chille a changed jungle

UV0921

This abridged case was prepared by Jose Joaquin Matte (MBA 02), under the supervision of Wei Li, Professor of Business Administration. The authors gratefully acknowledge the financial assistance of Dardens Batten Institute. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2002 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of the Darden School Foundation. Rev. 3/08.

CHILE: A CHANGED JUNGLE FOR

THE LATIN AMERICAN TIGER (ABRIDGED)

In June 1998, Carlos Massad, president of Banco Central de Chile (the central bank of Chile), was evaluating the Chilean economic situation. After a decade of spectacular economic performance with average annual growth rates of more than 7% (Exhibit 1), Chile had earned the name Latin American Tiger in reference to the fast-growing tiger economies in East Asia (Hong Kong, Singapore, South Korea, and Taiwan).

Chile was facing one of the biggest challenges since the collapse of its financial system in 1982. Somewhat ironically, the 1997 crisis plaguing those same namesake tigers, which resulted in sharp currency devaluations and severe economic contractions in East Asia, had greatly increased the risk premium for investing in other emerging markets. Investors, who once willingly poured billions of dollars into emerging markets, were now avoiding them indiscriminately. They were choosing instead to park their money in safe havens such as the United States. This sudden withdrawal or stopping of foreign investment was now causing severe economic difficulties in other emerging economies that were dependent on foreign investment for economic development and threatened to ignite a new round of financial crises. Perhaps most worrisome, the next round of crises could be much closer to home. (See Exhibit 2 for Chiles balance of payments.)

For many years, Chile could rely on its abundant natural resources, most notably copper, forestry, and fishery, to provide the country with the hard currency needed to import equipment and technology (Exhibits 3 and 4). But the weakened economies in Asia had depressed the world demand for commodities. The price of copper had fallen to its lowest level since 1988 (Exhibit 5). The combination of capital flight and weakened exports had started to slow down production in Chile (Exhibit 6) and to drain the countrys foreign exchange reserves (Exhibit 2). Massad had to come up with a strategy to reverse the deterioration in Chiles balance of payments and prevent a major crisis. While the economic institutions and policies implemented since the early 1990s had worked well for Chile, the global economic environment had changed drastically in the last couple of years. Should Chile change course? If so, in what direction?

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The Dilemma of the Early 1990sControls on Capital Inflows

The early 1990s saw a sharp increase in capital flows into most emerging economies in the Western Hemisphere. Chile was no exception (Exhibit 2). These inflows created a dilemma for the central bank: In order to achieve its internal objectivethe inflation targetthe central bank needed to keep interest rates sufficiently high. They were often higher in Chile than abroad to dampen aggregate demand. (See Exhibit 7 for time-series plot of a Chilean benchmark short-term real interest rate.) The interest rate differential needed to control aggregate demand, and inflation gave rise to incentives for interest-arbitrage capital inflows. This put upward pressure on the exchange rate. There was, therefore, the risk that high interest rates needed to control inflation would cause a rise in even larger capital inflows and a further appreciation of the real exchange rate (RER) (Exhibit 8). The appreciation in RER would in turn cause deterioration in Chiles export competitiveness and make the economy more vulnerable to external shocks, therefore compromising the central banks external objective of maintaining a competitive and stable exchange rate. The dilemma was how to control inflation through a tight monetary policy without damaging Chilean export competitiveness.

Initially, the Chilean central bank responded to the capital inflows with foreign exchange intervention to slow the pace of currency appreciation. Later, the central bank also tried to offset the inflows by removing some existing restrictions on capital outflows. But this created a somewhat perverse reaction as investors responded to lowered barriers to capital outflow by committing more capital to Chile.

In June 1991, the central bank introduced controls on capital inflows: a 20% Unremunerated Reserve Requirement (URR) on foreign loans and foreign investment in fixed-income securities. Under the URR, a foreign investor who bought short-term debt securities in Chile or held deposits in Chilean banks was required to deposit 20% of the investment in a non-interest-earning account at the central bank for one year. The requirement to hold non-interest-earning deposits for one year meant that the financial burdenthe foregone earningsdecreased as the term of the investment lengthened. The second element of the capital controls was the imposition of a minimum holding period of one year for foreign direct investments forbidding foreign investors from withdrawing their direct investments within one year.

