DB Chile Equity Market

8/3/2019 DB Chile Equity Market

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Global Emerging Markets Chile

Macro Strategy

21 April 2008

Monthly Market Monitor (M3)

Chile: open forbusiness!

We highlight 2 themes and 4 stocks:1) Food inflation: Soquimich (chemicals)and Multiexport Foods (fish farm); and 2)Commodity boom: CAP (iron ore & steel)

and Vapores (shipping).

We have published our fourth Monthly Market Monitor (M3).

Guilherme Paiva, CFAStrategist

(1) 212 250 2873

[email protected]

Andres OrlandiStrategist

(1) 212 250 2975

[email protected]

Deutsche Bank Securities Inc.

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced fromlocal exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors shouldbe aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers ofDBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 torequest that a copy of the IR be sent to them.

DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1

Company

GlobalMarketsResea

rch

Our M3 report focus on Equity Strategy and Economics for a specific countryWe have published our fourth Monthly Market Monitor (M3). Our first, second andthird reports, entitled Colombia: waiting for lift-off, Peru: the dawn of a goldenera? and Argentina: a fragile juggling act, were published in early 2008. Everymonth, we will publish an M3 report with our Equity Strategy and Economicsviews for one of the six countries that are part of the MSCI Latin America index.

Top-down equity investment ideas and market analysisThe M3 can be divided in two main sections: A forward-looking segment in which we highlight: a) our index target andrecommendation for the equity market, b) the medium-term macro-economicoutlook for the country and c) investment themes and related stocks; and An equity market and economic guide in which we highlight: a) the main

equity indices and their constituents, b) liquidity and corporate governanceconsiderations and c) the macroeconomic and policy background of thecountry.

Our 2008 year-end target for the IPSA index is 3,200 points (8% ETR in pesos)We recommend a small overweight in Chilean stocks for three reasons: 1) soliddouble-digit earnings growth (14% in 2008 and 17% in 2009) with little downsiderisk; 2) leverage to global growth with counter-cyclical policies that mitigate

slowdowns and 3) fair equity valuations which should not prevent further re-rating.We highlight two investment themes and four related stocks Food inflation (2 stocks): Soquimich (chemicals) and Multiexport Foods (fish

farm); and Commodity boom (2 stocks): CAP (iron ore & steel) and Vapores (shipping).

The most open and leveraged to global growth economy in Latin AmericaIn the long term, we believe the country has the best macroeconomicfundamentals and the brightest growth outlook in the region. In the short term, wehave revised down our 2008 GDP forecast to a still robust 4.4%, as the Chileaneconomy continues to battle the negative supply shock from higher oil prices.

The latest inflation readings have been benign but we dont believe we are out ofthe woods yet. Our base-case scenario for interest rates envisions the CentralBank on hold during the next few quarters. However, the risk to our forecast is tothe upside, as the Central Bank should maintain a tightening bias as long asinflation remains above target.

Latin America research team

Head of ResearchRizwan Ali1 (212) 250 3712

StrategyGuilherme Paiva, CFA1 (212) 250 2873

Construction and TransportDaniel McGoey, CFA52 (55) 5201 8017

Bernardo Carneiro, CFA55 (11) 2113 5975

Energy & UtilitiesMarcus Sequeira1 (212) 250 3255

Financial ServicesMario Pierry1 (212) 250 6957

Food & Beverage and RetailReinaldo Santana52 (55) 5201 8016

MediaMiguel Garcia1 (212) 250 7977

Metals & MiningJorge Beristain, CFA1 (212) 250 2723

David S.Martin1 (212) 250 5580

Pulp & Paper and ConglomeratesMarcelo Luna1 (212) 250-7911

TelecomRizwan Ali

1 (212) 250 3712

Small & Mid CapsJosh Milberg, CFA55 (11) 2113 5971


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21 April 2008 Monthly Market Monitor (M3)

Page 2 Deutsche Bank Securities Inc.

Table of Contents

Overview ............................................................................................ 3Chile: Open for business! ............................................... ...................................................... ....3Equity Strategy.................................................................................. 4Target and recommendation.....................................................................................................4Valuation ............................................... ................................................... ................................. 5Investment themes...................................................................................................................9Correlations.................................................. ....................................................... .................... 10Macro outlook..................................................................................11Economic activity ...................................................... ...................................................... ........ 11Inflation ................................................. ...................................................... ............................ 12Monetary policy .................................................. ...................................................... .............. 12Fiscal accounts................................................. ...................................................... ................. 13External sector .............................................. ...................................................... .................... 14Equity guide..................................................................................... 16Indices............................................... ................................................... ................................... 16Index performance.................................................... ...................................................... ........ 16Market size and liquidity................................... ................................................... .................... 18Market participants ................................................... .................................................... .......... 19Corporate governance..................................................................... ........................................ 19Index sector weights and market cap..................................................... ................................ 21Stock weights ..................................................... ...................................................... .............. 22Stock liquidity................................................... .................................................... ................... 22Stock performance................................. ................................................... .............................. 23Appendix Company descriptions................................................. ......................................... 25Macro background .......................................................................... 29Economic activity ...................................................... ...................................................... ........ 29Inflation ................................................. ...................................................... ............................ 31Monetary policy .................................................. ...................................................... .............. 32External sector .............................................. ...................................................... .................... 35Fiscal accounts................................................. ...................................................... ................. 38Latam Equity Strategy reports guide ............................................ 40


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Deutsche Bank Securities Inc. Page 3

Overview

Chile: open for business!

We have published our fourth Monthly Market Monitor (M3)1. Every month, we will publish aM3 report with our Equity Strategy and Economics views for one of the six countries that are

part of the MSCI Latin America index (Brazil, Mexico, Chile, Argentina, Peru and Colombia).

The M3 report can be divided in two main sections:

A forward-looking segment in which we highlight: a) our index target and

recommendation for the equity market, b) the medium-term macro-economic outlook for

the country and c) top-down investment themes and related stocks; and

An equity market and economics guide in which we highlight: a) the main equity indices

and their constituents, b) liquidity and corporate governance considerations and c) the

macroeconomic and policy background of the country.

Equity strategy

Our 2008 year-end target for the IPSA index is 3,200 points for an estimated total return (ETR)

of 8% in local currency terms dividends included. Moreover, we recommend a small

overweight position in Chilean equities based on three arguments:

1. Solid double-digit earnings growth (14% in 2008 and 17% in 2009) and little downside

risk to our earnings estimates as cyclical stocks only account for 20-25% of the market;

2. Leverage to global growth with counter-cyclical policies that should mitigate slowdowns.

We forecast the Chilean economy should grow 4.4% in 2008 and accelerate to 4.7% in

2009, while Latin America should decelerate from 4.4% to 4.2%; and

3. Fair equity valuations which should not prevent further multiple expansion. We estimate

Chilean stocks currently trade at forward 9.9x EBITDA and 16.5x earnings.

We also highlight two investment themes and four related stocks that we deem interesting:

Food inflation:Soquimich (chemicals) and Multiexport Foods (fish farm); and

Commodity boom:CAP (iron ore & steel producer) and Vapores (shipping).

Economics

Recently, we have revised down our 2008 GDP forecast to a still-robust 4.4% as the Chilean

economy continues to battle the negative supply shock from higher oil prices. The latest

inflation readings have been benign but we dont believe we are out of the woods yet. Our

base-case scenario for interest rates envisions the Central Bank on hold during the next few

quarters. However, the risk to our forecast is to the upside as the Central Bank should

maintain a tightening bias as long as inflation remains above target.

Lastly, we analyze at length the macroeconomic trends that have impacted Chilean

fundamentals over the past decade. Our analysis can be divided in five sections: 1) economic

activity, 2) inflation, 3) monetary policy, 4) external sector and 5) fiscal accounts. Overall, Chile

has the most open economy in Latin America and it is leveraged to global growth. We

believe the country has the best long-term macroeconomic fundamentals and the brightest

growth outlook in the region.

1Our first three M3 reports entitled Colombia: waiting for lift-off, Peru: the dawn of a golden era? and Argentina: a

fragile juggling act, were published on January 16, February 20 and March 26, 2008, respectively.

Guilherme Paiva, CFA

+1 (212) 250-2873

We have published our

fourth Monthly Market

Monitor (M3)

The M3 report can be

divided in two main sections

Our year-end target for the

IPSA index is 3,200 points

We highlight two top-down

investment themes and four

related stocks

We have revised down our

2008 GDP forecast to a still-

robust 4.4%

We provide an analysis of

the macro background of

Chile


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Equity StrategyTarget and recommendation

We forecast a 3,200 points year-end target for the local IPSA index. Our 2008 estimate for

Chilean equities embeds an 8% ETR in local currency. We derive our index target from: 1)

bottom-up earnings growth forecasts (for the following 12-24 months) generated by our

fundamental analysts and 2) the forecast change to the market forward-looking P/E multiple.

Our 2008YE target for the IPSA is based on 1) a 17% earnings growth estimate for 2009 and

2) an 11% de-rating (P/E multiple contraction) for Chilean stocks during the current year.

