1. Chile: Macroeconomic Outlook (and Tremors) Rodrigo Valdés Central Bank of Chile

2. Agenda External conditions: A double dip earthquake Policy response –Fiscal policy: Structural surplus rule –Monetary policy in an inflation targeting framework and free float Results and further issues –Policy traction (effectiveness) –Maneuvering space

3. External Conditions

4. Terms of Trade (Index 1996=100) Sept. avg. 1990-1997 May 88 91 94 97 100 103 106 98990001020304

5. Chilean Sovereign Spreads (basis points) EMBI Chile 2009 Chile 2012 80 100 120 140 160 180 200 220 240 Jul. 99 000102 500 600 700 800 900 1000 1100 1200 (Chile)(EMBI)

6. Net Capital Inflows ( % of GDP, four quarter moving average) -2 0 2 4 6 8 10 97III98III99III00III01III02 III (p)

7. Policy Response

8. Central Government Fiscal Surplus (% of GDP) Official -3 -2 0 1 2 3 96979899000102 W/O CSF Privatiz.

9. Consolidated Public Debt (% of GDP) Gross 0 10 20 30 40 50 8990919293949596979899000102 (June) 30 40 50 60 70 80 Net (Net)(Gross)

10. 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

11. Private Sector Expected Inflation (%) PRBC-360 one-year TAB 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 5,0 01Feb.Apr.Jun.Aug.Oct.Dec.Jun.Oct. survey

12. Short-Term External Debt and FX Reserves (Debt/Reserves ratio, %) 0 10 20 30 40 50 60 70 80 90 909192939495969798990001 02(Sep.)

13. Financial System Indicators (%) Non-Perf. LoansProfitabilityBasel Index Dec.'00 1.7312.713.34 June '01 1.8418.712.92 Sept. 1.8218.412.86 Dec. 1.6217.712.73 Mar. '02 1.7416.913.71 June 1.7816.813.42 July 1.8117.113.44 Aug. 1.8217.113.58 Sept. 1.8616.6n.a.

14. MPR and Central Bank Bonds Interest Rates (%) (mpr, pdbc) (prc) PRC-20 PRC-8 PDBC-30 PDBC-90 MPR 2 3 4 5 6 7 8 9 Aug-01Oct-01Dec-01Feb-02Apr-02Jun-02Aug-02Oct-02 0 1 2 3 4 5 6 7

15. Real and Nominal Exchange Rate (index, 1996=100, w/r to G-5) NER-5 RER-5 80 90 100 110 120 130 140 150 160 96979899000102

16. Results and Further Issues

17. GDP and Domestic Demand Real Growth (%, four quarters moving average) GDP Demand -12 -9 -6 -3 0 3 6 9 12 97III98III99III00III01III02III

18. Further Issues Policy traction (effectiveness) has been lower than expected –Political pressure for “more” –Questions regarding the value of credibility rewards –Anyway, what is the benchmark? (crisis vs downturn) Maneuvering space: bounded –Fiscal rule may collide with market expectations –FX market required the announcement of intervention

19. Chile: Macroeconomic Outlook (and Tremors) Rodrigo Valdés Central Bank of Chile