Prospects and fundamentalsProspects and fundamentals of the Chilean economy

Rodrigo VergaraBoard member

Central Bank of Chile

C E N T R A L B A N K O F C H I L E 17 OCTOBER 2011

MINERA MONTE SOPHIE

TopicsTopicspp

Macroeconomic scenario

Prospects and fundamentals of the Chilean economy

Final thoughts

2

MINERA MONTE SOPHIE

IntroductionThe Chilean economy recovered strongly from the global crisisf 2008 2009 d f th d f th th k /t iof 2008-2009 and from the damages of the earthquake/tsunami

of February 2010. Last year it grew 5.2% and this year it isexpected to grow in the range of 6.25% to 6.75%.The recovery of output has proceeded hand in hand with strongjobs creation and a decline in unemployment. Meanwhile,inflation has returned to figures around the 3% target, althoughg g , gcore levels remain bounded.For 2012, we forecast that our economy will grow between4 25% and 5 25% while inflation will stay close to 3%4.25% and 5.25%, while inflation will stay close to 3%.However, there are important risks, coming from abroad.Tensions persist and the end is not expected any time soon.The Chilean economy has policy tools to mitigate the adverseeffects of the external scenario. Furthermore, its regulationframework allows for a sound financial system

3

framework allows for a sound financial system.

MINERA MONTE SOPHIE

Macroeconomic scenario

MINERA MONTE SOPHIE

Sovereign spreads(*)Sovereign spreads(*)(b i i t )(b i i t )

7007007 0007 000

(basis points)(basis points)

500

600

700

500

600

700

5 000

6,000

7,000

5 000

6,000

7,000

300

400

500

300

400

500

3 000

4,000

5,000

3 000

4,000

5,000

100

200

300

100

200

300

1 000

2,000

3,000

1 000

2,000

3,000

0

100

0

100

ene 10 jul 10 ene 11 jul 1110 Jul 11 Jul0

1,000

0

1,000

10j l 10 11j l 1110 Jul 11 Jul

Italy FranceGermany Spain

ene.10 jul.10 ene.11 jul.1110 Jul. 11 Jul.ene.10jul.10ene.11jul.11Ireland Portugal Greece

10 Jul. 11 Jul.

5

(*) As measured through 5-year CDS spreads.Source: Bloomberg.

y p

MINERA MONTE SOPHIE

World activityWorld activity

Manufacturing PMIGross domestic product(diffusion index, pivot = 50)(index, IV.07=100, quarterly series)

115115 7070

105

110

105

110 6060

100

05

100

05

40

50

40

50

90

95

90

95

30

40

30

40

IV.07 IV.08 IV.09 IV.10

U. Kingdom EurozoneChile U.S.A.

08 09 10 11

6Sources: Central Bank of Chile and Bloomberg.

MINERA MONTE SOPHIE

Stock indexes (*)Stock indexes (*)(i d ll 03/J /2011(i d ll 03/J /2011 13/O t b /2011 100)13/O t b /2011 100)(in dollars, 03/January/2011(in dollars, 03/January/2011--13/October/2011 =100)13/October/2011 =100)

110

120

110

120

100

110

100

110

80

90

80

90

70

80

70

80

11 l S

Europe Latin America Emerging markets U.S.A Chile

ene.11 mar.11 may.11 jul.11 sep.1111 Mar. May. Jul. Sep.

7(*) For Europe, Latin America and Emerging markets corresponds to MSCI index. For United States and Chilecorresponds to the Dow Jones index and the IPSA index, respectively . Source: Bloomberg.

MINERA MONTE SOPHIE

World growthWorld growth( l h t)( l h t)(annual change, percent)(annual change, percent)

Average 2009 2013 (f)00-07 MPR

Jun. 11

MPR Sep. 11

WEO Sep. 11

MPR Jun. 11

MPR Sep. 11

WEO Sep. 11

MPR Sep. 11

2011 (f) 2012 (f)2010 (e )

11 11 11 11 11 11 11

World at PPT 4.2 -0.6 5.0 4.1 3.9 4.0 4.5 4.0 4.0 4.5

World at MER 3.2 -2.1 3.8 3.2 3.0 3.0 3.8 3.3 3.2 3.7

United States 2.6 -3.5 3.0 2.7 1.6 1.5 3.2 2.0 1.8 2.8

Eurozone 2.2 -4.1 1.7 1.7 1.7 1.6 1.5 1.2 1.1 2.1

Japan 1.7 -6.3 4.0 -0.6 -0.5 -0.5 3.1 2.8 2.3 1.8

China 10.5 9.2 10.3 8.9 9.0 9.5 8.6 8.3 9.0 8.7

Rest of Asia 5.1 0.1 7.8 4.8 4.9 4.9 4.9 4.5 5.0 5.0

Latin America (excl Chile) 3 5 -2 0 6 3 4 2 4 2 4 5 4 3 3 9 3 9 4 2Latin America (excl. Chile) 3.5 2.0 6.3 4.2 4.2 4.5 4.3 3.9 3.9 4.2