Figure 1: Chilean IPSA index (2002-present) and DB 2008

target

Figure 2: Chile equity returns (upside), earnings growth

and P/E multiple change

0

1,000

2,000

3,000

4,000

2002 2003 2004 2005 2006 2007 2008

5%

28%19%19%

20%

78%

-12%-2%

-17%

-100%

-50%

0%

50%

100%

2000A 2001A 2002A 2003A 2004A 2005A 2006A 2007A 2008E

NTM PE Re/(De) Rating EPS Growth (12-24 months)NTM return

Source: Deutsche Bank Source: Deutsche Bank

We recommend a small overweight position in Chilean equities for three reasons:

Earnings growth and visibility: We forecast Chilean companies will post a solid 14%

earnings growth rate in 2008 and 17% in 2009. Furthermore, we see little downside riskto our earnings estimates as volatile cyclical stocks only account for 20-25% of MSCI

Chile and IPSA despite the leverage that the Chilean economy has to global growth via

copper;

Economic growth: We estimate the Chilean economy should grow a robust 4.4% in

2008 and accelerate to 4.7% in 2009, while we expect Latin American growth to

decelerate from 4.4% to 4.2% for the same years. Moreover, the Chilean economy is

among the few in the region that can implement effective counter-cyclical macro

policies;

Valuation: Chilean stocks currently trade at 12-month forward looking 9.9x EV/EBITDA

and 16.5x earnings. These multiples are on average roughly in line with their 8-year

historical mean (between minus and plus one standard deviation) and therefore have

room for further expansion (re-rating).

Figure 3: DB Latin America forecasted index targets and returns

4/21/08 2008 LC Div ETR local FX FX 2008 USD ETR

Current target Upside yield currency spot forecast target Upside USD

Brazilian Bovespa 64,923 70,000 7.8% 2.2% 10.0% 1.66 1.75 40,000 2.6% 5.2%

Mexican Bolsa 31,796 35,000 10.1% 3.4% 13.5% 10.51 10.9 3,211 6.2% 10.0%

Chilean IPSA 3,064 3,200 4.4% 3.2% 7.7% 457 464 6.9 2.9% 6.2%

Argentine Merval 2,186 2,200 0.6% 0.8% 1.4% 3.17 3.26 675 -2.1% -1.2%

Peruvian IGBVL 17,470 18,000 3.0% 5.3% 8.3% 2.75 2.87 6,272 -1.4% 4.1%

Colombian IGBC 9,657 10,000 3.6% 1.6% 5.2% 1,782 2,231 4.5 -17.3% -14.9%

MSCI Latin America 4,750 2.5% 4,900 3.1% 5.6%

Source: Deutsche Bank


+1 (212) 250-2873

We forecast a 3,200 points

year-end target for the local

IPSA index

We recommend a small

overweight position in

Chilean equities


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Valuation

Country

Deutsche Bank has a proprietary valuation model for four Latin American equity markets

(Brazil, Mexico, Chile and Argentina). The coverage breadth of our fundamental equity

research department is representative of the overall market, and therefore allows us to

aggregate bottom-up financial data in order to calculate country valuation metrics.

Deutsche Bank equity research department covers 18 companies in Chile. These stocks have

a combined market capitalization of approximately USD136bn, and they account for

approximately 80% of the MSCI Chile and 70% of the IPSA indices.

Our market multiples are calculated by adding nominal values of individual companies (for

example, the price-to-earnings ratio is the aggregate market cap divided by the aggregate net

income) rather than a market-cap-weighted multiple. In our opinion, this methodology better

reflects reality because of the non-linearity of the price-to-earnings ratio (i.e. it tends toward

infinity when earnings tend to zero).

Chilean stocks trade at 9.9x forward-looking Ebitda estimates, which is 7% lower than the10.6x 8-year historical average. Alternatively, the market trades at 0.5 standard deviations

below the historical mean. We should note that Chilean stocks reached a recent peak of

10.8x forward Ebitda (+2% or 0.1x standard deviations) in October 2007.

The Chilean market trades at 16.5x forward earnings, which is 10% higher than the 15.0x 8-

year historical average. Alternatively, the stocks trade at 0.8 standard deviations above the

historical mean. Furthermore, our equity composite reached a recent peak of 18.6x forward

earnings (+24% or 2.0x standard deviations) in October 2007.

Figure 4: Chile forward EV/Ebitda (2000-2008) Figure 5: Chile forward P/E (2000-2008)

9.9x

6x

9x

12x

15x

2000 2002 2004 2006 2008

Chile Avg. +1 S.D. -1 S.D.

16.5x

10x

14x

18x

22x

2000 2002 2004 2006 2008


Source: Bloomberg and Deutsche Bank Source: Bloomberg and Deutsche Bank

Meanwhile, Chilean stocks trade at 2.6x forward book value, which is 50% higher than the

1.7x 8-year historical average. Alternatively, the market trades at 2.1 standard deviations

above the historical mean. We should note that Chilean stocks reached a peak of 2.8x

forward book value (+65% or 2.7x standard deviations) in October 2007.

The current profitability of Chilean equities, measured by return on equity (ROE), is 15.5%,

which is approximately 4.2 percentage points (37%) higher than the 11.3% 8-year historical

average. Alternatively, current profitability is 1.6 standard deviations above the historical

mean. Therefore, the ROE generated by Chilean companies almost justifies their price-to-

book valuation level.

DB has a proprietary

valuation model for four

Latin equity markets

DB equity research covers

18 companies in Chile

Our market multiples are

calculated by adding

nominal values of individual

companies

Chilean stocks trade at anattractive 9.9x forward

Ebitda

and 16.5x forward

earnings

Chilean stocks trade at 2.6x

forward book value

and generate a 15.5% ROE


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Figure 6: Chile forward P/BV (2000-2008)

2.6x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

2000 2002 2004 2006 2008



Finally, Chilean stocks trade at 3.4% forward-looking dividend yield, which is 20% lower than

the 4.2% 8-year historical average. Alternatively, the market trades at 1.1 standard deviation

below the historical mean. We should note that Chilean stocks reached a recent bottom of

2.8% forward dividend yield (-35% or -2.0x standard deviations) in December 2005.

Figure 7: Chile forward return-on-equity (2000-2008) Figure 8: Chile forward dividend yield (2000-2008)

15.5%

5%

7%

9%

11%13%

15%

17%

2000 2002 2004 2006 2008


3.4%

2%

3%

4%

5%

6%

2000 2002 2004 2006 2008


Source: Bloomberg and Deutsche Bank Source: Bloomberg and Deutsche Bank

Stocks

We calculated price-to-earnings, price-to-book value, enterprise value-to-EBITDA, dividendyield and ROE ratios for the forty companies of the MSCI Chile and IPSA indices. We depict

the data in two tables:

The first table encompasses the 18 Chilean stocks currently covered by Deutsche Bank

fundamental equity research department. Furthermore, it displays 2008 valuation

multiples based on our analysts financial forecasts; and

The second table includes the 40 constituents of MSCI Chile and IPSA, and depicts 2007

valuation multiples based on a database created using historical company fillings and

other data sources.

Chilean stocks trade at 3.4%

forward-looking dividend

yield

We calculated valuationratios for 40 stocks


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Figure 9: Chile 2008 valuation multiples companies under Deutsche Bank coverage

4/21/08 Price Target Mkt Cap EV/ Dividend

Company Bbg ticker Rating USD USD Upside (USDm) PE P/BV EBITDA yield ROE

Falabella FALAB CI Hold 5.9 5.6 -5% 14,292 18.8 4.1 5.6 1.5% 22%

Socovesa SOCOVESA CI Buy 0.4 0.6 40% 561 11.9 1.3 11.9 2.2% 11%

Consumer Discretionary 14,854 14.6 2.4 9.4 1.9% 15%

Cencosud CENCOSUD CI Hold 4.2 4.7 12% 8,402 19.2 1.9 7.6 1.6% 10%

Cervecerias Unidas CCU CI Buy 7.6 9.6 26% 2,442 14.6 2.6 3.3 4.4% 17%

Distribucion y Servicio DYS CI Sell 0.4 0.3 -20% 2,724 19.8 2.1 6.0 1.2% 10%

Embotelladora Andina ANDINAB CI Buy 21.9 20.0 -8% 2,627 13.0 4.0 1.7 6.4% 31%

LA Polar LAPOLAR CI Hold 6.1 6.2 2% 1,352 15.9 3.7 4.5 1.8% 23%

Ripley RIPLEY CI Hold 1.0 1.7 73% 1,868 11.3 1.4 7.3 2.4% 13%

Consumer Staples 19,415 16.9 2.4 5.8 2.7% 15%

Banco de Chile CHILE CI Hold 0.1 0.1 11% 6,208 10.2 2.6 nm 8.6% 26%

Banco Santander Chile BSAN CI Buy 0.1 0.1 12% 9,609 11.7 2.7 nm 4.6% 23%

Financials 15,818 11.1 2.7 nm 6.1% 24%

Copec COPEC CI Hold 16.9 16.7 -1% 22,019 18.9 2.5 5.7 2.0% 13%

LAN Airlines LAN CI Buy 14.0 17.0 22% 4,780 14.0 3.6 4.5 2.7% 26%

Industrials 26,798 18.0 2.7 5.5 2.1% 15%

Empresas CMPC CMPC CI Hold 38.3 41.7 9% 7,895 18.0 1.3 7.7 1.7% 7%

Materials 7,895 18.0 1.3 7.7 1.7% 7%

Cia Telecom de Chile CTCA CI Hold 2.1 2.5 18% 2,068 37.5 1.0 4.3 6.5% 3%

Entel ENTEL CI Buy 17.5 23.0 32% 4,147 13.0 2.8 2.4 4.5% 21%

Telecom 6,214 21.1 2.2 3.0 5.1% 15%

Colbun COLBUN CI Sell 0.2 0.2 -13% 2,686 nm 1.1 nm 0.0% nm

Endesa ENDESA CI Hold 1.6 1.6 -4% 13,623 24.9 3.9 5.6 2.0% 16%

Enersis ENERSIS CI Buy 0.4 0.5 17% 12,828 27.3 2.3 5.1 1.8% 9%

Utilities 29,137 23.7 2.9 4.8 1.7% 11%

Chile 120,131 18.3 2.6 4.9 2.7% 15%

*Sector valuations are market-cap weighted; Source: Deutsche Bank


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Figure 10: Chile 2007 valuation multiples 40 members of MSCI Chile and IPSA

