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Chile: It helps to have smart friends

Armen Kouyoumdjian is the dude in question and when it comes to analysis of Chile’s macro situation (or any other South American country when he put his mind to it, for that matter) there’s no better independent voice out there. Armen’s been kind enough to allow me to reproduce his weekly missive on the blog here today. If you want to join his list send him a mail (address below) and tell him Otto sent you…and say please, cos I consider being on his list a privilege, not a right.


An Analysis of the First Quarter 2009 results

By Armen Kouyoumdjian

kouyvina (AT) cmet.net

June 12, 2009

The news that Chile’s GDP was negative for two quarters and fell even sharper during April means that the country is in recession according to the generally accepted principles of economic analysis. However, the authorities have refused to use the term, adding another element to my description of “management by negation”.

There is one aspect where figures do not lie, because contrary to many other vague macro-economic statistics (such as GDP, Unemployment or Inflation), it reflects a more or less precise accounting exercise. This refers to the fiscal accounts, for which first quarter 2009 figures were published in late April, and I have only now gotten round to processing them.

PARTICULAR FACTORS Even though budgetary figures may be precise, their presentation has become exceedingly hard to fathom in recent years. The reasons include combining current, fixed and financial transactions in the final results, and allow Hacienda advisors to come up with somewhat distorted final figures. Still, the raw material is there and it can tell us a lot. Another statistic which tells us a lot about the crisis in Chile, but is not financial, are the 20,000 homeless people who seek shelter each night in Santiago alone, and that figure only relates to those staying in the hostels of one such charity, the Hogar de Cristo.

The first quarter of 2009 figures should not be projected for the full year, because they incorporate some aspects which are unlikely to persist for the whole of the year. They include the impact of the exchange rate on both revenue and expenditure denominated n foreign currency. In the first quarter of 2008, the exchange rate averaged 454 pesos per U$. The equivalent figure for 2009 was 581 pesos. Discounting inflation, the real peso value of the dollar increased by 22 % on a year-on-year basis.

The other variable which marked a strong change was the price of copper. From an average of U$ 3.54/lb. in January-March 2008, the price dropped 56 % to just U$ 1.56 this year. It has averaged U$ 2.03 in April/May and is now over U$ 2.30.

One aspect which does look as if it will continue all year is the increase in expenditure, because it is an electoral year. One has to take this with a pinch of salt as announcements and actions are separated by the Chilean bureaucratic Colorado Canyon (the U$ 1 bn capitalisation of CODELCO, part and parcel of the U$ 3bn “stimulation plan” announced ages ago, is still under discussion).

There is not much point comparing the first quarter results to the draft budget for 2009 announced at the end of October last year. This is not so much because we only have one quarter’s figures, but the hypotheses contained therein on growth, inflation, copper price and the exchange rate have long since lost their meaning.

REVENUE SIDE Looking at current revenue, which consists mainly of taxes, these plunged by 37.3 % in the first quarter, to a total of U$ 7.64 bn. Though some of the drop was due to temporary reductions or suspension of taxes on fuels and stamp duty for instance, other items truly reflect a very sick economy in terms of growth.

No tax reflects economic activity better than VAT. Revenue from that source accounted for no less than 38 % of current income, and fell by 20.5 % in real terms (all percentages mentioned in this report, in accordance with Chilean accounting principles, are in real terms).

Revenue from copper and other mining activities saw the sharpest drop, falling by 92 %, and ending up at just 3.4 % of revenue. In fact, they reverted to form, and maybe now people will believe me when I say that in most years, the Chilean state gets more out of the nasty habit of smoking than from copper. No wonder, in the country with the highest per capita expenditure on cigarette and drink, as previously mentioned. In fact, tobacco taxes brought in $ 248 million during the quarter, 70 % more than copper, and bucked the trend with a 6.5 % increase. A combination of less driving and lower taxes meant that on the other hand, fuel duties brought-in 13.9 % less, at U$ 314 million. Lower imports and statutory reductions under Free Trade Agreements meant that customs revenues dropped by 48.6 %. Income tax, another good measure of economic activity, and which accounted for 29.5 % of revenue, saw its yield reduced by 25.2 %.

There is a puzzling increase of 8.4 % in the revenue from state social security contributions, which at first glance does not square up with the increase in unemployment. The only explanation I can think of is the move of lower paid workers from private health coverage to the less expensive state FONASA scheme.

Non-current revenue only brought in an additional U$ 57 million.

Some time in the near future, if it has not already been said, some (or several) authorities will insist that the deterioration of public finances is mainly due to the fall in copper. This argument, which is older than the Tibetan Book of the Dead, once again stands no scrutiny. In the first quarter of 2009, the Treasury received U$ 2.2 bn less from copper. This represents less than half the total loss in revenue (U$ 4.54 bn).

Like all of us stupid savers, public finances also bore the brunt of the drop in interest rates on the country’s savings. These dropped by 77 % to U$ 257 million. As of March 31st, consolidated Treasury savings amounted to U$ 23.4 bn.

EXPENDITURE SIDE The analysis of the expenditure side of the equation is more complicated, because we have an important element of non-current items. Starting with current expenses, these increased by 15.3 % in the first quarter, with all items showing an increase, led by purchases of goods and services (+ 20.5 %) and subsidies & donations (+ 17.7 %). The 14.9 % increase in the interest bill (itself a modest U$ 255 million, almost exactly equal to the revenue on savings), is most probably due to the higher peso cost of servicing dollar debt, as mentioned earlier.

To the U$ 7.18 bn of current expenditure, one has to add U$ 1.55 bn of non-financial investments and transfers. The amount of investment, at U$ 922 million, jumps by 57.3 %, though transfers to other entities also shows a 57.5 % increase. It remains to be seen how much of that money has actually been spent at the receiving end. The official report mentions a 73 % increase for housing, 52 % for public works and 45 % for public security.

Combining current and investment outlays, total expenditure increased by 21.3 % in the first quarter.

BALANCE AND OUTLOOK On the basis described above, there was a quarterly deficit of U$ 1.1 bn or 0.7 % of GDP. Under the circumvoluted methodology of Hacienda, they still aim for a balanced budget for the full year.

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