Commodity exporters 3.1 -1.2 2.9 2.7 2.2 2.0 3.0 2.5 2.5 3.2

Trading partners 3.6 -0.4 5.9 4.3 4.2 4.4 4.7 4.3 4.5 4.6

8(f) Forecast.Source: Central Bank of Chile.

MINERA MONTE SOPHIE

Inflation indicatorsInflation indicators( l h t)( l h t)

1010

(annual change, percent)(annual change, percent)

6

8

6

8

2

4

6

2

4

6

0

2

0

2

-4

-2

-4

-2

06 07 08 09 10 11

CPI CPIX1 CPIX CPI minus foodstuffs and energy

9 Sources: Central Bank of Chile and National Statistics Institute (INE).

MINERA MONTE SOPHIE

Monthly index of economic activity (Monthly index of economic activity (ImacecImacec))(annual change percent)(annual change percent)(annual change, percent)(annual change, percent)

12

16

12

16

88

0

4

0

4

-4-4

-8-8

06 07 08 09 10 11

10 Source: Central Bank of Chile.

MINERA MONTE SOPHIE

Employment and unemployment (*)Employment and unemployment (*)(i d t d 1990(i d t d 1990 2011 )2011 )(index, centered on 1990(index, centered on 1990--2011 average)2011 average)

20

40

20

40

0

20

0

20

-20-20

-40-40

90 93 96 99 02 05 08 1190 93 96 99 02 05 08 11

Employment Unemployment

11

(*) Seasonally-adjusted quarterly series.Source: Ricaurte, M. 2011. “Indicadores de Mercado Laboral para la Comparación de las Crisis Asiática yFinanciera Internacional.” Preliminary document, Central Bank of Chile (June).

MINERA MONTE SOPHIE

Nominal exchange ratesNominal exchange rates(index 03/January/2000(index 03/January/2000 14/October/2011 100)14/October/2011 100)(index, 03/January/2000 (index, 03/January/2000 –– 14/October/2011=100)14/October/2011=100)

180180

140

160

140

160

80

100

120

80

100

120

40

60

80

40

60

80

zerla

ndus

tral

iach

Rep

.ea

land

Braz

ilJa

pan

Can

ada

lom

bia

haila

ndN

orw

ayC

hile

Swed

enal

aysi

aIs

rael

rozo

nePo

land

Chi

naPe

ruun

gary

ppin

esh

Afr

ica

. Kor

eaRu

ssia

Indi

ang

dom

Mex

ico

.S.A

(2)

Swit

zA

uC

zec

N. Z

CC

o Th N S M Eur

Hu

Phili

Sout

hRe

p

U. K

i MU

.

Range (1) Average July (3) Spot October

12

(1) The range indicates the highest and lowest values of the local currencies during the indicated period. (2)Uses the Broad index. (3) Data for 27 july 2011.Sources: Central Bank of Chile and Bloomberg.

MINERA MONTE SOPHIE

Real exchange rate (1)Real exchange rate (1)(i d 1986 100(i d 1986 100))

120120

(index, 1986=100(index, 1986=100))

110

120

110

120

90

100

90

100

80

90

80

90

7070

88 90 92 94 96 98 00 02 04 06 08 1088 90 92 94 96 98 00 02 04 06 08 10

RER 91-10 average 96-10 average Spot (2)

13

(1) Preliminary for October 2011. (2) Calculated using the observed exchange rate of11/October/2011.Source: Central Bank of Chile.

MINERA MONTE SOPHIE

d f d l f hProspects and fundamentals of the Chilean economy

MINERA MONTE SOPHIE

Inflation and activityInflation and activity

CPI inflation (1) Gross domestic product and domestic C ( )(annual change, percent) demand (2)

(annual change, percent)1010 1818

468

468

1212

024

024

0

6

0

6

-4-20

-4-20

-6

0

-6

0

07 09 11 13 00 02 04 06 08 10 12(f)

IPoM Jun.2011 IPoM Sep.2011Jun. 11 Report Sep. 11 Report Domestic demand GDP

15

(f) Forecast. (1) Gray area, as from third quarter of 2011, shows forecast. (2) Gray area, as from 2011, showsmid-point of growth forecast in the baseline scenario of September 2011’s Report for this and next year.Sources: Central Bank of Chile and National Statistics Institute (INE).