4/21/08 Price Mkt Cap

Company Bbg ticker Rating USD (USDm) PE P/BV EV/EBITDA Div yield ROE

Falabella FALAB CI Hold 5.9 14,292 26.7 4.8 2.5% 18%

Forus FORUS CI NC 1.5 396 19.6 2.8 2.5% 14%

Parque Arauco PARAUCO CI NC 1.3 798 63.4 1.8 2.0% 3%

Salfacorp SALFACOR CI NC 2.2 551 11.6 1.4 1.3% 12%

Socovesa SOCOVESA CI NC 0.4 561 16.1 1.3 3.3% 8%

Consumer Discretionary 16,599 27.5 4.4 18.6 2.5% 17%

Embotelladora Andina ANDINAB CI Buy 21.9 2,627 14.7 4.3 6.4% 29%

Cencosud CENCOSUD CI Hold 4.2 8,402 18.2 2.2 1.1% 12%

Cervecerias Unidas CCU CI Buy 7.6 2,442 14.1 2.8 3.5% 20%

Concha y Toro CONCHA CI NC 2.0 1,435 19.2 2.9 1.0% 15%

Distribucion y Servicio DYS CI Sell 0.4 2,724 28.1 2.2 1.1% 8%

Empresas Iansa IANSA CI NC 0.1 161 14.9 0.4 6.6% 3%

LA Polar LAPOLAR CI Hold 6.1 1,352 18.2 4.4 1.4% 24%

Multiexport Foods MULTIFOO CI NC 0.4 443 28.4 2.2 0.0% 8%

Ripley RIPLEY CI Hold 1.0 1,868 13.1 1.6 2.2% 12%

Consumer Staples 21,454 18.4 2.7 11.7 2.2% 15%

Banco de Chile CHILE CI Hold 0.1 6,208 11.7 2.7 nm 4.8% 23%

Banco de Creditos e BCI CI NC 33.6 3,330 11.2 2.2 nm 3.8% 19%

Banco Santander Chile BSAN CI Buy 0.1 9,609 14.2 3.0 nm 4.2% 21%

Corpbanca CORPBANC CI NC 0.0 1,519 13.6 1.4 nm 1.4% 11%

Financials 20,666 12.9 2.7 nm 4.1% 21%

Banmedica BANMED CI NC 1.2 989 15.5 4.4 6.0% 28%

Health Care 989 15.5 4.4 4.0 6.0% 28%

Almendral ALMEN CI NC 0.1 1,572 11.9 1.5 7.2% 13%

Antarchile ANTAR CI NC 22.8 10,815 16.3 2.0 4.0% 12%

Copec COPEC CI Hold 16.9 22,019 20.0 2.7 2.0% 13%

LAN Airlines LAN CI Buy 14.0 4,780 15.2 4.3 4.4% 28%

Madeco MADECO CI NC 0.1 660 15.4 1.1 0.2% 7%

Sigdo Koppers SK CI NC 0.9 755 12.3 1.3 11.0% 10%

Vapores VAPORES CI NC 1.9 1,421 12.7 1.7 0.5% 1

Industrials 42,021 17.8 2.6 9.2 3.1% 15%

Sonda SONDA CI NC 1.6 1,275 25.2 2.4 1.1% 10%

Information Technology 1,275 25.2 2.4 5.9 1.1% 10%

CAP CAP CI NC 35.5 5,411 23.9 6.3 1.8% 27%

Empresas CMPC CMPC CI Hold 38.3 7,895 15.0 1.3 1.6% 9%

Masisa MASISA CI NC 0.2 1,379 39.2 1.1 0.9% 3%

Soc. Quimica y Minera SQM/B CI NC 30.4 8,541 50.1 7.4 1.2% 15%

Materials 23,225 31.4 4.7 13.7 1.5% 15%

Cia Telecom de Chile CTCA CI Hold 2.1 2,068 86.8 1.0 7.5% 1%

Entel ENTEL CI Buy 17.5 4,147 14.4 3.0 4.4% 21%

Telecom 6,214 38.5 2.4 5.4 5.4% 14%

AES Gener GENER CI NC 0.5 3,025 34.3 1.4 1.7% 4%

Colbun COLBUN CI Sell 0.2 2,686 nm 1.0 nm 0.0% nm

Cia General de Eletricidad CGE CI NC 7.7 2,712 13.1 1.9 5.6% 14%

Edelnor EDELNOR CI NC 1.6 746 12.7 1.9 0.0% 15%

Endesa ENDESA CI Hold 1.6 13,623 29.0 4.1 1.8% 14%

Enersis ENERSIS CI Buy 0.4 12,828 26.5 2.4 1.9% 9%

Inv. Aguas Metropolitanas IAM CI NC 1.3 1,286 23.9 1.2 4.0% 5%

Utilities 36,907 26.7 2.8 8.0 2.0% 11%

CHILE 169,350 22.8 3.1 10.8 2.7% 15%*Sector valuations are market-cap weighted; Source: Deutsche Bank, company data


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Investment themes

We highlight two top-down sector investment themes and four related stocks:

Food inflation

Food inflation is a current global phenomenon. In our report entitled Soft grains can earn

hard cash, published on March 11, we analyzed the four main drivers of soft grains demand:1) population growth, 2) higher GDP per capita, 3) ethanol consumption and 4) global

warming. Our conclusion was food inflation is mainly a structural investment theme on staple

goods. There are two vehicles in the Chilean equity market to gain exposure to food inflation:

Soquimich: the company produces specialty fertilizers (50% of companys sales and

50% share of the global potassium nitrate market in 2007) besides iodine, lithium and

industrial chemicals and could benefit from an increase in global arable land. Soquimich

has a sustainable competitive advantage with its exclusive access to two superior natural

endowment: 1) caliche and 2) salar brines located in the Atacama desert; and

Multiexport Foods: the firm operates fish farms and it is the third largest Chilean

salmon exporter. Multiexport Foods is short grains but could benefit from an eventual

increase in protein prices driven by cost inflation. The key is the competitive advantage

of fish versus poultry, pork and beef. The transformation ratio (number of kilos of grains

equivalent to produce one kilo of protein) is only 1.2 for fish versus 2.0 for poultry, 4.0 for

pork and 7.0 for beef.

Figure 11: Potassium nitrate main end markets and

demand growth

Figure 12: Baltic capesize freight index (rebased:

2002=100)

Vegetables

40%Industrial

crops20%

Others

15%

Fruits

25%

4.8% 2002-07 CAGR

0

500

1,000

1,500

2,000

2002 2003 2004 2005 2006 2007 2008

Source: Deutsche Bank and Soquimich Source: Deutsche Bank

Commodity boom

China has grown at an impressive pace in the 21st century, supported by secular trends. The

gradual improvement in income per capita levels continues to drive individuals from the

countryside to the main cities. Two vehicles to gain exposure to the Chinese urbanization

theme through Chilean stocks are:

CAP: the company is an integrated long and flat steel producer. The iron ore division

accounted for ~40% of the 2007 consolidated EBITDA while the steel division accounted

for ~60%. CAP intends to basically double its iron ore output from 8.2m mtons in 2007

to 15.0m mtons in 2010 and its crude steel capacity from 1.5m mtons in 2007 to 2.5-

3.0m mtons in 2012; and

Vapores: the firm is the largest shipping company in Latin America, operating more than

100 vessels. Vapores main service is container transport for which demand has grown

at an average 10% per year between 2002 and 2006. The company has benefited from

the increase in freight rates driven by Chinese demand despite its exposure to higher oil

prices.

We highlight two top-down

investment themes

Food inflation is a current

global phenomenon

China has grown at an

impressive pace


10/48



Correlations

We calculated 2-year correlations for Chilean equities versus U.S. and regional stocks, the

foreign exchange rate, country risk and copper prices using weekly data. The analysis is

useful to have a better understanding of the potential macro drivers of Chilean stocks, even

though correlations do not necessarily imply causality.

MSCI Chile exhibits strong correlations (higher than +0.5 or lower than -0.5) with the IPSA

(+0.93) - not a surprise despite the difference in index compositions and currency returns

with MSCI Latin America (+0.79) and with the U.S. S&P500 (+0.73) prices. Furthermore, the

international equity benchmark also has a strong positive relationship with the foreign

exchange rate (+0.55). Interestingly, country risk (-0.30) and copper prices (+0.35) exhibited

weak correlations between -0.5 and +0.5.

Meanwhile, the IPSA, similarly, exhibits strong correlations with MSCI Chile (+0.93), with

MSCI Latin America (+0.73) and with the U.S. S&P500 (+0.69) prices. However, the local

equity benchmark does not have a strong relationship with the foreign exchange rate (+0.26).

Lastly, the correlations between the local equity benchmark with country risk and copper

prices are weak and fall in the -0.5 to +0.5 range.

