NATIONAL INTELLIGENCE DAILY CABLE - CHILE: ECONOMIC SITUATION FOR 1977

Created: 6/11/1977

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NATIONAL INTELLIGENCE DAILY CABLE

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Notice StniRhr* IntalUoance Soureai and Malhodi Involvad

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CHILE* Economic Situation?

J0m% Gradually recovering uorld oopper price* and rieing nonoopper exports should permit Chile tome relief from the hareh fiscal and monetary msanurss of recent ueare. The ruling military Juntaperaent increase in import* thie year The gain uilleoovery in real groat national product from the severelyevele and ehould further aid in redwing Chile's triple-digit inflation.

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Unlike moot countries of comparableophistication, Chile had to slaeh imports--and thus domestic income andcope with the payments problems stem-wing from rising oil prices and world recession. Until recontlv its oxtreraely weak international credit rating practical lv ruled out access to commercial funds. World criticlen of Chilean hu man rights practices severely limited new official economicand made foreign debt renegotiation difficult at best.

The Chilean populace has complained little about the austerity because of the threat of government repression and more importantly, because manynot' feel they are better off than under the Allende regime.

flpB The balanae of payments had improved considerably bvecauso of rising earnings from noncopper exports booming coppor production, moderate recovery in world copper prices, and short-term capital Inflows attracted by soaringrates. The junta took advantage of the improvement to terminate its foreign debt renegotiation efforts and to rebuild foreign reserves. Although peso devaluation was slowed and tar- -iffs were further cut, other fiscal and monetary measures caused imports for tha yearhole to drop anercent.

_,This year tho military government intends to use its improved foreign reserve position and tho small additional gain expected in export earnings to permit an Increase in imports sufficient to restore real gross national product to4 level. Although this will require some easing of austerity the government hopes that increased supply will permit continued progress against inflation. It also Intends to avoid debtand to assert its independence of the us and other critics of its human rights practices by sharply reducingfrom govorr.nentu and international agencies.

V Exports are likely to rise aboutercent1 billion. Coppor shipments will remain roughly at last year's levelons, but an expected rise in averaqo copper prices will boost earnings moderately. Stronger demand for noncopper exports in markets developedJ should allow sales of such goods to rise0 million, despite an expected weakening in Chile's competitive position because of slower peso devaluation.

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ffjp The government's reduction of US and International Monetary Fund aid this year will leadut in official capital inflows to0 million, comparedhilean missions to the US and Western Europe are seeking commercial bank loans to help fill the gap.

aW Direct investment will remain low, mainly because of past bureaucratic delays ic approving new projects. Full debt amortization payments7 will5 million, slightly more thanotal net capital inflows will conrequently shrink to0 million, compared0 million

Chile is expected to increase imports to aboutillion. Higher domestic wheat yields and low wheat import prices willeduction in spending for food imports. Most of the increase in imports will corns in fuels, rawand goods for Industry. Bringing total imports toarget level will require5 million more than chile*ow expects to receive from trade and capital flows. Given the recent imp rovehe Chilean credit rating, wo be-lieve that Chile can raise this additional amount from pri- vate sourcss.

lthough the junta is stilltrong anti-Inflation policy, it intends to ease austerity. Real wages arc to be increasedercent. The juntalight relaxation of its restrictive monetary policy in the first quarter. Itoderate program cf tax reductions, increased social spending, and wage increases for government workers on Mayhese steps are expected to resultovernment deficit of aroundercent of expenditures thisbelowpercent deficit

Growth in the monoy supply is expected to decline from last yoar. The attack on inflation was also aidedwo-month voluntary price freeze by private industry that ended in May. On balance, we estimate that inflation will decline

Jjflff With somewhat stronger demand, real gross domestic product shouldercent this year. Finished

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goods inventories in some industries are likely to holdgrowth toercent,2 porcent last year. Good woather should permit agriculturalto rise as muchercent above last year.activity, which began picking up late last year, should grow this year for the first timemployment will riseercent this year. The unneolovment rate will decline only slightly,2 percent

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