102(e) structural actual

12. Financial System Strength

13. 13 Chile: Banking Solvency Indicators (%) 0 2 4 6 8 10 12 14 949596979899000102 (jun) Basel Indicator Non Performaning Loans minimumrequired

14. 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. 15 Chile: Financial Savings by Institutional Investors (% GDP) 0 20 40 60 80 100 19941995199619971998199920002001 pension funds insurance companies mutual funds

16. 16 Chile: Domestic Corporate Bond Market (USD billions) (total outstanding) (Issuance) 0 1 2 3 4 5 6 7 19941995199619971998199920002001 0,0 0,5 1,0 1,5 2,0 2,5 3,0 outstanding issuance

17. External Sector Strength

18. 18 Chile: Total Exports Volume (index 1990=100) 0 50 100 150 200 250 300 6065707580859095 00 02

19. 19 Chile: Exports by Sector (% total exports) 1960 2001 Mining Industry Agriculture 1980

20. 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. 21 Chile: Current Account Deficit (% GDP) 0 1 2 3 4 5 6 909192939495969798990001020304 forecast

22. 22 Chile: Cumulative Investment Abroad (% GDP)

23. 23 Net International Reserves (% Short Term Debt + Amortizations) 0 50 100 150 200 250 300 350 Argentina Brazil Colombia Mexico Peru Chile Korea Malaysia Thailand Poland Czech Rep. Hungary Latin American Countries Investment Grade Countries

24. 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 500 1000 1500 Latin American Countries Investment Grade Countries

25. Microeconomic & Institutional Strength

26. 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. 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. 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.

29. Macroeconomic Stability

30. 30 Chile: GDP, 1960-2002 (billions of 1996 Chilean pesos) 5000 10000 15000 20000 25000 30000 35000 40000 19601970198019902002(e)

31. 31 Chile: GDP Growth (Annual %) -2 0 2 4 6 8 10 12 14 8589939701 average 1985-2001

32. 32 Chile: Inflation and Targets (annual %) 0 5 10 15 20 25 30 35 90 90 91 91 92 92 93 93 94 94 95 95 96 96 97 97 98 98 99 99000102

33. Recent Structural Reforms

34. 34 Bilateral and Multilateral Negotiations: Further Trade Integration General Import Tariff (%) 0 2 4 6 8 10 12 14 16 9091929394959697989900010203 Free trade agreement with EU Currently negotiation Free Trade agreements with the US, EFTA, Korea WTO, FTAA

35. 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. 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

37. How to Reduce Growth Volatility?

38. 38 GDP Growth (Annual %) -30 -20 -10 0 10 20 30 1900 19201940196019802001

39. 39 Terms of Trade (index 1990=100) 70 80 90 100 110 120 80828486889092949698000204

40. 40 Chile: Exports by Sector (% total exports) 1960 2001 Mining Industry Agriculture 1980

41. 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. 42 Inflation and Targets (annual %) 0 5 10 15 20 25 30 35 90 90 91 91 92 92 93 93 94 94 95 95 96 96 97 97 98 98 99 99000102

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

44. 44 Chile: Financial Savings by Institutional Investors (% GDP) 0 20 40 60 80 100 19941995199619971998199920002001 pension funds insurance companies mutual funds

45. 45 Chile: Domestic Corporate Bond Market (USD billions) (total outstanding) (Issuance) 0 1 2 3 4 5 6 7 19941995199619971998199920002001 0,0 0,5 1,0 1,5 2,0 2,5 3,0 outstanding issuance

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

47. Fundamentals of the Chilean Economy Central Bank of Chile October 2002