Figure 13: Correlations between Chilean equities and selected assets

04/21/08 MSCI Chile IPSA MSCI LA S&P500 CLP 5y CDS Copper

MSCI Chile 1.00 0.93 0.79 0.73 0.55 -0.30 0.35

IPSA 0.93 1.00 0.73 0.69 0.26 -0.37 0.26

MSCI LA 0.79 0.79 1.00 0.80 0.53 -0.34 0.38

S&P500 0.73 0.69 0.80 1.00 0.44 -0.34 0.20

CLP 0.55 0.26 0.53 0.44 1.00 -0.02 0.40

5y CDS -0.30 -0.37 -0.34 -0.34 -0.02 1.00 -0.07

Copper 0.35 0.26 0.38 0.20 0.40 -0.07 1.00


We calculated correlations

for Chilean equities versus

selected assets

MSCI Chile exhibits strong

correlations with IPSA,

MSCI Latam, U.S. S&P500

and the peso

The IPSA, similarly, also

exhibits strong correlations

with other equity indices

but not with the currency


11/48



Macro outlook

Economic activity

We revised our 2008 GDP growth projection to a still-optimistic 4.4% from 4.8% we hadbefore. The Central Bank announced that Februarys economic activity indicator (Imacec)

increased by 5.6% YoY, or above our expectation of 5.1% YoY. Our estimate had already

been revised upward recently on the back of the stronger-than-expected industrial production

figures posted during the second month of this year. According to the press release, this

reading was positively affected by one additional working day in February 2008 versus 2007.

Even though these activity numbers surprised on the upside, they do not change our view

that this years economic outlook remains worrisome because:

1. Record high inflation will impose an additional drag on households disposable income

and consumption should decelerate further in the quarters ahead;

2. Recent real exchange rate appreciation is expected to harm some manufacturing

sectors, and the positive effect that the new pulp plants had over industrial production in

2007 is expected to fade away as we are not aware of additional investments;

3. The outlook for the global economy is deteriorating; and

4. The short-term energy situation does not look promising and the likelihood of rationing

keeps mounting.

On the last point in particular, as a result of operational problems, the Nehuenco power

station is going to remain off-line for a few more months. Additionally, current forecasts

suggest another dry year for 2008 (La Nia-related), which exacerbate the problem caused by

already low water reservoir levels. Finally, the uncertainty regarding natural gas imports from

Argentina keeps increasing, as that country is facing its own energy crisis.

Figure 14: Chilean industrial production and economic activity indicator (Imacec)

-5%

0%

5%

10%

15%

2004 2005 2006 2007 2008

(annualgrowth)

Industrial production Imacec


Andres Orlandi

+1 (212) 250-2975

We revised our 2008 GDP

growth projection to a still-

optimistic 4.4%

The economic outlook

remains worrisome

partially because the

short-term energy situation

does not look promising


12/48



Inflation

INE reported that March inflation came out at 0.8% month-on-month, or 30bp lower than

market expectations according to Bloomberg survey. As expected, inflation last month was

mainly driven by education and foodstuffs prices which advanced by 3.7% and 2.2%

sequentially. This positive surprise (lower-than-expected figures) was due to the fact that 1)

transportation cost decreased by 1.3% MoM (versus our 0.40% deflation forecast) and 2)housing prices dropped by 0.4% MoM (versus our flat estimate). This reading brought inflation

to 1.2% year-to-date and 8.5% annually, or well above the target range. Meanwhile, core

inflation met expectations at 0.8% monthly or 7.7% yearly. Additionally, non-tradable inflation

came out at 1.3% sequentially (9.7% year-on-year) while tradable inflation declined by 0.3%

month-on-month, or 40bp lower than during the same month last year.

In sum, even though these readings suggest the recent government efforts in reducing fuel

taxes, the impressive year-to-date peso appreciation and the use of the gasoline stabilization

fund, have certainly helped tame inflation, we continue to believe we are not out of the

woods. The Central Bank (CB) will need to continue to closely monitor inflation expectation in

order to prevent second-round effects. Barring another domestic supply shock, our

projections now suggest that annual inflation will most likely decline in the months ahead, butit should still be above the target range (2.0-4.0%) at the end of the year.

Figure 15: Chilean annual headline and core inflation

-2%

0%

2%

4%

6%

8%

10%

2004 2005 2006 2007 2008 2009

(

annual)

CPI CPI Forecast Core, IPCX Core, IPCX1


Monetary policy

In line with our expectations, the CB recently kept the overnight interest rate unchanged at

6.25% but removed the tightening bias. Importantly, the CB said that recent information

confirms expectations that annual inflation has already peaked and will start declining in the

months ahead. Moreover, the Board removed the tightening bias given that in March they

said that even though monetary policy will depend on the new information further

tightening could not be ruled out. This time, however, they just said that future changes in

the monetary policy rate will depend on new information. In our opinion, barring another

domestic supply shock, this statement suggests that most likely the tightening cycle is over.

We expect the Central Bank to start a prolonged pause (i.e.: a couple of quarters) as inflation

starts converging towards the target band. That is, even though the outlook for the economy

does not look promising (consumption is slowing down, energy rationing remains a real

March inflation came out at

0.8% MoM, or 30bp lower

than market expectations

We continue to believe we

are not out of the woods on

the inflation front yet

The CB recently kept the

overnight interest rate

unchanged at 6.25%

We expect the Central Bank

to start a prolonged pause


13/48



threat, recent real FX appreciation is expected to harm some manufacturing sectors and the

global economic picture keeps deteriorating), the monetary authority will not be able to ease

monetary policy in the near future, as inflation remains well above the target range and

uncertainty from international food and energy prices remains high.

On the domestic economy, the CB reiterated that economic activity during the first quarter

has been less dynamic than initially anticipated mainly on the back of a deceleration inconsumption as investment remains relatively strong. On the inflation front, the statement

stated that even though March inflation surprised on the downside, annual figures remained

elevated. Additionally, they also suggested that in line with their expectations, the latest

information shows that inflation remained limited to a few products. As last time, they also

acknowledged that core inflation (IPCX-which excludes gasoline, perishables and some

regulated prices) remains high, but has not increased further. As expected too, they noted

that the Chilean peso, in real terms, continued to appreciate and that wage inflation has been

consistent with official projections.

On the international economy, the board stated that recent information suggests the U.S.

economy is already in a recession. Additionally, they said that growth in emerging economies

has been revised downward despite the fact commodity prices have remained at high levels.

Figure 16: Chilean overnight policy interest rate

4.5%

5.0%

5.5%

6.0%

6.5%

2007 2008 2009

Policy Rate Forecast


Fiscal accounts

We forecast this years fiscal surplus in Chile will beat 2007s record figure, as copper prices

remain at very high levels and despite the gloomy growth outlook. In particular, we project

2007s fiscal surplus above 8.4% of GDP, as the governments revenues to GDP ratio climb

to 26.0%. In late 2007, the government decided to reduce the structural fiscal surplus rule to

0.5% from 1.0% of GDP, starting in 2008.

Chiles fiscal policy is prudently managed with a structural surplus rule that ties expenditure

growth to Chiles long-term revenue capacity. We believe this decision was welfare

improving, as more funds will be dedicated to social areas (such as education and health) that

create positive externalities not well accounted for in private investment decisions.

Furthermore it could lead to lower taxes to promote investment and employment. Chile is a

country that has built a strong reputation and has enough macro-buffers to allow a

sustainable fiscal expansion without jeopardizing macroeconomic stability.

The Central Bank reiterated

that growth was lower than

expected in 1Q08

while the international

scenario is not favorable

Fiscal solvency is not an

issue

Chiles fiscal policy is

prudently managed


14/48



External sector

On the back of the impressive year-to-date real exchange rate appreciation of the Chilean

peso, export sectors, local economists and, more importantly, the House of Representative,

asked the CB to consider intervening in the local currency markets and/or imposing capital

controls to foreign inflows. While the CB has never discarded the option of intervening in the

FX market, should the real exchange rate be inconsistent with macroeconomic fundamentals,the board has been very vocal in rejecting capital controls as the economic costs

(microeconomic distortions, amplification of external shocks, etc.) are far greater than the

potential benefits2. That is, although political pressures could increase further, we believe the

CB will not hurt its reputation by imposing capital controls as the board, especially the

President, strongly believes in a flexible exchange rate regime.

Indeed, right after the March monetary policy meeting, the Central Bank stated that between

April 14 and December 12 of 2008, the Central Bank will buy USD8.0bn in the currency

market to increase international reserves in order to strengthened the international liquidity

position of the Chilean economy to better face further deterioration in the international

condition. Additionally, the Board stated that within the inflation target regime with flexible

exchange rate this measure is justifiable given the significant uncertainty surrounding theevolution of the international financial markets. Moreover, this is consistent with the fact that

the real exchange rate is currently misaligned (stronger) with macroeconomic fundamentals.

Between April 14 and May 9, the monetary authority will buy around USD50m on a daily

basis by a competitive action mechanism.

2Moreover, under the FTA agreement with the U.S., they could only be in place for one year.

