* Strong copper prices seen driving growth in 2011
* Peso rally, rising consumer prices pose risks
(Updates with graphic)
By Simon Gardner
SANTIAGO, Feb 25 A year after one of the
biggest earthquakes on record slammed Chile with a $30 billion
hit to its economy, a massive reconstruction effort is
underpinning a strong rebound seen continuing in 2011.
But even as Chile celebrates its recovery from the massive
8.8 magnitude quake and ensuing tsunamis that ravaged south
central Chile, its growth outlook is clouded by a sharp rally
in its peso currency and rising price pressures.
The state says it has completed 50 percent of its end of
the rebuilding effort after the February 2010 quake, which
killed more than 500 people.
Even though regular aftershocks still rattle nerves and
serve as a constant reminder of the disaster, Chile's hammered
wood pulp industry is back on its feet, and the hard-hit wine
and fruit sectors are recovering strongly. Chile, the world's
No. 1 copper producer -- whose linchpin copper mining sector
was basically unscathed in the quake -- is seen growing around
6 percent this year, driven by record copper prices.
"The impact of reconstruction on growth is becoming
stronger as time goes on," said Finance Minister Felipe
Larrain, who financed an $8.4 billion reconstruction package
with a mix of sovereign debt issuance, higher royalties levied
on mining companies, and copper boom savings. [ID:nN12197354]
Larrain attributes part of the expected strong growth rate
this year to a low base of comparison, with Chile having exited
the recession triggered by the global financial crisis only in
the first quarter of 2010. The earthquake struck just days
before President Sebastian Pinera took power, forcing him to revamp
his agenda to focus on the recovery effort.
> For full coverage of economy [ID:nN30113748]
> For a graphic: link.reuters.com/peg38r
Both the government and central bank trimmed their growth
outlooks after the quake, estimating it could shave around 0.25
to 0.5 percentage point off annual growth. But data points to a
5.2 percent expansion in 2010, within the original range.
The first quarter of 2010 bore the burden of the quake,
with the economy expanding just 1.6 percent as it exited
recession, but growth jumped to average 6.4 percent in the
following three quarters.
Regional growth data shows the hardest hit regions of Bio
Bio and Maule are firmly on the mend.
But among all the signs of economic strength, Chile faces
some bumps in the road that could derail the strong growth
Already grappling with rising inflation, Chile could suffer
if the political unrest in the Middle East and North Africa
that has recently boosted oil prices becomes prolonged. In
addition to importing nearly all of its fuel, Chile would face
the risk that higher oil prices would drag on the global
economy and on China, the world's biggest copper consumer.
On the plus side for Chile, the copper supply is seen
remaining tight, and prices are expected to remain high,
supporting Chile's economy.
"The main risk, not just for Chile but the whole region, is
inflation that comes from the international market,
particularly from commodities, food and energy," said Alfredo
Coutino, Latin America director for Moody's Analytics.
As in regional powerhouse Brazil, inflation in Chile
quickened in January, driven partly by rising fuel prices. That
put pressure on central bankers to follow the lead of a host of
emerging market economies from China to India and Thailand to
Peru raise interest rates. For details, see [ID:nN08268227]
As copper prices rose to lifetime highs and the dollar
weakened internationally, so too Chile's peso has rallied back
toward near three-year highs despite a $12 billion central bank
currency intervention. The strong peso is hammering exporters.
That trend puts the central bank in a bind, forced to
prioritize inflationary concerns over the strong peso. The
central bank raised its benchmark rate to 3.5 percent this
month after prices rose in January, and signaled more hikes are
to come -- but creating an environment that will probably put
even more upward pressure on the peso. [ID:nN17302923]
Analysts say Chile's benchmark rate would look restrictive
at around 6 percent. Chile's market sees the rate just below
that a year from now, according to the central bank.
In the real economy, quake survivors are still struggling.
Jose Recabal, a 46-year-old fisherman, has seen his
earnings slump because with tourism yet to pick up again in his
small, battered coastal fishing town of Curanipe, he must rely
more on bulk sales to restaurants, which pay lower prices than
sales made directly to tourists.
He and fellow residents of Curanipe, which lies around 37
miles (60 km) from the quake epicenter, are happy with the pace
of reconstruction, but worry about the continued weakness in
tourism. Many new wood-built houses pepper the town, though
bare foundations of homes destroyed by tsunami recall the
"I think the reconstruction is great," he said, as he
tended his small fishing boat. "But tourism is down, which is
what moves the local economy. Without fishing, the town dies."
His previous boat, swept away by the tsunami, still sits
encrusted on jagged black rocks further up the coast where the
swell dumped it on Feb. 27 last year.
The government says it has repaired 940 miles (1,500 km) of
damaged roads and rebuilt over 200 bridges, and rebuilt and
repaired damaged ports and airports. But tens of thousands of
homes and several large hospitals are still pending.
Beyond damage to wood pulp plants and the country's two
main refineries, the quake also pushed back completion dates
for two new coal plants, keeping energy supply tight because of
a drought sapping hydroelectric reservoirs.
Nonetheless, Chile seems to have emerged from the quake
with its economic strength intact.
"The damage to the economy has been very, very mild. It
didn't leave a permanent scar," said Alberto Ramos, senior
economist at Goldman Sachs in New York.
"Even purging the data from what could be the extra kick
from reconstruction, confidence is high, credit is firming,
monetary conditions are still supportive ... So everything is
aligned for the economy to perform well throughout 2011."
(Reporting by Moises Avila, Fabian Cambero, Maria Jose
Latorre, Brad Haynes and Felipe Iturrieta in Santiago and Ivan
Alvarado in Curanipe; Writing by Simon Gardner; Editing by