Chile Says It Can Handle Financial Gap Due to Earthquake

Chile Says It Can Handle Financial Gap Due to Earthquake

By Dialogo
July 19, 2010

Chilean treasury minister Felipe Larraín said Thursday that he is not concerned about a 600-million-dollar deficit in a post-earthquake rebuilding plan, and he believes that any impact on the peso will be manageable.

Larraín told Reuters in New York that the easiest way to close the gap, since the Congress rejected an increase in mining royalties, would be to make use of the profits from the copper boom kept in accounts abroad.

However, he indicated, the administration could also opt for issuing more debt or for the sale of surplus government assets.

Nevertheless, he reiterated that using the copper fund is not “a good way to deal with” the deficit and that it would have been better to obtain the money through the royalties.

The administration has expressed concern that repatriating more dollars could create undesirable pressure on the exchange rate and on interest rates in the world’s largest producer of copper.

“It’s certainly not something we can’t address. We can certainly deal with 600 million dollars when we have a sovereign-wealth fund of 11 billion dollars,” Larraín said during a visit to promote investment in Chile.

“We’re concerned about the pressure on the currency, but we believe that we can sort things out (…) We hope to move forward without significant undue pressures, beyond those we have at present,” he added.

The Chilean peso has fallen 4.8 percent against the U.S. dollar so far in 2010. In 2009 the peso rose 26.4 percent against the U.S. dollar. Chilean financial markets will be closed Friday for a religious holiday.

Larraín predicts an inflation rate between 3 and 4 percent in 2010 and closer to 3 percent in 2011.

The Chilean Congress last week rejected an administration proposal to adjust mining royalties in order to help pay for the 8.4 billion dollars that the central government is supposed to provide for rebuilding after the earthquake, in a significant political setback for President Sebastián Piñera.

Nevertheless, the legislators on Wednesday approved the central part of a financing initiative that aims to pull together more than 3 billion dollars for the broader rebuilding package.