The objective of the URR was to favor equity over debt financing and long-term financing over short-term financing and allow the operation of a tight monetary policy without resulting in large [BOP] account imbalances.1 The URR was expected to discourage short-term inflows without affecting long-term foreign investments. Between 1991 and 1997, the rate of the URR was increased, and its coverage extended (Exhibit 9).

1 Le Fort and Budnevich, 1996.

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Exchange Rate Policy

A crawling peg exchange rate system was introduced in 1985 by Finance Minister Hernan Bchi. The peso was allowed to trade against the U.S. dollar in a band around the target exchange rate set by the central bank. The central bank intervened if the market rate threatened to move outside the band. The trading band was set initially at 3% around the target rate and was raised to 5% in 1989. The exchange rate policy aimed to contain excessive volatility in the market value of the peso and to maintain competitiveness of Chilean exports on international markets. Because the consumer price inflation had been running at a much higher rate in Chile than in the United States, the central bank used frequent and small devaluations of the target nominal exchange rate to keep the real exchange rate at a competitive level.

After the introduction of the URR, and in response to continuing capital inflows and escalating pressure on the peso, the central bank used the crawling peg system to allow an orderly and gradual appreciation of the currency in real terms. This was usually done by keeping the target nominal exchange rate devaluing at a slower rate on average than the prevailing inflation. To introduce more exchange rate flexibility, the central bank also widened the trading band to 10% in 1992, and 12.5% in 1997. Throughout the 1990s, the central bank kept a restrictive monetary policy in order to reduce the inflation inertia in the economy. See Exhibit 8 for charts on nominal and real exchange rates. Trade Policy

Since the 1970s, Chile had opted for unilateral trade liberalization, producing one of the most transparent trade regimes in the world. With only a few exceptions, a single- and low-import tariff rate had been in effect since the 1970s. The authorities preserved this policy and further complemented it in the 1990s with a series of both multilateral and bilateral trade agreements.

Chile signed its first free trade agreement with Mexico in 1991. The agreement incorporated a program for further tariff reductions that culminated in 1998 with tariff-free trade between the two countries, except for a short list of goods and services. Following the agreement with Mexico, Chile signed, in 1993, a trade agreement with Venezuela and another one with Colombia. Both agreements established tariff-reduction programs culminating in tariff-free trade for most traded goods and services in 1997. Additional bilateral trade agreements were signed with Ecuador (1994) and Peru (1998).

In 1994, Chile was invited to attend the inaugural summit meeting for the North American Free Trade Agreement (NAFTA) meeting. It was hoped that Chile would join the United States, Canada, and Mexico as a member of NAFTA. Support for NAFTAs expansion was dramatically reduced following the Mexican peso devaluation in 1995 and growing trade imbalances among NAFTA partners. Nevertheless, the Chilean incorporation into the NAFTA received a push forward when Chile signed a free trade agreement with Canada in November 1996. This agreement became operational in June 1997 with immediate free trade for 80% of bilateral trade and a program to

UV0921

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reduce the tariffs to zero within six years (except for some agricultural products). In 1997, the Clinton administration failed to secure fast-track negotiating power from the U.S. Congress,2 delaying indefinitely Chiles chances to join the NAFTA.

In June 1996, Chile signed an association agreement with Mercosur, the Latin American common market that included Argentina, Brazil, Paraguay, and Uruguay. The agreement consisted of 40% reduction of tariffs for most traded products. Further tariffs cuts were expected to reach 70% by 2002 and 100% by 2004.3 These trade arrangements further strengthened Chiles trade links with its Latin American neighbors, in particular with Argentina and Brazil (Exhibit 3).

In 1996, Chile signed a framework agreement on economic cooperation with the European Union. This agreement replaced a more restrictive one signed in 1990 and included cooperative programs in areas such as customs, investments, environmental regulations, intellectual property, and telecommunications. In early 1998, Chile and the European Commission agreed to a negotiation schedule toward a free trade area that would be operational in 2005.

