SCENARIOS-Chile’s quandary: How to finance quake rebuilding

By Daniel Trotta and Antonio de la Jara

SANTIAGO, March 16 (BestGrowthStock) – Chile is likely to uphold
the market-friendly policies that have made it an investor
favorite in Latin America as it prepares to finance earthquake
reconstruction, diversifying risk with multiple sources.

Newly installed President Sebastian Pinera, a billionaire
businessman and ideological conservative, said last week his
government will create a special fund with a combination of
loans, savings and budgetary austerity to help pay for the
estimated $30 billion in damage.

“That’s the beauty of Chile. This is not Venezuela,” said
Alberto Bernal, head of research at Bulltick Capital Markets,
referring to Chile’s reputation as one of the most investor
friendly countries in Latin America.

So it came as some surprise when Finance Minister Felipe
Larrain said on Tuesday the idea of raising taxes has not been
ruled out. [ID:nN16247272]

Following are some scenarios of how the government may
raise funds:

* INTERNATIONAL BOND: Though Chile is one of the few Latin
American countries with an investment grade rating and there
would be ample demand for Chilean paper, the government is
unlikely to resort to the capital markets in the short term
because an influx of U.S. dollars would strengthen the Chilean
peso, delivering a blow to the agricultural export sector that
was hit hard by the quake.

* DOMESTIC BOND: Issuing debt in the local market would
have a lesser impact on the exchange rate but would also
pressure interest rates higher, putting a drag on the local
economy just as it has emerged from recession.

* BUDGETARY ADJUSTMENTS: Pinera, who took office on March
11, inherited the 2010 budget established by the center-left
government of former President Michelle Bachelet. Larrain said
on Tuesday the new government would soon announce changes in
the budget, but there is only so much that can be done. The
annual budget is barely equal to the estimated $30 billion in
damage.

* TAPPING THE SOVEREIGN WEALTH FUNDS: Chile has saved some
$14.7 billion, largely from revenues generated by the copper
industry. Dipping into these savings would be cheaper than
borrowing on the market, but it would also have same foreign
exchange effect by strengthening the peso.

* TAX INCREASES: Larrain conspicuously said tax increases
have not been ruled out, but if so, economists expect them to
be limited and targeted at areas such as tobacco. The
government has already signaled a willingness to let expire a
temporary tax break on fuel.

* MULTILATERAL LOANS: The Andean Development Fund (CAF) has
approved a $300 million loan, and the Inter-American
Development Bank is studying a $460 million reconstruction
loan.

* COPPER REVENUES: If copper prices remain firm, it could
provide enough unforeseen revenue to cover rebuilding costs.
Current prices (CMCU3: ) are about 25 percent higher than the
2010 budget estimates for the yearly average.

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(Editing by Kenneth Barry)

SCENARIOS-Chile’s quandary: How to finance quake rebuilding