We believe the CB will not

hurt its reputation by

imposing capital controls

The CB will buy USD8.0bn in

the currency until the end of

the year


15/48



Figure 17: Chile economic forecasts

2006 2007F 2008F 2009F

Nominal GDP (USD bn) 145.8 166.4 195.4 217.9

Population (mn) 16.3 16.4 16.6 16.8

GDP per capita (USD) 8,959 10,120 11,768 12,989

Real GDP (YoY%) 4.0 5.1 4.4 4.7

Priv. consumption 7.1 5.9 5.1 4.8

Gov't consumption 3.6 6.0 7.5 8.2

Investment 4.0 8.8 6.4 5.4

Exports 4.2 8.6 5.0 6.1

Imports 9.4 12.8 8.0 7.3

Prices, Money and Banking

CPI (Dec YoY%) 2.6 7.8 4.9 4.1

Broad Money 17.5 22.4 21.3 20.2

Credit 18.8 16.8 17.8 17.3

Fiscal Accounts (% of GDP)

Consolidated budget balance 7.9 8.7 5.4 2.9

Govt spending 18.5 18.5 19.6 19.9

Govt revenues 26.4 27.2 25.0 22.8

External Accounts (USD bn)

Exports 58.1 68.2 70.5 71.2

Imports 35.9 45.6 48.0 52.0

Trade balance 22.2 22.7 22.5 19.3

% of GDP 15.2 13.6 11.5 8.8

Current account balance 5.3 7.5 4.6 0.6

% of GDP 3.6 4.5 2.3 0.3

FDI 5.1 8.3 8.7 7.8

FX reserves 19.4 21.5 21.2 20.7

Debt Indicators (% of GDP)

Government debt 19.1 16.7 17.7 18.4

Domestic 16.2 14.2 15.1 15.9

External 2.9 2.6 2.5 2.5

Total external debt 32.6 31.3 25.9 22.3

in USDbn 47.6 52.1 50.7 48.7

Short-term (% of total) 19.6 19.5 20.1 20.9

General

Industrial production (YoY%) 3.3 3.4 5.0 5.0

Unemployment (%) 7.8 7.1 6.4 6.5

Financial Markets (end period) Current 3M 6M 12M

Overnight rate (%) 6.25 6.50 6.50 6.25

6-month rate (%) 6.60 6.50 6.50 6.25

CLP/USD 433 440 450 470

Source: DB Global Markets Research


16/48



Equity guide

Indices

There are two main benchmarks in Chile:

1) The Selected Stocks Price index (IPSA): the local benchmark is a liquidity-weighted

index composed of the most relevant stocks traded in the Santiago Stock Exchange. The

index was created in 1977 and its portfolio is revised every quarter (March, June,

September and December). The IPSA usually has 40 companieswith market

capitalization higher than USD200 millionand their weights are calculated based on

financial turnover over the past 12 months and free float; and

2) The MSCI Chile index: the international benchmark is a free-float adjusted capitalization-

weighted index whose goal is to include 85% of the free-float adjusted market

capitalization in the country. The index was developed in December 1987 with a base

value of 100. The MSCI Chile index currently has 27 constituents and it is calculated in

both U.S. dollars and local currency.

Index performance

Chilean stocks have experience a long-lasting bull market since late 2002. Both the local IPSA

and MSCI Chile indices have been 2-baggers or more in U.S. dollars since then, as can be

seen in Figure 18. The gains have been solid but Chilean equities have also had their share of

volatilitysee Figure 19.

Figure 18: MSCI Chile and IPSA indices performance in

U.S. dollars (2002-2007)

Figure 19: MSCI Chile versus MSCI Latin America

relative performance in U.S. dollars (2002-2007)

332

308

50

150

250

350

450

2002 2003 2004 2005 2006 2007

IPSA USD MSCI Chile USD

64

128

60

80

100

120

140

2002 2003 2004 2005 2006 2007

MSCI Chile vs Latin Am erica

Source: Deutsche Bank and Bloomberg Source: Deutsche Bank and Bloomberg

The equity market has experienced a series of mini (bull market) corrections over the past five

years, and two more serious ones in 2007:

1) The first serious correction happened from June to mid-August 2007, when the U.S. sub-

prime crisis unfolded and spilled-over to Chilean equitiesthe main Chilean equity

benchmarks shed 12% in less than 45 days; and

2) The second serious correction occurred from October 2007 to mid-January 2008, after a

local regulatory body stated that local pension funds, which were heavily invested in

equities, would have one-year to comply with the statutory equity holding allocation

capsthe main Chilean equity indices lost 24% in less than 90 days.


+1 (212) 250-2873

There are two main

benchmarks in Chile

Chilean stocks have

experienced a long-lasting

bull market since late 2002

The equity market

underwent two periods of

turbulence in 2H 2007


17/48


18/48



Market size and liquidity

MSCI Chile is the third largest country constituent of MSCI Latin America with a 6% weight

USD130 billion market capitalization. The countrys weight increased during the 2002-2004

period to low double-digit levels, but it has been in a steady fall since then. Meanwhile, MSCI

Latin America has a current market capitalization of USD1.5 trillion.

The average daily trading volume of the Santiago Stock Exchange was USD190m in 2007.

The liquidity has gradually increased from less than USD15m in 2002 to the current 6-year

high supported by a higher share turnover and the bull market. Lastly, a silver lining is that

local trading represents only about 80% of total volume; therefore investors can also gain

exposure to Chilean stocks via some liquid ADR instruments.

Figure 22: MSCI Latin America breakdown by country

BRZ

66%

MEX

21%

CHL

6%

PER

3%

ARG

2%

COL

2%


Chile is the third largest equity market in terms of average daily trading volume in Latin

America. The Santiago Stock Exchange accounted for ~5.5% of the aggregate trading

volume of the six main stock exchanges in Latin America in 2007. Back in early 2005, the

Santiago Stock Exchange accounted for a 6-year high 9.0% of the regional average daily

trading volume, but its share has gradually fallen since then.

Figure 23: Santiago stock exchange average daily

trading volume (12-month moving average)

Figure 24: Latin America stock exchanges average daily

trading volume composition (12-month moving average)

0

50

100

150

200

2002 2003 2004 2005 2006 2007 2008

(US$m)

0%

25%

50%

75%

100%

2002 2003 2004 2005 2006 2007 2008

Brazi l Mex ico Ch ile Peru Co lomb ia Argen tina


MSCI Chile is the third

largest country constituent

of MSCI Latin America

The average daily trading

volume of the Santiago

Stock Exchange was

USD190m in 2007

...which also ranks Chile in

third place in Latin America


19/48



Market participants

The average daily trading volume of the Santiago Stock Exchange was USD190m in 2007.

However, the Santiago Stock Exchange doesnt provide a breakdown of traded volume by

type of investor (i.e. individuals, pension funds, etc). Nevertheless, we calculated the weight

of foreign and local investors in on-shore trading using Chilean Central Bank (CCB) and

Superintendencia de Valores y Seguros data.

We estimate that local investors traded on average close to USD150m per day (or

approximately 80% of the onshore volume) in 2007. The local investor base is relatively

concentrated; we calculate that pension funds traded on average close to USD100m per day

(52%), while individuals traded USD40m (21%) and mutual funds USD12m (6%) last year.

Meanwhile, we estimate that foreign investors traded on average USD40m per day (or 21%).

Figure 25: Chile: local trading volume breakdown by participants (2007)

Foreigners

21%

Individuals

21%

Pension funds

52%

Mutual funds

6%USD190m

Source: Deutsche Bank, Superintendencia de Valores y Seguros, Chilean Central Bank and Bloomberg

Corporate governance

Corporate governance practices are investor friendly in Chile as the country has a robust set

of laws and regulations that protect minority shareholders. Chile has a private corporate

sector dominated by a few economic groups, which are present in several industries but

operate through holding companies. Therefore, corporate governance practices are important

to safeguard the interests of these economic groups. We discuss corporate governance

practices in Chile by focusing on three related topics:

1. Share classes;

2. Tag along rights; and

3. Tender offer regulations.

We analyze the Chilean

institutional investor base

Local investors accounted

for ~80% of the local volume

Corporate governance

practices are investor

friendly in Chile


20/48



Share classes

The Ley de Sociedades Annimas 18.046 establishes two types of listed shares in Chile:

1) Common shares (acciones de pago):they are similar to their U.S. peers and have full

voting rights. Local regulations prohibit shareholders to have more than one vote per

each share; and

2) Preferred shares: they have limited or no voting rights. These shares have preference

over common shares in some aspects like 1) receiving dividends or 2) being reimbursed

in case of bankruptcy.

Tag along rights

Minority shareholders have tag along rights whenever a mandatory tender offer is triggered.

The tender offer price should be the maximum of 1) the price agreed with the controlling

shareholder or 2) the highest price the acquirer paid to buy stock in the market during the

previous 90 and following 120 days of the offer. Meanwhile, the size of the tender offer is

discussed in the next section.

Tender offer (Oferta Publicas de Adquisicion OPA)

The Ley de Mercado de Valores (number 18,045) establishes two types of tender offers in

Chile:

1. Voluntary:these tender offers can be made at any time for any amount of shares. The

tender price and distribution method are determined by the acquirer; and

2. Mandatory:these tender offers are triggered by three conditions:

An investor purchases 50% plus one share of the voting capital over the past twelve

months and acquires control of the company. The investor has to acquire these

shares through a mandatory tender offer;

An investors stake surpasses two-thirds of the voting capital. The tender offer size

has to be for the entire free float;

An investor acquires control of a holding company whose publicly traded subsidiaryrepresents 75% or more of the holding companys consolidated assets. The tender

offer size has to be 50% plus one share minus its current stake.

The standard distribution method for mandatory tender offers is pro-rata. For instance, if the

amount of shares tendered exceeds the offer size, each shareholder will tender an equal

proportion of their original amount.