Overall, Chile had maintained a liberal, transparent trade regime since the free market reforms in the 1970s. The government had a clear preference for concluding free trade agreements that did not inhibit its own freedom to undertake further unilateral reforms. Chiles main trade policy instrument was the uniform tariff that was introduced in the late 1970s. In December 1997, the tariff was 11%, and further reductions to 7% or 8% had been sent to the Congress for approval. Despite an increased emphasis on regional agreements since 1990, the authorities sought to continue the process of unilateral liberalization by further reducing tariffs.

Chiles trade balance was highly dependent on primary goods, including copper, fruits, forestry, and fishery products. About 10% of Chiles exports were manufactured goods, mainly processed from natural resources. Despite export diversification efforts, Chile continued to be highly dependent upon copper, and the economy remained sensitive to fluctuations in world copper prices. To cope with the resulting volatility of export income, the Chilean government operated a stabilization fund out of its copper revenues. Reliance on Commodities

Chile had the largest reserves of copper in the world, accounting for 28% of the worlds proven and economically viable reserves (Exhibit 4). Copper production was even more concentrated: Chile produced 34% of the world output. Copper, therefore, played a very important role in the Chilean economy. It represented nearly 40% of all Chilean exports (Exhibit 3). The mining sector as a whole represented 50% of all the exports and 8% of the GDP. As with any other

2 A U.S. president with fast-track negotiating power was authorized by Congress to negotiate a free trade agreement

with a foreign country. Congress could only approve or disapprove the negotiated agreement but had no authority in modifying it.

3 Investing Licensing and Trading in Chile. The Economist Intelligence Unit.

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-5-

commodity, the price of copper was very volatile and subject to wide swings in the short run (Exhibit 5). Inventories, as well as international market conditions, drove the world market price of copper. As shown in Exhibit 4, Europe, Asia, and North America were the main consumers of copper. Given the extensive use of copper in the construction, automotive, and telecommunications industries, an increasing share was used in Japan and other Asian countries, making the region the most dynamic copper market in recent years. Investment Link to Neighboring Countries

Chilean companies had been active investors themselves in Latin America. Because Chile was the first country to undertake mass privatizations of state-owned assets, many privatized companies in Chile had extensive experience with postprivatization enterprise restructuring. When Argentina, Brazil, and other Latin American countries started to privatize their state-owned firms, Chilean firms had a competitive advantage in restructuring and better access to Chilean and international financial markets for financing. Between 1990 and 1995, Chileans made more than USD5.5 billion in direct investment in Argentina, USD1.9 billion in Peru, and USD415 million in Brazil. Economic weakness in neighboring countries would have an immediate impact on the Chilean economy. Taking Action

In June 1998, Carlos Massad was evaluating the Chilean economic situation. Structural reforms such as trade liberalization and privatization, combined with macroeconomic policies on exchange rates, inflation, and partial capital controls, had paid off handsomely. Nevertheless, the Asian financial crisis could present serious challenges to other emerging market countries, including Chile. The next domino to fall could be a Latin American country. The Brazilian real had been under pressure since December 1997. While the Brazilian government had skillfully averted an immediate devaluation, Massad knew that Chile had to prepare for the worst as investors continued to flee emerging markets and commodity prices continued to be weak.

Massad had to devise a strategy to minimize the potential for harm due to the ripple effects emanating from the Asian crisis. In the past, the Chilean central bank focused more attention on controlling inflation and on stabilizing the exchange rate. Should the central bank continue to focus on price stability in the changed global economic environment? Or should its policies focus more on economic growth and employment?

Acting independently, the Chilean central bank had decided to pursue a restrictive monetary policy by increasing the benchmark 90-day interest rate from a 6.5% real rate to 7% in January 1998, and to 8.5% in February in an effort to make investment in Chile more attractive (Exhibit 7). But would this be enough? Massad had to consider the overall state of the Chilean economy, commodity prices, and investor confidence in emerging markets in general and in Chile in particular. Facing a new interdependent world, he felt that he had to act quickly and forcefully.

UV0921

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What should he do that would avert a crisis and at the same time make Chile an attractive

market for international trade and investment?

