Chile's economy and risks

SANTIAGO Mon Mar 28, 2011 10:46am EDT

SANTIAGO (Reuters) - Chile, the world's No.1 copper producer, has rebounded from a devastating earthquake a year ago as domestic demand and record prices for the red metal drive sustained growth.

Following are key economic facts:

* Chile's gross domestic product grew 5.2 percent in 2010 to $221.6 billion and is seen adding around 6 percent this year, boosted by an estimated 8.2 percent growth in the first quarter from the quake-stricken year prior.

* Consumer price increases have been contained amid robust growth so far, but inflation expectations are rising as global fuel and food prices compound local pressures and unemployment hit a two-year low of 7.1 percent in the fourth quarter.

The central bank responded aggressively to inflation concerns with a bigger-than-expected increase to its key interest rate in March, bringing it to 4.0 percent, and the market expects another 50 basis-point rate hike in April.

* Rising interest rates and terms of trade improved by strong copper prices helped push Chile's peso to near three-year highs at the close of 2010, hurting exporters and leading the central bank to launch a $12 billion intervention.

The peso fell more than 7 percent when the program began in January but has rebounded since, prompting the government to slow the growth of public spending and lure foreign issues of peso-denominated debt.

The government says it is not considering capital controls to protect its exchange rate, but several subtler currency measures are possible.

* Chile's free-market economic policies have remained stable as center-right President Sebastian Pinera assumed power last year following 20 years of center-left rule that put an end to General Augusto Pinochet's 17-year dictatorship.

* Chile produces a third of the world's mined copper and maintained stable output last year at 5.41 million tons despite aging deposits and labor issues. Record prices drove copper export revenues to $69.6 billion last year, up 43 percent from 2009.

State estimates project a 6.4 percent increase in copper output this year as production ramps up at Antofagasta's (ANTO.L) Esperanza mine, which started operations last year and is seen producing around 190,000 tons a year.

* The linchpin mining industry accounted for 33 percent of Chile's direct foreign investment from 1974 to 2009, and the government expects the sector to attract a further $45 billion in foreign investments from 2010 to 2017. Other key industries include forestry, salmon, fruit and wine exports, all of which have rebounded from the February 2010 earthquake.

Capitalizing on its stability and robust institutions, Chile also aims to become a hub for Latin American finance, and has begun a series of capital market reforms to simplify the tax system, increase access to financing and create a new market for high yield instruments.

* High energy prices threaten to choke growth and compound inflationary pressures but should not impact copper output, as an extended drought saps hydroelectric reserves and forces the country to rely on costlier fuel-powered plants.

Chile says it will have to double electricity generation in the next decade to keep up with growth, but environmental concerns have stalled major coal plants and hydro dams, while Japan's quake has stoked criticism of nuclear studies.

Two new liquefied natural gas terminals have given the fuel a major boost on the local grid, and high energy prices have bolstered the prospects for wind, solar and geothermal projects.

(Reporting by Moises Avila and Brad Haynes; Editing by Andrew Hay)

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