There are two types of listed

shares in Chile

Minority shareholders have

tag along rights via

mandatory tender offers

There are two types of

tender offers in Chile

The standard distribution

method for mandatory

tender offers is pro-rata


21/48



Index sector weights and market cap

We analyze the sector composition of the MSCI Chile and IPSA indices:

MSCI Chile: the benchmark has seven sectors: 1) Utilities (with a 25% weight), 2)

Materials (23%), 3) Industrials (21%), 4) Consumer staples (13%), 5) Financials (8%), 6)

Telecom (6%) and 7) Consumer discretionary (4%). The index is very diversified as thebiggest sectors account for only 25%; and

IPSA: the benchmark also has seven sectors and similar weights: 1) Industrials (with a

27% weight), 2) Utilities (23%), 3) Materials (17%), 4) Consumer staples (13%), 5)

Financials (10%), 6) Telecom (5%) and 7) Consumer discretionary (5%).

Figure 26: MSCI Chile sector breakdown Figure 27: IPSA sector breakdown

CD

4%

IN

21%

UT

25%

TC

6%

MT

23%

CS

13%

FN

8%

UT

23%

IN

27%

CS

13%

CD

5%

FN

10%

MT

17%

TC

5%


The two biggest sectors in Chile are Industrials and Utilities. These industries account for

close to 50% of the MSCI Chile and IPSA indices. The Industrials sector has USD42 billion in

market capitalization while the Utilities sector has USD37 billion. Financials, Materials and

Consumer staples are next in line with USD20-24 billion, followed by Consumer discretionary

with USD17 billion and Telecom with USD6 billion. Lastly, Information Technology and Health

care round up the list, but they are in a different league with less than USD2 billion.

Figure 28: Chile sector market capitalization

42

37

2321 21

17

6

1 1

0

10

20

30

40

50

Industrials Utilities M aterials Cons.

Staples

Financials Cons.

Disc.

Telecom Info Tech Health

Care

(US$bn

)

Source: Deutsche Bank and Bloomberg

We analyze the sector

composition of the main two

indices

The two biggest sectors in

Chile are Industrials and

Utilities


22/48



Stock weights

Copec, Endesa and Enersis are the main blue chips in Chile. These companies are the largest

stocks in both MSCI Chile and IPSA with combined 38% and 32% weights, respectively.

Furthermore, CMPC, CAP and Cencosud are also important stocks with relevant weights.

The main constituents of MSCI Chile and IPSA are:

MSCI Chile: the index has 27 companies. Its top five members are: 1) Copec (with a

16% weight), 2) Endesa (11%), 3) Enersis (11%), 4) Soquimich (8%) and 5) CMPC (7%);

and

IPSA: the index has 40 companies. Its top five members are: 1) Copec (with a 16%

weight), 2) Endesa (9%), 3) Enersis (8%), 4) CMPC (6%) and 5) CAP (6%).

Figure 29: MSCI Chile: main individual constituents Figure 30: IPSA: main individual constituents

ENDESA

11%

ENERSIS

11%

CAP

6%SQM/B

8%

COPEC

16%

OTHERS

5%

NEXT 10

29%

CENCOSUD

7%

CMPC

7%

ENDESA, 9%

CAP, 6%

CENCOSUD,

5%

COPEC, 16%

ENERSIS,

8%

CMPC, 6%

ANTAR, 5%

NEXT 10,

35%

OTHERS,

18%


Stock liquidity

Chilean equities have recorded an average daily turnover of approximately USD250m over the

past 12 months. Liquidity is of less consideration for foreign institutional investors interested

in Chilean stocks because of the decent absolute turnover of the local equity market (close to

USD200m). Market liquidity is much dispersed; the top 3 stocks accounted for only around

30% of the overall volume, while the top 10 stocks accounted for about 65%.

There are eight stocks with an overall average daily traded volume bigger than USD10m over

the past year: 1) Enersis, 2) Lan Airlines, 3) Endesa, 4) Soquimich, 5) Santander Chile, 6)

Cencosud, 7) Copec and 8) DYS. Moreover, there are six other relevant stocks (CAP,

Falabella, La Polar, Entel, CTC and Colbun) that traded more than USD5m per day during the

past 12 months. Finally, there are 12 Chilean companies with a sponsored level three ADR

program, through which roughly 20% (USD50m) of the overall volume is traded offshore,

while the other 80% (US$200m) is traded onshore via local stocks.

There are five ADRs with an average daily traded volume bigger than USD5m over the past

year: 1) Enersis, 2) Lan Airlines, 3) Santander Chile, 4) Soquimich and 5) Endesa. Liquidity

then dries up quickly with the average daily trading volume for the other ADRs being lower

than the USD2m level. The next figure depicts average daily trading volume for the top 30

companies present in both the MSCI Chile and IPSA indices broken down in onshore and

offshore instruments.

Copec, Endesa and Enersis

are the main blue chips

Chilean equities have

recorded an ADTV of

US$250m over the past year

ENI, LAN, EOC, SQM, SAN,

CENCOSUD, COPEC and

DYS have an ADTV bigger

than USD10m

There are five ADRs with an

average daily traded volume

bigger than USD5m


23/48



Figure 31: Chile average daily trading volume for top 30 MSCI Chile and IPSA constituents

04/21/08 Average Daily Trading Volume (USDm)

Rank Short name Company Sector 1W 1M 3M 6M 1Y ADR Local

1 ENERSIS Enersis Utilities 38.7 29.5 25.9 31.0 28.7 9.9 18.8

2 LAN LAN Airlines Industrials 13.4 13.0 15.2 21.7 25.2 9.4 15.8

3 ENDESA Endesa Utilities 19.4 21.2 19.9 21.6 19.9 6.6 13.34 SQM/B Sociedad Quimica y Minera Materials 40.0 36.1 23.7 20.2 17.5 10.0 7.5

5 BSAN Banco Santander Chile Financials 13.4 13.8 13.0 14.8 14.6 9.8 4.9

6 CENCOSUD Cencosud Consumer Staples 17.6 11.6 11.6 17.7 14.4 0.0 14.4

7 COPEC Copec Industrials 10.0 11.1 10.3 15.2 12.8 0.0 12.8

8 DYS Distribucion y Servicio Consumer Staples 7.0 5.0 9.2 10.3 11.7 1.5 10.2

9 CAP CAP Materials 23.8 9.4 8.6 10.6 8.5 0.0 8.5

10 FALAB Falabella Consumer Discretionary 7.5 5.4 5.5 7.7 7.3 0.0 7.3

11 LAPOLAR LA Polar Consumer Staples 9.5 7.0 7.9 8.2 7.3 0.0 7.3

12 ENTEL Entel Telecom 3.4 4.3 4.5 7.6 7.0 0.0 7.0

13 CTCA Cia Telecom de Chile Telecom 4.1 3.1 4.2 5.5 6.0 1.9 4.1

14 COLBUN Colbun Utilities 2.4 2.8 3.0 4.8 5.3 0.0 5.3

15 GENER AES Gener Utilities 8.7 4.2 2.7 7.0 5.0 0.0 5.0

16 ANDINAB Embotel ladora Andina Consumer Staples 10.3 3.9 3.0 3.3 4.8 0.7 4.2

17 RIPLEY Ripley Consumer Staples 2.5 1.8 2.6 5.2 4.7 0.0 4.7

18 VAPORES Vapores Industrials 2.1 1.4 2.7 3.8 4.3 0.0 4.3

19 CMPC Empresas CMPC Materials 2.3 2.7 3.3 5.8 4.2 0.0 4.2

20 CHILE Banco de Chile Financials 2.2 2.0 4.3 4.0 3.9 0.8 3.1

21 CCU Cia de Cervecerias Unidas Consumer Staples 3.0 2.9 3.6 3.9 3.4 1.3 2.1

22 SOCOVESA Socovesa Consumer Discretionary 2.1 0.7 0.6 1.4 3.3 0.0 3.3

23 MASISA Masisa Materials 1.1 18.3 6.9 4.4 3.3 0.0 3.3

24 CORPBANC Corpbanca Financials 0.6 1.3 2.4 3.4 3.1 0.3 2.8

25 SONDA Sonda Information Technology 8.5 3.5 2.9 2.3 3.0 0.0 3.0

26 IAM Inv. Aguas Metropolitanas Utilities 2.5 1.5 2.5 2.2 2.9 0.0 2.927 MADECO Madeco Industrials 1.3 1.5 1.3 3.4 2.7 0.0 2.7

28 MULTIFOO Multiexport Foods Consumer Staples 0.1 0.1 0.2 0.4 1.5 0.0 1.5

29 CONCHA Concha y Toro Consumer Staples 1.2 1.9 1.4 1.5 1.5 0.4 1.1

30 BCI Banco de Creditos e Inversiones Financials 0.5 2.5 1.2 1.4 1.5 0.0 1.5

Top 3 / Total* 27% 27% 29% 29% 30% 49% 24%

Top 10 / Total* 72% 67% 68% 66% 65% 90% 58%

CHILE 265.7 231.8 211.6 258.9 248.9 52.6 196.3

*Total includes 40 constituents of the MSCI Chile and IPSA; Source: Deutsche Bank and Bloomberg

Stock performance

We depict the performance of the constituents of the MSCI Chile and IPSA indices sorted by

sector. Year-to-date, the best performing stock has been Soquimich (+70%) while the worst

performing stocks have been DYS and Iansa (-20%). Turning to the blue chips, year-to-date,

Copec is down 5%, while Endesa and Enersis are up 31% and 22%, respectively.

At the sector level, Materials is ahead of the pack (+36%), followed closely by Information

Technology (+27%), Consumer discretionary (+21%), Utilities (+20%) and Telecoms (+13%)

in 2008. Meanwhile, Financials (+5%), Consumer staples (+1%) have recorded only single-

digit gains year-to-date, while Industrials (-2%) and Health care (-10%) are the only sectors

with negative returns.