UV

0921

-7

-

Exhi

bit 1

CH

ILE

: A C

HA

NG

ED

JU

NG

LE

FO

R

TH

E L

AT

IN A

ME

RIC

AN

TIG

ER

(AB

RID

GE

D)

Chi

lean

Eco

nom

y (in

mill

ions

of U

.S. d

olla

rs, e

xcep

t as n

oted

)

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

Priv

ate

cons

umpt

ion

12,2

0514

,325

14,9

1016

,979

20,4

3625

,877

27,4

8434

,223

39,7

5943

,323

46,6

45G

over

nmen

t con

sum

ptio

n2,

075

2,47

82,

501

2,67

73,

120

3,84

24,

184

5,26

76,

247

6,86

77,

548

Gro

ss fi

xed

inve

stm

ent

3,70

34,

855

5,84

56,

352

6,43

48,

906

10,3

9212

,325

15,1

7216

,565

18,2

90In

crea

se/d

ecre

ase

in st

ocks

539

589

391

541

845

549

660

434

1,22

01,

314

1,25

2Ex

ports

of g

oods

and

serv

ices

5,77

28,

265

8,89

79,

502

10,7

0212

,174

11,4

6815

,515

19,4

1619

,004

20,1

86Im

ports

of g

oods

and

serv

ices

5,22

46,

602

7,74

98,

604

9,25

911

,631

12,4

8714

,817

18,2

5820

,555

22,1

46

GD

P19

,069

23,9

1224

,795

27,4

4632

,279

39,7

1841

,701

52,9

4763

,556

66,5

1871

,775

Net

Fac

tors

Inc/

paym

ents

abr

oad

-1,6

14-1

,958

-1,7

93-1

,592

-1,8

26-1

,821

-1,6

00-2

,654

-2,7

18-2

,714

-2,5

70G

NP

17,4

5521

,954

23,0

0325

,854

30,4

5337

,897

40,1

0150

,293

60,8

3963

,804

69,2

05

Exch

ange

rate

(pes

os/d

olla

r)23

824

729

733

737

538

243

140

440

742

544

0

As %

of G

DP

Priv

ate

cons

umpt

ion

64%

60%

60%

62%

63%

65%

66%

65%

63%

65%

65%

Gov

ernm

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onsu

mpt

ion

11%

10%

10%

10%

10%

10%

10%

10%

10%

10%

11%

Gro

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inve

stm

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19%

20%

24%

23%

20%

22%

25%

23%

24%

25%

25%

Incr

ease

/dec

reas

e in

stoc

ks3%

2%2%

2%3%

1%2%

1%2%

2%2%

Net

exp

orts

3%7%

5%3%

4%1%

-2%

1%2%

-2%

-3%

GD

P at

198

6 pr

ices

62,3

3466

,892

73,9

5676

,690

82,8

0292

,969

99,4

6410

5,14

111

6,31

512

4,93

813

4,17

4R

eal G

DP

grow

th6.

6%7.

3%10

.6%

3.7%

8.0%

12.3

%7.

0%5.

7%10

.6%

7.4%

7.4%

Infla

tion

rate

19.9

%14

.7%

17.0

%26

.0%

21.8

%15

.4%

12.7

%11

.4%

8.2%

7.4%

6.1%

Une

mpl

oym

ent r

ate

7.9%

6.3%

5.3%

5.6%

5.3%

4.4%

4.5%

7.9%

7.3%

6.4%

6.1%

Gro

wth

in m

onet

ary

base

21

.0%

46.5

%17

.2%

23.3

%44

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26.3

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16.2

%22

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16.2

%20

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Gro

wth

in M

138

.9%

22.5

%35

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23.6

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22.5

%24

.0%

9.9%

27.0

%20

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15.2

%G

row

th in

M2

27.1

%31

.2%

23.5

%28

.1%

23.3

%23

.4%

11.3

%25

.8%

19.6

%16

.3%

9.6%

Popu

latio

n (m

illio

ns)

12.5

12.8

13.0

13.1

13.3

13.5

13.8

14.0

14.2

14.4

14.6

Sour

ce: I

MF

UV

0921

-8

-

Exhi

bit 2

CH

ILE

: A C

HA

NG

ED

JU

NG

LE

FO

R

TH

E L

AT

IN A

ME

RIC

AN

TIG

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(AB

RID

GE

D)

Bal

ance

of P

aym

ents

(in

mill

ions

of U

.S. d

olla

rs, e

xcep

t as n

oted

)

