MINISTRY OF FINANCE

How to Reform and be Re-elected?

Chile’s Experience and Future Challenges

Rodrigo Álvarez ZentenoUndersecretary of Finance of Chile

MINISTRY OF FINANCE

Presentation Overview

About Chile: an Economic background Chile’s Reform How to be Re-elected?

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About Chile: an Economic background Chile’s Reform How to be Re-elected?

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The current economic scenario • Population: 17,1 MM (2010 estimate)• GDP 2009:

• Total: US$164 bn• Per capita (current dollars): US$9.525• Per capita (PPP): US$14.341

• Human Development Index 2007: 0,878 (high, rank: 44/182, 1st in Latin America)

• Life expectancy at birth (years): 78,5 • Adult literacy rate (% aged 15 and above):

96,5

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5

Quarterly Economic Growth

Source: Central Bank of Chile

Highest growth rate in the last 5

years

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Monthly Economic Activity: Highly Dynamic

Source: Central Bank of Chile

Immediate effect of

the earthquake

Highest monthly

growth rate since July

1996

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Strong Employment Creation

Source: INE

Since mobile quarter January-March 2010 data are based on the New National Employment Survey. Due to the conceptual differences between the new survey and the older one, data can not be spliced.

Employment creation since January-March: 164.780

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Inflation

Source: Central Bank of Chile, Monetary Policy Report, September 2010

4.5

1.1

2.4

3.7

7.8

7.1

-1.4

3.9

3.2

2.62.8

2.6

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010 (f)

2011 (f)

(% change dec/dec)

Average 2000-2009: 3.3%

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(Variación % en 12 meses, septiembre)

1.9

1.5

-0.5

-4

-2

0

2

4

6

8

10

12E

ne-

05

Ab

r

Jul

Oct

En

e-06

Ab

r

Jul

Oct

En

e-07

Ab

r

Jul

Oct

En

e-08

Ab

r

Jul

Oct

En

e-09

Ab

r

Jul

Oct

En

e-10

Ab

r

Jul

IPC IPC X IPC X1

Inflation: Total and Long range

Fuente: INE

Inflación Septiembre: 0.4%

Inflación en 12 meses: 1.9%

Inflación Acumulada 2010: 2.7%

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Fiscal Deficit During Global Recession

Source: Eurostat, OECD, IMF and DIPRES

(Central Government, % of GDP, 2009)

0

2

4

6

8

10

12

14

16S

we

de

n

Ge

rma

ny

De

nm

ark

Lu

xem

bo

urg

Au

stria

Hu

ng

ary

Ne

the

rlan

ds

Be

lgiu

m

Ch

ile

Fin

lan

d

Italy

Cze

ch R

ep

ub

lic

Po

lan

d

Slo

vak

Re

pu

blic

Fra

nce

Jap

an

Ice

lan

d

Po

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ga

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Sp

ain

Un

ited

Sta

tes

Un

ited

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Gre

ece

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About Chile: an Economic background Chile’s Reform How to be Re-elected?

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The “old” Reform • A huge first step to reform our economy was

given on the 80´s 90´s, when an extensive program of privatizations and State modernization. During the last 20 years there was stability and development.

• As a result we have a solid and healthy Public Finance

• All is reflected in today’s Chile’s economic performance…

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Chile´s Declining Macroeconomic Volatility

Source: Own elaboration based on Central Bank of Chile

(average of four-quarter trailing standard deviation of GDP growth)

0

0.5

1

1.5

2

2.5

3

3.5

4

1981-1990 1991-2000 2001-2009

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Chile´s Very Favorable International Credit Conditions

Source: JP Morgan and Bloomberg

(Sovereign spread, July 12)

1198

767725

239 223 220 205 198 191 165 138 102

-9 -43-200

0

200

400

600

800

1000

1200

1400

Ve

ne

zue

la

Arg

en

tin

a

Gre

ec

e

Po

rtu

ga

l

Bra

zil

Ire

lan

d

Co

lom

bia

Me

xic

o

Pe

ru

Sp

ain

Ch

ile

Ita

ly

Fra

nc

e

Ge

rma

ny

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Public Debt Burden: A Comparison

Source: Eurostat, OECD, IMF and DIPRES

(Gross Central Government Debt, % of GDP, 2009)

0

20

40

60

80

100

120

140

160

180

200C

hile

Lu

xem

bo

urg

No

rwa

y

Cze

ch R

ep

ub

lic

Slo

vak

Re

pu

blic

De

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ark

Sw

ed

en

Fin

lan

d

Ge

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ny

Sp

ain

Po

lan

d

Un

ited

Sta

tes

Ne

the

rlan

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Au

stria

Ire

lan

d

Un

ited

Kin

gd

om

Fra

nce

Hu

ng

ary

Po

rtu

ga

l

Ice

lan

d

Be

lgiu

m

Italy

Gre

ece

Jap

an

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The Government of Chile: A Net Creditor