MINERA MONTE SOPHIE

Gross domestic productGross domestic product( l( l h t)h t)

1212

(real y(real y--oo--y change, percent)y change, percent)

8

12

8

12

44

-4

0

-4

0

-8-8

04 05 06 07 08 09 10 1104 05 06 07 08 09 10 11

Minería TotalMining

16Source: Central Bank of Chile.

MINERA MONTE SOPHIE

Share of mining in national GDP (*)Share of mining in national GDP (*)( t)( t)(percent)(percent)

2525

20

25

20

25

1515

1010

55

00

85 90 95 00 05 06 07 08 09 10

17(*) Current price.Source: Central Bank of Chile.

MINERA MONTE SOPHIE

Mining employment (*)Mining employment (*)( t f t t l)( t f t t l)

3.03.0

(percent of total)(percent of total)

2.5

3.0

2.5

3.0

1 5

2.0

1 5

2.0

1.0

1.5

1.0

1.5

0 0

0.5

0 0

0.5

0.00.0

86 89 92 95 98 01 04 07 10

18

(*) As from January 2009, the new indexes with annual base 2009=100 are used, so they are not strictlycomparable with previous figures.Source: National Statistics Institute (INE).

MINERA MONTE SOPHIE

Actual and projected total investment in Actual and projected total investment in mining (*)mining (*)g ( )g ( )(million of dollars)(million of dollars)

8 000

10,000

8 000

10,000

6,000

8,000

6,000

8,000

4,0004,000

2,0002,000

00

06 07 08 09 10 11(f) 12(f) 13(f) 14(f) 15(f)

19

( ) ( ) ( ) ( ) ( )

(f) Forecast. (*) Corresponds to copper, gold and silver.Source: Chilean Copper Commission based on an information of each particular project.

MINERA MONTE SOPHIE

Chile is not immune to external financial developments, but it has the tools with which to cushion their

lpotential impact.

The future of the international scenario is highly uncertain. Theibilit f t diti i t i b t it i tpossibility of extreme conditions is not minor, but it is not

considered in our present baseline scenario.However, the Chilean macroeconomic framework has beenincreasingly effective to deal with external shocks and ensuremacroeconomic stability.Its main elements are:

Accountable, predictable fiscal policy that guarantees the solvency ofthe public sector and smoothes the expenditure of copper income.Monetary policy conducted by an autonomous central bank under anMonetary policy conducted by an autonomous central bank under aninflation-targeting regime and a flexible exchange rate;Growing commercial integration that allows to diversify import andexport markets;export markets;Sound financial system, with competitive, well capitalized banks, withappropriate regulation and supervision.

20

MINERA MONTE SOPHIE

Chile’s fiscal balance Chile’s fiscal balance ( t f GDP)( t f GDP)(percentage of GDP)(percentage of GDP)

6

9

6

9

3

6

3

6

00

-6

-3

-6

-3

Effective Structural

90 93 96 99 02 05 08 11(f)

21(f) Forecast. Report published by the Finance Ministry in October 2011.Source: Budget Office, Finance Ministry of Chile.

MINERA MONTE SOPHIE

Public debt in 2010 (1) (2)Public debt in 2010 (1) (2)( t f GDP)( t f GDP)

Japan

(percentage of GDP)(percentage of GDP)

HungaryIsrael

United StatesU. Kingdom

GermanyJ p

Rep KoreaCzech Rep.

South AfricaPoland

PhilippinesHungary

ArgentinaMexico

VenezuelaPeru

Chile (3)Rep. Korea

-20 0 20 40 60 80 100 120

BrazilArgentina

Latin AmericanEconomies

Other EmergingEconomies

AdvancedEconomies

22

(1) Net debt of central government (excludes reserves, Central Bank debt and social security). (2) Data fromemerging economies, except Chile, are Moody‘s estimates. (3) As of December 2010, the net debt of thecentral government amounts to -7.5% of GDP.Sources: Central Bank of Chile, IMF, JP Morgan Chase, Finance Ministry of Chile and Moody's.

MINERA MONTE SOPHIE

External Debt: International comparison (1) (2)External Debt: International comparison (1) (2)(percentage of GDP)(percentage of GDP)

150150

(percentage of GDP)(percentage of GDP)

100

150

100

150

5050

00

alia

Aa2

)en

ia2) qu

ia) on

iaA

2) pón

Aa3

)he

ca) ra

elA

1) hile

Aa3

)qu

íaa2

)xi

coaa

1) asil

aa2)

taly

(A2)

enia

Aa3)

Rep.