Bal

ance

of P

aym

ents

1989

1990

1991

1992

1993

1994

1995

1996

1997

Q1

1997

Q2

1997

Q3

1997

Q4

1998

Q1

Cur

rent

Acc

ount

-690

-484

-99

-958

-2,5

54-1

,585

-1,3

50-3

,510

1,41

3-2

,316

-5,9

52-8

,056

-3,6

76Tr

ade

bala

nce

1,48

31,

284

1,48

572

2-9

9073

21,

381

-1,0

912,

784

420

-3,6

24-5

,812

-2,5

36Ex

port

s (f.o

.b.)

8,07

88,

373

8,94

210

,007

9,19

911

,604

16,0

2515

,405

18,7

7217

,284

15,3

2015

,276

15,9

16Im

port

s (f.o

.b.)

-6,5

95-7

,089

-7,4

56-9

,285

-10,

189

-10,

872

-14,

644

-16,

496

-15,

988

-16,

864

-18,

944

-21,

088

-18,

452

Serv

ices

and

tran

sfer

s-2

,173

-1,7

68-1

,584

-1,6

80-1

,565

-2,3

17-2

,731

-2,4

19-1

,371

-2,7

36-2

,328

-2,2

44-1

,140

Serv

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-460

-228

33-1

77-2

28-1

49-3

24-2

6066

4-3

88-3

2823

633

2In

com

e -1

,940

-1,7

37-1

,928

-1,8

81-1

,656

-2,4

99-2

,714

-2,6

66-2

,643

-2,9

12-2

,564

-2,8

28-1

,748

Tran

sfer

s22

619

831

237

832

033

130

750

760

856

456

434

827

6

Cap

ital a

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inan

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Acc

ount

1,24

12,

857

964

3,13

22,

995

5,29

42,

357

6,66

58,

623

8,89

410

,511

1,39

43,

360

Fore

ign

dire

ct in

vest

men

ts1,

277

654

696

537

600

1,67

22,

205

3,44

61,

584

3,92

44,

908

3,00

03,

664

Portf

olio

inve

stm

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8336

118

945

873

090

834

1,10

03,

140

3,02

41,

936

1,36

0-1

56O

ther

cap

ital (

net)

-119

1,84

379

2,13

71,

665

2,71

311

82,

119

3,89

91,

946

3,66

7-2

,966

-148

Err

ors a

nd O

mis

sion

s-3

3-5

039

237

3-1

3-5

5813

2-6

51-3

,224

-3,1

08-1

,970

6,53

0-3

,029

Ove

rall

Bal

ance

519

2,32

31,

257

2,54

742

83,

151

1,13

92,

504

6,81

23,

469

2,58

9-1

32-3

,345

Fina

ncin

g-5

19-2

,323

-1,2

57-2

,547

-428

-3,1

51-1

,139

-2,5

04-6

,812

-3,4

69-2

,589

132

3,34

5R

eser

ve a

sset

s-5

48-2

,121

-1,0

49-2

,344

-170

-2,9

18-7

40-1

,107

-6,8

12-3

,469

-2,5

8913

23,

345

Use

of f

unds

and

cre

dit l

oans

-21

-209

-197

-203

-249

-210

-298

00

00

00

Exc

eptio

nal f

inan

cing

508

-11

0-9

-22

-101

-1,3

970

00

00

Inte

rnat

iona

l res

erve

s (1)

3,62

96,

068

7,04

19,

168

9,64

013

,088

14,1

4014

,833

16,0

1717

,017

17,5

8517

,306

16,4

65G

over

nmen

t sur

plus

/ de

ficit

(-)

366

220

496

906

827

896

1,64

01,

548

3,67

666

41,

622

342,

757

Gov

ernm

ent r

even

ues

5,43

05,

692

7,21

09,

142

9,69

211

,951

14,1

3315

,610

18,0

8416

,366

17,4

5918

,086

17,7

25G

over

nmen

t spe

ndin

g5,

064

5,47

16,

714

8,23

68,

865

11,0

5512

,493

14,0

6214

,408

15,7

0215

,836

18,0

5214

,968

(1):