Source: DIPRES

(Central Government Debt, % of GDP)

-24

-18

-12

-6

0

6

12

18

24

30

36

42

48

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

Gross Net

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Chile’s Economic and Social Stabilization Fund (Sovereign Fund)

Source: DIPRES

(billion dollars)

14.0

20.2

11.3

0

5

10

15

20

25

2007 2008 2009

July 2010: 11.1

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The Budget: Structural Balance Rule • The SBR isolates the impact of the

economic cycle on public finances• The SBR commits to a balanced budget

(zero deficit) when• The economy grows at its potential rate• Copper price is at its long-term level

• In practice, this means • Saving during economic booms, when

extraordinary revenues are received• Dissaving in downturns, when fiscal revenue

drops

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(% of GDP)

-6

-4

-2

0

2

4

6

8

10

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

Effective Balance Structural Balance

Central Government Balance 1987-2009

Before the Structural

Balance Rule

After the Structural

Balance Rule

Source: DIPRES

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The “new” Reform

• The overall Chile’s experience in crisis situation is positive

• The world face us with new challenges• Preventive measures should be considered

within political reform schemes

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21

Modernization of the State

• Human Resources (Senior Public Management (ADP) and Civil Service)

• Evaluate new services to be incorporated Review advertising and requirements for applications to increase turnout in contests

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22

Reforming Chilean Administration

• New State comission for the reform of Public Administration.

• Delivery Unit to fulfill the Government compromises

• New agency for the revision of Public Policies

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Strong reforms on Analisys:

Reform of the Corporate Governance for Public Companies

Reform of the Corporate Governance for Private Companies

Reform of the Regulatory Agencies: Financial, Banking, Capital Market

Strong Policy in The International Arena.We will continue the negociations regarding free

trade agreements and tax treaties

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Bicentennial Market Capital Reform

Institutional reform

Middle class and Small and middle Companies

Transparency and information

Risks and Financial Stability

Tax

Markets and new financial models

Consumer protection

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25

Tax Incentives for R&D

• Tax incentive which allows companies to use 35% of expenditure in R&D (extramural) in contracts with research centers registered as a tax credit (established 2008)

• Only generated 19 contracts totaling US$ 1,5MM

• Will create an additional tax incentive for private investment in R&D conducted within the enterprise (intramural)

• Will extend the limit of investment tax credit for extramural R&D

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About Chile: an Economic background Chile’s Reform How to be Re-elected?

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Chile choose to change

• From 1990 until 2010 a center-left coalition governs.

• People wants a new political performance, “a new way of govern”

• President Sebastián Piñera, assumed his position on 11 march 2010.

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GOVERNMENT PROGRAM 2010-2014

• Grow at 6% average annual rate• Create 200.000 jobs annually (2010-2014)• Increase investment (Gross Fixed Capital

Formation) from 21% of GDP (2009) to 28% of GDP in 2014

• Eliminate extreme poverty by 2014• Lay the ground to become a developed country by

2018

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RECOVERY OF THE CAPACITY OF GROWTH AND JOB CREATION OF CHILE

• Recover investment Accelerated depreciation Tax incentives for small businesses Reduce costs of bureaucracy

• Increase employment Incentives to hire Emergency jobs National training plan Adaptability of the workforce Protection of labor rights

• Improve productivity Promotion of science and technology Promotion of innovation and entrepreneurship Modernization of the state

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Basic Principles

• Financing the government program does not require tax increases

• A temporary tax increase is only needed to finance about one third of the reconstruction effort

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Poverty Alleviation21.1%

Investment Incentives5.3%

Others6.8%

Quality of education23.9%

Fight to Crime and Drug Dealing

5.3%

Health Improvement10.1%

SMBs Support27.6%

Resources Needed for the Government Program

Government Program: US$9.3 bn

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Chile’s Road to Development by 2018(GDP per capita, PPP)

0

5000

10000

15000

20000

25000

30000

35000

40000

4500020

09

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Growing at 6% Growing at 3% US$ 22.000

By 2028By 2018

14.341

22000

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High Economic Growth Expected in 2011

Source: IMF, Consensus Forecast and Central Bank of Chile

4.7

4.5

4.8

6.0

5.75.8

3.5

4

4.5

5

5.5

6

6.5

I M F Consensus Forecast Monthly Survey Expectations,Central Bank of Chile

2010 2011

2009: -1.5%

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How to Reform and be Re-elected?

Chile’s Experience and Future Challenges

Rodrigo Álvarez ZentenoUndersecretary of Finance of Chile