(A1)

and

(A2)

rael

(A1)

Rep.

(A1)

hile

Aa3)

rkey

Ba2)

xico

aa1)

azil

aa2)

pan

Aa3)

It ( AEs

love

(Aa2

Eslo

vaq

(A1

Pol o (A Ja ( A

Rep.

Ch

(A1) Is ( A C ( A

Turq (Ba

Méx (Ba Br (BaI (

Slov

e (A

Slov

aK R (

Pol ( Is(

Czec

h R ( C (A

Tur (B

Mex (Ba

Br (BaJa (A

Public debt Private debt

23

(1) For comparison effects, public debt is defined as the debt of the consolidated government.(2) External debt as of the first quarter of 2011; GDP of 2011 as forecast by the IMF and Moody’s risk rating.Sources: Central Bank of Chile, World Bank, IMF and Moody's.

MINERA MONTE SOPHIE

Sovereign spreads(*) Sovereign spreads(*) (b i i t )(b i i t )(basis points)(basis points)

1 0001 000

800

1,000

800

1,000

400

600

400

600

0

200

0

200

entin

a(B

3)

Mex

ico

(Baa

1)

Braz

il(B

aa2)

Peru

(Baa

3)

ombi

a(B

aa3)

Chile

(Aa3

)un

gary

(Baa

3)Ru

ssia

(Baa

1)

olan

d(A

2)

Afric

a(A

3)

Chin

a(A

a3)

alay

sia

(A3)

00

Latin American economies Other investment-grade economies

Arge M ( ( (

Colo (

Hu ( R ( Po S. AC

Ma

24(*) JP Morgan Chase’s EMBI Global. In parentheses, Moody’s rating. Sources: JP Morgan Chase and Moody’s.

MINERA MONTE SOPHIE

Chile’s risk premium (*)Chile’s risk premium (*)(b i i t )(b i i t )(basis points)(basis points)

500500

400

500

400

500

300300

100

200

100

200

0

100

0

100

Corporate bond Sovereign excl.-CodelcoSovereign bond

99 00 01 02 03 04 05 06 07 08 09 10 11

25

(*) As from September 2009, Chile’s sovereign spread (excluding the copper corporation Codelco) is proxiedby Chile’s 5-year CDS hedge contracts’ spread.Sources: Central Bank of Chile and JP Morgan Chase.

MINERA MONTE SOPHIE

Share in Chile’s foreign trade (1)Share in Chile’s foreign trade (1)( t)( t)(percent)(percent)

Europa (2)Resto del

1990

Europa (2)

2010

Europe (2)Rest of the Europe (2)

f hEuropa (2) 38,2

mundo 28,5

16,6 Resto del mundo 39,2

Europe (2)38.2

world 28.5

U S A

p16.6 Rest of the

world39.2

ResEE.UU. 10,4

U.S.A10.4

China 0,8

óEE.UU.

h

Japón9,9U.S.A J

China0.8

Chi

Japan9.9

Japón14,9

UU17,5

China 24,0

,U.S.A17.5 Japan

14.9 China24.0

26

(1) Two-year moving average of exports from Chile to indicated destination. (2) Europa includes: Germany,Belgium, Spain, France, Finland, Greece, Netherland, Italy, Norway, Portugal, U. Kingdom and Sweden.Source: Central Bank of Chile.

MINERA MONTE SOPHIE

Contribution of trading partners to Contribution of trading partners to growth (*)growth (*)(percentage points)(percentage points)

6

8

6

8

2

4

2

4

2

0

2

0

-4

-2

-4

-2

90 95 00 05 10

Desarrolladas Emergentes Socios comercialesDeveloped Emerging Trading partners

27

(*) Gray area, as from 2011, shows forecast.Sources: Central Bank of Chile based on a sample of investment banks, Consensus Forecasts, IMF andrespective countries’ statistics bureaus.

MINERA MONTE SOPHIE

Terms of trade (1)Terms of trade (1)(i d 1989(i d 1989 2010 100)2010 100)(index, 1989(index, 1989--2010 average =100)2010 average =100)

150

170

150

170

130130

90

110

90

110

7070

89 91 93 95 97 99 01 03 05 07 09 11 13(f)11(f)89 91 93 95 97 99 01 03 05 07 09 11 13(f)11(f)

Chile Latin America and the Caribbean (2)

28

(f) Forecast.(1) Gray area, as from 2011, shows forecast. (2) Shows terms of trade for the exchange of goods andservices. Sources: Central Bank of Chile (Report of September 2011) and IMF.

