ECONOMIC IMPACT:MEXICO CITY – Chile's devastating earthquake will set back the country's recovery from recession and put pressure on central bankers to keep interest rates low to help the economy.
Saturday’s 8.8-magnitude quake tore up highways and bridges, knocked out power that feeds mines and factories and shook apart scores of buildings, killing more than 400 people.
With details of the extent of the destruction still emerging, economists said it was hard to estimate the degree to which Latin America’s most advanced economy would be set back.
The damage could cost Chile up to $30 billion (€22 billion), equivalent to roughly 15 per cent of gross domestic product (GDP), said Eqecat, a firm that helps insurers model catastrophe risks.
The quake has also shaken president-elect Sebastián Piñera’s pledge to boost economic growth just before his centre-right government is sworn in, ending 20 years of leftist rule.
“There will be a widespread and deep impact on Chile’s economy,” said Nick Chamie, who heads research on emerging markets at RBC Capital Markets in Toronto.
Mr Chamie and other analysts said Chile’s peso could weaken, perhaps sharply, on the news.
At the same time, the country’s biggest copper mines, which are important economic drivers, were mostly spared by the disaster and officials said copper exports would not be affected. Chile produces a third of the world’s copper.
The country’s relatively good construction standards also helped it to resist the quake, which was one of the world’s strongest in the past 100 years.
“The direct economic impact of the earthquake [could] be limited,” said Pimco portfolio manager Curtis Mewbourne.
Further helping Chile, the country’s fiscal position is widely considered to be the most solid in Latin America, which will make it easier for the government to rebuild hospitals and highway overpasses.
But with damaged and destroyed buildings littering central Chile, the earthquake nevertheless knocks some of the wind out of a recovery from last year’s recession, its first in a decade.
Chile’s economy was set to grow as much as 5.5 per cent this year after shrinking an estimated 1.9 per cent in 2009, according to forecasts by the central bank, which has hinted it could raise rates although not until at least the second quarter.
Policymakers might now hold rates steady for longer to give the economy a lifeline.
Goldman Sachs economist Alberto Ramos said GDP would take a hit in the current quarter and probably in the April to June period as well. “It’s likely the central bank will keep liquidity and monetary conditions extremely loose in the near future to support the government’s efforts to stabilise the economy.”
Despite the immediate hardships, Chile is probably Latin America’s best-prepared nation for disasters. It privatised its pension system in 1981, years ahead of similar policy shifts in other Latin American countries. The change helped to build a deeper domestic capital market that reduced dependence on borrowing from foreigners. Strict regulation also helped Chile’s banks fend off the global financial crisis.
Chile has a track record of prudent saving and has amassed a huge war chest of funds from copper exports. It has one of Latin America’s lowest government debt-to-GDP ratios, helping it to borrow at cheaper rates than Mexico or Brazil. – (Reuters)