Chile says increase in bond sale unlikely

By Daniel Bases and Ana Nicolaci da Costa

WASHINGTON (BestGrowthStock) – Chile does not expect to increase the size of its first international debt offering since the country’s devastating earthquake in February, Finance Minister Felipe Larrain said on Saturday.

Chile announced on Friday it would sell $1.5 billion worth of debt on the international markets, its first in six years.

“The most likely scenario is that we will maintain that figure. That is the most likely scenario, no commitment though,” Larrain said in an interview on the sidelines of the International Monetary Fund/World Bank’s spring meetings.

Chile faces a financing gap of about $5.9 billion in 2010, said Larrain, who took office under the country’s new center-right president, Sebastian Pinera.

Larrain said the reason for not increasing the amount of the sale, which would not likely be a problem for what is widely considered the best-run economy in Latin America, was the impact it might have on the foreign exchange rate.

“If we do a big sovereign bond, let’s say double what we have announced, the effects on the exchange rate will be immediately felt because the markets will anticipate that more foreign resources, more dollars, will come into the market.”

To fill that gap, the government is using a combination of debt, its sovereign wealth fund and sales of minority stakes in companies operating in sectors that include water and sewage and real estate, Larrain said.

“But if you put them together, it could amount to something. I wouldn’t say a figure because once you say, you are a slave to your words,” Larrain said.

Chile’s credit rating, solidly ensconced in investment grade status, is the envy of the region.

The government is selling $1 billion worth of U.S. dollar-denominated bonds and $500 million in global bonds denominated in pesos, which Larrain said would be the first in the history of the country.

CURRENCY

The earthquake and subsequent tsunami killed hundreds of people and caused about $30 billion in financial losses, from infrastructure damage to lost production output.

Prudent fiscal management in the world’s No. 1 copper producer has endowed the country with a sizable rainy-day sovereign wealth fund. Even after suffering a drop of $9 billion last year, the fund stands at about $11 billion.

Larrain said repatriating a sizable amount of cash from the fund back to the economy or borrowing too much from abroad could be dangerous.

“If we had a significant appreciation of the currency in the reconstruction process, we rebuild from the earthquake and tsunami, and on the other hand we may destroy parts of our local production and productive capacity and we don’t want to do that,” he added.

Local producers would effectively find their goods and services in the global marketplace more expensive, choking off the demand they would need to rebuild.

In the immediate aftermath of the earthquake, there were expectations of strong inflows of U.S. dollars into the economy because the government would take external sources of financing.

Instead, the currency lost ground in the past few weeks, accumulating losses of about 2.6 percent so far this year, as investors came to understand the government’s plans meant fewer than expected dollars would be repatriated.

Larrain emphasized the full independence of the central bank, but also the government’s support for maintaining the benchmark interest rate at 0.5 percent.

He said there was a delicate balance, and danger, between reacting too soon and limiting the recovery and acting too late and face rising inflation.

Larrain also said it was widely understood the current rate was “not an equilibrium rate.”

“So that the central bank will start to normalize, will have to normalize the rate in time. But I think that basically, central banks are always a little more hawkish than finance ministers,” he said.

(Editing by Peter Cooney)

Chile says increase in bond sale unlikely