Excl

udes

gol

d re

serv

es -

Ann

ualiz

ed d

ata

on q

uarte

rly in

form

atio

n

Sour

ce: I

MF

UV0921

-9-

Exhibit 3

CHILE: A CHANGED JUNGLE FOR THE LATIN AMERICAN TIGER (ABRIDGED)

International Trade

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Exports

United States 22.4% 19.3% 17.7% 17.4% 17.6% 16.3% 17.6% 17.3% 14.4% 16.6% 15.9%Japan 11.0% 12.2% 13.6% 16.2% 18.4% 16.9% 16.0% 17.0% 17.7% 16.2% 15.7%United Kingdom 9.5% 11.3% 11.1% 11.0% 7.8% 6.0% 5.2% 5.0% 5.1% 4.8% 4.4%Brazil 6.2% 5.1% 6.1% 6.5% 4.5% 5.6% 5.9% 4.5% 6.5% 5.8% 6.2%Others 50.9% 52.1% 51.5% 48.9% 51.7% 55.2% 55.3% 56.2% 56.3% 56.6% 57.8%

Copper 42.8% 48.4% 49.8% 45.5% 40.5% 38.8% 35.3% 36.6% 40.5% 39.1% 41.1%Fresh fruit 10.2% 8.3% 6.7% 8.5% 10.5% 9.7% 9.2% 8.0% 7.0% 7.8% 7.2%Fish meal 6.9% 6.5% 6.3% 4.5% 5.2% 5.4% 4.0% 3.9% 3.9% 3.9% 3.3%Cellullose 5.1% 4.4% 4.0% 5.1% 5.0% 6.8% 6.7% 8.0% 9.6% 6.5% 5.8%Others 35.0% 32.4% 33.2% 36.4% 38.8% 39.3% 44.8% 43.5% 39.0% 42.7% 42.6%

Imports

United States 19.2% 19.7% 18.6% 17.7% 19.3% 19.5% 22.3% 22.3% 23.9% 23.1% 22.0%Argentina 9.6% 7.7% 10.2% 7.6% 7.9% 9.5% 7.9% 8.5% 6.4% 5.3% 9.3%Japan 9.4% 10.9% 9.7% 7.5% 8.5% 9.8% 9.5% 8.5% 7.5% 6.0% 5.4%Brazil 4.0% 5.5% 5.5% 6.5% 6.7% 6.2% 5.2% 8.1% 8.7% 9.2% 6.3%

Source: Datastream

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Exhibit 4


Copper Reserves (in millions of tons)

Basic Reserves Percentage of Reserves Percentage of (1) Total Reserves (2) Total Reserves

Chile 163 25.9% 88 27.5%United States 90 14.3% 45 14.1%China 37 5.9% 18 5.6%Poland 36 5.7% 20 6.3%Zambia 34 5.4% 12 3.8%Russia 30 4.8% 20 6.3%Congo (Kinshasa) 30 4.8% 10 3.1%Mexico 27 4.3% 15 4.7%Peru 24 3.8% 7 2.2%Canada 23 3.7% 10 3.1%Australia 23 3.7% 7 2.2%Other countries 113 17.9% 68 21.3%Total 630 320(1): Basic Reserves include all known reserves(2): Reserves include only reserves which are economically viable

Source: U.S. Geological Survey, Mineral Commodities Summaries (January 1998)

Consumption by Region

Consumption per region (%) 1992 1993 1994 1995 1996 1997

Europe 39% 33% 33% 33% 31% 31%Germany 10 8 9 9 8 8France 5 4 4 4 4 4Italy 5 4 4 4 4 4United Kingdom 3 3 3 3 3 3Other Europe 16 14 13 13 12 12

Asia 34% 37% 35% 37% 38% 38%Japan 13 13 12 12 12 11China 8 9 7 9 9 9Taiwan 4 4 5 5 4 4South Korea 3 4 4 4 5 5Other Asia 6 7 7 7 8 9

Americas 25% 28% 30% 27% 28% 28%United States 20 21 23 21 21 21Canada 1 2 2 2 2 2Mexico 1 2 2 1 2 2Other America 3 3 3 3 3 3

Africa 1% 1% 1% 1% 1% 1%

Oceania 1% 1% 1% 2% 2% 2%

Total 100% 100% 100% 100% 100% 100%

Source: IMF

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Exhibit 5


Copper Price

Copper Price - Grade A3 (USD per metric ton @ Dec 97 prices - using GDP deflator)

1500

2000

2500

3000

3500

4000

4500

1/1/1987 5/15/1988 9/27/1989 2/9/1991 6/23/1992 11/5/1993 3/20/1995 8/1/1996 12/14/1997 Source: DataStream.