MINERA MONTE SOPHIE

Real copper price (*)Real copper price (*)(corresponding to the price of August 2011, cents (corresponding to the price of August 2011, cents

600600

( p g p g ,( p g p g ,of dollar per pound)of dollar per pound)

500

600

500

600

400400

300300

200200

100100

70 73 76 79 82 85 88 91 94 97 00 03 06 09

29(*) Price at the London Metal Exchange deflated by the US metal PPI. Includes data up to 12/October/2011. Sources: Bloomberg and Cochilco.

MINERA MONTE SOPHIE

Current account balanceCurrent account balance( t f GDP)( t f GDP)

66

(percentage of GDP)(percentage of GDP)

4

6

4

6

0

2

0

2

-2

0

-2

0

-4-4

-6-6

90 92 94 96 98 00 02 04 06 08 10 12(f)

30(f) Forecast contained in September 2011’s Monetary Policy Report.Source: Central Bank of Chile.

MINERA MONTE SOPHIE

Banking solvency indicators (1)Banking solvency indicators (1)( l t)( l t)(annual average, percent)(annual average, percent)

12

16

12

16

88

44

00

95 97 99 01 03 05 07 09 11 (2)

(1) As from January 2008, past-due portfolio data are not strictly comparable with previous figures, because,

Basel Capital Adequacy Index Non-performing Loans

31

(1) As from January 2008, past due portfolio data are not strictly comparable with previous figures, because,as part of the plan to converge to international financial reporting standards (IFRS), the banks modified theformat of their financial statements. (2) Figures up to June 2011 for the Basel index, and up to August 2011for past-due portfolio. Sources: Central Bank of Chile and Superintendence of Banks & Financial Institutions(SBIF).

MINERA MONTE SOPHIE

Target and actual inflationTarget and actual inflation( l h t)( l h t)

3232

(annual change, percent)(annual change, percent)

24

28

32

24

28

32

16

20

16

20

4

8

12

4

8

12

-4

0

4

-4

0

4

90 92 94 96 98 00 02 04 06 08 10 12(f)

32

(f) Forecast as from the third quarter of 2011 used in the Monetary Policy Report of September 2011.The forecast considers a monthly frequency calculated using a quarterly projection.Sources: Central Bank of Chile and National Statistics Institute (INE).

MINERA MONTE SOPHIE

Actual and expected MPRActual and expected MPR( t)( t)

99

(percent)(percent)

7

8

9

7

8

9

5

6

5

6

2

3

4

2

3

4

0

1

2

0

1

2

S S b S O b S

07 08 09 10 11 12 13

33 Source: Central Bank of Chile.

TPM EEE agosto EEE septiembre EEE octubreMPR August EES September EES October EES

MINERA MONTE SOPHIE

Nominal interest rates of Central Bank of Nominal interest rates of Central Bank of Chile documentsChile documents(percent)(percent)

6 56 5

6.0

6.5

6.0

6.5

5.55.5

4 5

5.0

4 5

5.0

4.0

4.5

4.0

4.5

jun.11 jul.11 ago.11 sep.11 oct.11

BCP-2 BCP-5 BCP-10

Jun.11 Jul.11 Aug.11 Sep.11 Oct.11

34 Source: Central Bank of Chile.

BCP 2 BCP 5 BCP 10

MINERA MONTE SOPHIE

Final thoughts

MINERA MONTE SOPHIE

We are facing major risks. Extreme scenarios are not themost likely, but the possibility exists and requires to be

d dready to respond.

Risks in the external scenario are significant and varied. Today theyi il i E d th t f th d l d ld b tare primarily in Europe and the rest of the developed world, but

there could be important repercussions on emerging economies.Unlike in most of the developed world, in Chile we have space to actboth at the fiscal and monetary front.In Chile, the financial markets have operated normally. The CentralBank monitors their evolution on a daily basis and has the capacityBank monitors their evolution on a daily basis and has the capacityand disposition to act and mitigate difficulties if it deems necessary.The MPR is within a range of normal rates that are consistent withkeeping inflation near the target If the economic scenario sokeeping inflation near the target. If the economic scenario sorequires, we have all the necessary capacity to take appropriate andtimely action to attenuate its effects in Chile. The experience of2009 also helps with the implementation of the necessary actions.2009 also helps with the implementation of the necessary actions.We expect the economy to continue to advance towards a growthrate on the order of 5%, a figure wich is believed to be the trendgrowth rate for Chile today

36

growth rate for Chile today.

MINERA MONTE SOPHIE

Prospects and fundamentalsProspects and fundamentals of the Chilean economy

Rodrigo VergaraBoard member

Central Bank of Chile

C E N T R A L B A N K O F C H I L E 17 OCTOBER 2011

MINERA MONTE SOPHIE