We depict the recent

performance of the main

Chilean stocks

At the sector level Materials

is ahead of the pack (+36%)

in 2008


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Figure 32: Chile price performance for selected stocks

04/21/08 Price Mkt Cap Price change in USD %

Company Bloomberg ticker Rating USD (USDm) 1 week 1 month 3 months 6 months YTD

Falabella FALAB CI Hold 5.9 14,292 4% 10% 24% -1% 23%

Forus FORUS CI NC 1.5 396 4% -5% 25% -17% -2%

Parque Arauco PARAUCO CI NC 1.3 798 1% 13% 42% 7% 12%

Salfacorp SALFACOR CI NC 2.2 551 9% 3% 29% -16% 6%

Socovesa SOCOVESA CI Buy 0.4 561 8% 9% 36% NA 6%

Consumer Discretionary 16,599 4% 9% 25% -2% 21%

Embotelladora Andina ANDINAB CI Buy 21.9 2,627 -2% 5% 24% 3% 23%

Cencosud CENCOSUD CI Hold 4.2 8,402 4% -2% 11% -4% 5%

Cia de Cervecerias Unidas CCU CI Buy 7.6 2,442 1% 7% 22% -7% 10%

Concha y Toro CONCHA CI NC 2.0 1,435 4% 6% 12% -24% -5%

Distribucion y Servicio DYS CI Sell 0.4 2,724 6% -4% -14% -32% -20%

Empresas Iansa IANSA CI NC 0.1 161 -2% -15% -7% -36% -20%

LA Polar LAPOLAR CI Hold 6.1 1,352 5% 3% 17% -14% -6%

Multiexport Foods MULTIFOO CI NC 0.4 443 -2% 4% -4% -35% -17%

Ripley RIPLEY CI Hold 1.0 1,868 11% 6% 8% -23% -13%

Consumer Staples 21,454 4% 1% 10% -12% 1%Banco de Chile CHILE CI Hold 0.1 6,208 -1% -11% 9% -2% 7%

Banco de Creditos e Inversiones BCI CI NC 33.6 3,330 -1% -5% 16% 0% 12%

Banco Santander Chile BSAN CI Buy 0.1 9,609 1% 7% 15% -2% 4%

Corpbanca CORPBANC CI NC 0.0 1,519 -1% -2% 7% -12% -3%

Financials 20,666 0% -1% 13% -2% 5%

Banmedica BANMED CI NC 1.2 989 1% 2% 5% -9% -10%

Health Care 989 1% 2% 5% -9% -10%

Almendral ALMEN CI NC 0.1 1,572 0% 2% 29% -3% 9%

Antarchile ANTAR CI NC 22.8 10,815 4% -3% 15% 2% 3%

Copec COPEC CI Hold 16.9 22,019 -2% -6% 4% -9% -5%

LAN Airlines LAN CI Buy 14.0 4,780 -1% 2% 22% -13% 0%

Madeco MADECO CI NC 0.1 660 5% 6% 30% -4% 4%

Sigdo Koppers SK CI NC 0.9 755 5% 4% 15% 0% 11%

Vapores VAPORES CI NC 1.9 1,421 2% 1% 13% -33% -12

Industrials 42,021 0% -3% 11% -7% -2%

Sonda SONDA CI NC 1.6 1,275 3% 15% 55% 10% 27%

Information Technology 1,275 3% 15% 55% 10% 27%

CAP CAP CI NC 35.5 5,411 4% 7% 60% 12% 32%

Empresas CMPC CMPC CI Hold 38.3 7,895 1% -4% 13% -4% 5%

Masisa MASISA CI NC 0.2 1,379 0% 9% 29% -2% 21%

Sociedad Quimica y Minera SQM/B CI NC 30.4 8,541 7% 39% 94% 59% 70%

Materials 23,225 4% 15% 55% 23% 36%

Cia Telecom de Chile CTCA CI Hold 2.1 2,068 5% 2% 30% -10% 14%

Entel ENTEL CI Buy 17.5 4,147 -1% 1% 26% -1% 12%

Telecom 6,214 1% 2% 28% -4% 13%AES Gener GENER CI NC 0.5 3,025 5% 11% 33% -6% 12%

Colbun COLBUN CI Sell 0.2 2,686 1% 4% 4% -21% -12%

Cia General de Eletricidad CGE CI NC 7.7 2,712 1% 7% 8% -7% -1%

Edelnor EDELNOR CI NC 1.6 746 3% 8% 50% -9% 13%

Endesa ENDESA CI Hold 1.6 13,623 3% 9% 50% 7% 31%

Enersis ENERSIS CI Buy 0.4 12,828 4% 16% 49% 0% 22%

Inv. Aguas Metropolitanas IAM CI NC 1.3 1,286 0% 1% 21% 5% 7%

Utilities 36,907 3% 11% 41% 0% 20%

CHILE 169,350 2% 5% 26% -1% 12%Source: Deutsche Bank


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Appendix Company descriptions4

AES Gener generates and distributes electricity to customers in Chile, elsewhere in

Latin America, and the United States. The company operates thermoelectric and

hydroelectric plants. Through subsidiaries, Gener extracts coal, natural gas, and

petroleum. It also manages ports, offers ship agency and chartering services, and

transports cargo.

Almendral is a holding company engaged in investment in telecommunications, real

estate and energy sectors. The company is a primary holder of Entel Chile, a major

telecommunications service provider in Chile. It also invests in communications, real

estate and the sanitation services sector; its primary holdings are in Almendral

Telecomunicaciones, Inmobiliaria El Almendral and Compaia Hispano Americana de

Servicios.

Antarchile invests in financial instruments and operating companies, particularly in the

forestry and energy industries. Through its subsidiaries, Antarchile also distributes fuel

and operates fishing and shipping businesses. The company's primary subsidiaries are

Copec, Pesquera Iquique-Guanaye, Forestal Cholguan, Astilleros Arica and Celulosa

Arauco y Constitucion. Banco de Chile was formed through the merger of Old Banco de Chile with Banco de A.

Edwards in January 2002. With a loan market share of 18% the bank ranks as the second

largest in the country, but as the largest private bank of local capital. The bank has a retail

network of 247 branches and 1,057 ATMs nationwide.

Banco de Credito e Inversiones attracts deposits and offers retail and commercial

banking services. The bank offers credit cards, securities brokerage services, health and

life insurance, and lease financing services. It has 243 offices in Chile and also has

presence in Lima, Sao Paulo, Mexico City, Miami and Hong Kong.

Banco Santander Chile is a bank that provides commercial and retail banking services.

Its product mix includes local and foreign-currency-denominated loans, foreign currency

forward contracts and credit lines. In addition, the bank also offers financial leasing,financial advisory services, mutual fund management, securities brokerage, insurance

brokerage and investment management.

Banmedica is a holding company principally active in the provision of health and life

insurance services. It offers a range of health plans designed to cover specific needs

through a chain of 90 branches; a national contact center, and more than 8,000

agreements with various health service providers. In addition, the company holds an

interest in a portfolio of clinics and other health service providers.

CAP is a holding company that through its subsidiaries mines, processes, and distributes

iron and manganese ores for commercial and industrial uses. It also manufactures liquid,

laminated, and finished steel products. The company holds an 11% direct interest in

both Intasa and Cintac, a 60% direct interest in Tecnocap and a 53% interest in

Novacero.

Cencosud is one of the leading multi-format retailers in Chile and Argentina. In Chile,

Cencosud is the second largest food retailer through its Jumbo hypermarkets and Santa

Isabel supermarkets. It recently acquired Almacenes Paris, a department store and

consumer finance business, and the third largest department store operator in Chile.

Cencosud also operates Chile's second largest and Argentina's largest home

improvement chain under the brand name Easy.

4Source is Bloomberg and Deutsche Bank.


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CMPC is the second largest forestry company in Chile. It is an integrated paper producerwhose main products are market pulp, folding boxboard, tissue products, newsprint,

multiwalled paper sacks, corrugated cardboard boxes and P&W papers. CMPC also

holds investments in Argentina, Uruguay, Peru and Mexico.

Colbun participates in the electricity and natural gas sectors. Colbun produces,transports, distributes and supplies electric energy and natural gas with an installedcapacity of 2,364 megawatts. In addition, the company provides consulting services in

the engineering field, both in the domestic Chilean market and abroad.

Compaia de Cervecerias Unidas brews beer and produces and distributes non-alcoholic beverages in Chile and Argentina. CCU is the leading brewer in Chile and the

second largest in Argentina. On the soft drinks side, CCU is the second largest bottler in

Chile including its proprietary brands and brands under license from Pepsi. CCU has also

diversified into spirits through a JV with the leading Pisco producer in Chile.

Compaia General de Electricidad generates and distributes electricity and gas toresidential, commercial, and industrial customers in southern Chile. The company also

maintains electrical networks, and rents and markets electrical equipment. Its gas sector

spans through eight companies in Chile and Argentina, including Gasco, Metrogas, and

Gasmar. Other investments include IGSA (real estate) and Tusan (transformers).

Concha y Toro owns and operates vineyards, vinification plants, bottling plants, and awine distribution network. Via Concha y Toro produces and exports worldwide its

premium, varietal, and sparkling wines. The companys principal trademarks include

Concha y Toro, Don Melchor, Terrunyo, Marques de Casa Concha, Casillero del Diablo,

Trio, Sunrise and Frontera. It also grows and markets fruit, and bottles mineral water.