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Exhibit 6


IMACEC Index of Monthly Economic Activity

IMACEC Activity Index - Monthly Change

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

Jan-

86

Jul-8

6

Jan-

87

Jul-8

7

Jan-

88

Jul-8

8

Jan-

89

Jul-8

9

Jan-

90

Jul-9

0

Jan-

91

Jul-9

1

Jan-

92

Jul-9

2

Jan-

93

Jul-9

3

Jan-

94

Jul-9

4

Jan-

95

Jul-9

5

Jan-

96

Jul-9

6

Jan-

97

Jul-9

7

Jan-

98

The IMACEC Index measured more than 90% of the components of the GDP.

Source: Banco Central de Chile

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Exhibit 7


Interest Rates

90-day real Interest Rate(Middle Rate - Real Rate)

0%

2%

4%

6%

8%

10%

12%

14%

1/1/1994 7/20/1994 2/5/1995 8/24/1995 3/11/1996 9/27/1996 4/15/1997 11/1/1997 5/20/1998 Source: Banco Central de Chile.

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Exhibit 8


Exchange Rate

Chilean Nominal Exchange Rate (pesos per USD)

100

150

200

250

300

350

400

450

500

Jan-87 May-88 Sep-89 Feb-91 Jun-92 Nov-93 Mar-95 Aug-96 Dec-97 Source: DataStream

Real Exchange Rate and Foreign Exchange Reserves (Chile, 1987-1998)

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

1987

M1

1987

M7

1988

M1

1988

M7

1989

M1

1989

M7

1990

M1

1990

M7

1991

M1

1991

M7

1992

M1

1992

M7

1993

M1

1993

M7

1994

M1

1994

M7

1995

M1

1995

M7

1996

M1

1996

M7

1997

M1

1997

M7

1998

M1

USD

Bill

ions

70.00

80.00

90.00

100.00

110.00

120.00

130.00

140.00

Real Effective Exchange Rate (right scale)(increase in index value representsreal appreciation)

Foreign Exchange Reserves (left scale)

Note: 1997M1 means January 1997 (month 1). Source: IMF.

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Exhibit 9


Changes in the URR

Date Measure Motivation

Jun 1991

20% URR was introduced for all new credit inflows. 20% of the credit inflows was required to be posted with the central bank in a non-interest-bearing account. The holding period varied from 90 days to one year depending on the maturity of the debt.

To discourage short-term inflows in favor of equity and long-term financing to increase flexibility of monetary policy

Jan 1992 20% URR extended to foreign currency deposits with proportional holding period

To close the deposit loophole

May 1992 URR was raised to 30% for bank credit lines. The holding period was set at one year regardless of loan maturity.

To increase the cost on foreign borrowings; unify duration to facilitate enforcement

Aug 1992 URR was raised to 30% on all foreign borrowing, foreign investments in Chilean debt securities and foreign deposits in Chile.

To close a loophole and increase the cost of implied tax on foreign borrowings

Jan 1995 Holding currency limited to USD only.

Jul 1995 URR extended to secondary ADR offerings (ADR = American Depository Receipt, representing ownership in the shares of a non-U.S. company listed on U.S. financial markets)

To close a loophole

Dec 1995 Foreign borrowing to be used externally was exempt of URR

To facilitate global operations of Chilean companies

Oct 1996 FDI committee would consider for approval productive projects only. Approved FDI would be exempt of URR

A relaxation of URR

Dec 1996 Foreign borrowing < USD200,000 (USD500,000 in a year) exempt of URR

Further relaxation

Mar 1997 Foreign borrowing < USD100,000 (USD100,000 in a year) exempt of URR

Source: Jos De Gregorio, Sebastian Edwards, Rodrigo O. Valds, NBER Working Paper 7645 (2000).

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