Copec is a diversified Chilean holding company whose main business areas are in theforestry and energy sectors. In the forestry sector, Arauco is one of the largest pulp and

forest products producers globally. In the energy sector Copec is the leader in the

Chilean fuel distribution business. Copec holds a minority stake in Metrogas, the natural

gas distributor of Santiago, and also participates in other sectors such as commercial

fishery, mining and energy generation.

Corpbanca offers banking services to both businesses and individuals in Chile, includingloans and leasing services to businesses, and loans, credit card services and mortgages

to individuals. The bank also provides financial advisory services, mutual fund

management, insurance brokerage and securities brokerage services through its

subsidiaries.

CTC is Chile's incumbent wireline telecommunications operator, privatized in 1988. Thecompany is controlled by Telefonica de Espana, and has a little over 2.0m fixed lines and

over 0.5 million DSL subscribers. In 2004, CTC sold its cellular business to Telefonica

Moviles, becoming a pure fixed line operator. More recently, CTC has been focusing on

segmentation and new businesses, such as pay TV (DTH and IP-TV) to offer triple play

services (voice, broadband internet and pay TV).

Distribucion y Servicio is Chile's leading food retailer. The company operateshypermarkets under the Lider banner, mini-hypermarkets under the Lider Vecino brand

and supermarkets under the Lider Express banner. DYS has also ventured into the

consumer finance business through its proprietary Presto credit card.

Edelnor is a company that is principally engaged in the generation, transportation,distribution and supply of electricity. It is based in Chile, supplying electric energy to the

1st and 2nd regions. Edelnor is also engaged in the purchase, transportation and sale of all

types of fuel: liquid, solid and gaseous. Edelnor offers advising services in engineering

and management, as well as maintenance and repair of electronic systems.


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Embotelladora Andina is the second largest Coca-Cola bottler in Latin America with 34

million potential consumers. Andina's franchised territories include Chile's capital

(Santiago) and its metropolitan area, Brazil's second largest city (Rio de Janeiro) and a

large portion of Argentina's central region including the cities of Mendoza, Cordoba and

Rosario. Andina's controlling shareholders hold close to 50% of the company while The

Coca-Cola Company holds an 11% stake.

Empresas Iansa is engaged in the production of sugar. The company is involved in all

stages of production from selection of the individual sugar beet, to extraction of the

sugar, its packaging and its distribution to all regions of Chile. It operates five plants,

located in Curico, Linares, Chillan Los Angeles and Rapaco, as well as a packaging plant

in Santiago.

Endesa and its subsidiaries generate and supply electricity. The company owns and

operates generating plants, and offers civil, mechanical, and electrical engineering,

architectural, environmental, and project management services. Endesa is Chile's largest

generation company, and through its subsidiaries, is also present in the generation

business in Argentina, Peru and Colombia, operating 46 generation plants with an

aggregate installed capacity of 11,727MW.

Enersis is a holding company with investments in generation, distribution and

transmission of electricity throughout Latin America. It is the country's largest generation

and distribution company, through its subsidiaries Endesa Chile and Chilectra. Enersis

subsidiaries are also present in Argentina, Brazil, Colombia and Peru.

Entel is Chile's second-largest wireless telecommunications provider by number of

subscribers and the largest by revenues. The company also provides long distance, local,

data and Internet services in Chile through its limited wired network and its NGN and

Wimax networks. It also has a presence in Peru, mainly on data and long distance

services.

Falabella is the largest department store operator in Chile and one of the largest in Latin

America. Falabella operates department stores throughout Chile, Argentina and Peru as

well as home improvement stores in Chile, Peru and Colombia. The company is also thelargest independent credit card operator in Chile. It has recently branched out into the

food retail segment in Peru and Chile.

Forus is engaged in the manufacturing, commercialization, import, export and

distribution of footwear, clothing and accessories via retail stores around the country.

The company operates more than 140 store locations through three subsidiaries:

Uruforus, operating in Uruguay; Argforus, operating in Argentina; and Topsafety.

Inversiones Aguas Metropolitanas is a holding company with a controlling interest in

Aguas Andinas and also engaged in the offering of all classes of audit, consulting and

other services related to sharing of technology and know-how. The company also

provides technical assistance, business and project administration related to

management and operations in sanitation.

La Polar is a Chilean lower and middle-income segment department store retailer. The

company has 31 stores and 110,000 m2 of selling space. La Polar is the fourth largest

department store with approximately 13% market share (sales). La Polar has a strong

financial division which offers credit to its clients and accounts for 25% of sales.

LAN Airlines is one of the largest airlines in Latin America and also the principal freighter

operator in the region. It provides domestic and international passenger and cargo air

transportation services, including 36 domestic routes and 63 overseas destinations,

integrating points throughout America, Europe and the South Pacific. LAN's

headquarters are located in Santiago, Chile.


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Madeco manufactures non-ferrous products from copper, copper alloys, and aluminum.

The company produces flexible packaging for the food industry, copper cables for

telecommunications operators, brass bars and coin blanks for coin manufacturing and

construction, and aluminum profiles. Madeco is based in Chile and also operates in

Argentina, Brazil, and Peru.

Masisa is a vertically integrated wood boards company that grows and harvests timberin plantations and sells its manufactured products primarily to the construction and

furniture industries. Its main products include wood boards for furniture, solid wood

products, sawn lumber and saw and pulp logs.

Multiexport Foods operates a salmon fish farm. The company exports to Japan, the

United States, Central Europe and Russia, as well as China, Korea, Southeast Asia and

Latin America. Multiexport's products include Atlantic salmon, salmon trout, smoked

salmon, mussels and cold- and hot-smoked fish products.

Parque Arauco develops and operates commercial centers in Chile that provide

shopping, entertainment, and eating facilities. The main malls controlled or owned by the

company are: Mall Parque Arauco, Parque Arauco Kennedy and Mall Arauco Maipu.

Parque Arauco also holds interests in shopping centers in Argentina and Peru, and other

commercial real estate investments.

Ripley is a department store with operations in Chile and Peru. Ripley provides credit to

customers and has over 5.8 million credit card holders. In addition, the company has a

bank in Chile. Approximately 75% of sales are generated in Chile and the rest in Peru. In

Chile it is the third-largest department store chain and in Peru it is the second largest.

Salfacorp is a real estate, construction and engineering company. Salfacorp operates

three business areas: 1) Engineering and Construction, engaged in the design and

building of various structures from small houses to thermal power stations; 2) Real

Estate, through the company's subsidiaries Geosal and Inmobiliaria Austral; and 3)

Management, which is engaged in management services.

Sigdo Koppers specializes in engineering, construction and real estate business. It also

provides internal and external supplies, including transportation and installation on site.

The company's investment activities include all types of assets and businesses,

industrial machinery, tourism and transport, and mining exploration.

Sociedad Quimica y Minera is a Chilean-based diversified, vertically integrated

specialty chemical and specialty fertilizer producer. SQM has three main business areas:

1) Specialty Fertilizers, 2) Iodine, and 3) Lithium. SQM is one of the most relevant and

lowest cash-cost producers in its three main business areas. SQM's competitive

advantages stem from access to unique caliche ore reserves, which are the most

significant commercially exploitable known source of iodine and natural nitrates. Socovesa is focused in the prospecting, development, sales and management of

residential property (buildings and houses). Additionally, the company provides interior

decoration, landscape design services and financing support. Socovesa serves a highlydiversified geographical area and socioeconomic population strata.

Sonda provides IT services and systems integrations, offering consultancy and software

development, as well as industry and business process applications and IT platform

distribution services. The company has more than 200 customer service centers

worldwide and main operations in Argentina, Brazil, Chile, Colombia, Costa Rica,

Ecuador, Mexico, Peru and Uruguay.

Vapores provides both shipping and port services. The company, using both owned and

chartered vessels, offers general and bulk cargo transport, fresh and frozen product

transport, and automobile shipping services to both coasts of South America, and ports

in North America, Europe, Asia, Africa, and Australia.


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Macro background

Economic activity

Fiscal restraint, independent monetary policy, a sound and deep financial system, and anoutward-looking trade policy have provided Chile with enviably stable rates of economic

growth and low inflation. Between 1987 and 2007, Chiles rate of economic growth averaged

5.9% a year, per capita income more than tripled in U.S. dollar terms, and the poverty rate

was cut in half. That said, Chile was not immune to macroeconomic crisis during this period.

For instance, as a result of the deterioration in the international environment in the late 1990s

and a rigid exchange rate regime, the 5% current account deficit was seen as difficult to be

financed, should capital inflows decline. Thus, the local currency suffered strong depreciation

pressures, spending sharply declined and output dropped by almost 1% in 1999. Before this

period, in 1982, a rigid exchange rate regime, fragile financial sector and disturbance in

international markets, had led to a decline in annual output by around 13%.

Given a combination of inflation below 3.0% and the fact that most of the crises in Chile havebeen associated with exchange rate rigidity, Chilean authorities decided to implement an

inflation targeting framework with a flexible exchange rate in 1999. Together with a

countercyclical based-rule fiscal policy and sound and deep financial markets, this approach

allowed the Chilean economy to grow on average by 5.0% between 2002 and 2007 with low

volatility (0.8%). That is, in comparison with other countries in the region, business cycles in

Chile have been less pronounced, which has ultimately helped foster long-term growth and

social progress. Nonetheless, the country also faces several challenges in order to spur long-

term growth such as low innovation and development expenditures, human capital (quality of

Documents

DB Chile Equity Market