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Chile's Copper Windfall Props Up Spending as Ecuador Defaults

Chile's Copper Windfall Props Up Spending as Ecuador Defaults 

Chilean homemaker Majorie Rojo shrugs when asked about the crash in the price of copper, the engine of her nation's economy.

"I don't know anything about that -- nothing, zero," Rojo, 28, said as she bounced her 19-month-old son in her arms at a government daycare center in Santiago.

Rojo has little reason to fret about the metal's 68 percent drop from a record reached in May. For the time being, President Michelle Bachelet says $28 billion in savings, amassed when copper prices were higher, will protect state-run services from spending cuts as global economic growth slows to 0.9 percent next year from 2.5 percent in 2008, according to the World Bank.

"A country like Chile stands out for being very forward- looking by putting away the copper windfall," said Alberto Ramos, a Goldman Sachs Group Inc. economist in New York. Other countries will have to "cut spending or keep spending and have high deficits. There is no easy way out."Santiago's stock index has fallen 23 percent this year, about half as much as the benchmark for neighboring Brazil. Still, the commodities crash may catch up with Chile if the crisis worsens, said Sergio Zapata, an analyst at Banchile Inversiones.

The peso has weakened 21 percent against the dollar this year, making it the region's second-worst performing currency tracked by Bloomberg, behind the Brazilian real.

"Chile isn't immune to the crisis," Zapata said. "But it's on a relatively better footing."Return to DemocracyAfter Chile's return to democracy in 1990, the ruling coalition broadened policies to control spending put in place under former dictator Augusto Pinochet by University of Chicago- trained economists. Since then, the country has earned the highest credit rating in South America. Moody's Investors Service rates Chile's $2.25 billion in foreign bonds A2 and said Nov. 20 that the debt may merit an upgrade.

To guard against price swings, the country linked its budget in 2001 to the long-term outlook for copper. Chile, which relies on the metal for about a quarter of government revenue, based 2008 expenditures on a price of $1.37 a pound, less than half the average this year.

That policy is helping to insulate Chile from the kind of funding cuts or increased borrowing confronting Venezuela, Argentina and Ecuador, Ramos said.

Five-year credit-default swaps based on Chilean bonds fell 3.5 basis points yesterday to 2.4450 percentage points, according to CMA Datavision. This means it costs $244,500 to protect $10 million of Chilean debt from default, the least among nine Latin American countries tracked by Bloomberg.

Oil 'Earthquake'

It costs $3.25 million to protect equal amount of Venezuelan bonds, $4.57 million to insure Argentine assets and $5.9 million to guarantee Ecuador's debt.

Ecuador this month defaulted on foreign bonds after a slump in oil, its biggest export. Argentina nationalized $24 billion in private pension funds, fueling speculation the government was seeking cash to prop up its finances, Ramos said.

Venezuelan President Hugo Chavez warned Nov. 17 that his nation should brace itself as an "earthquake" cuts oil revenue. Crude has plunged 73 percent from a July record to $39.91 a barrel. Venezuela is basing its 2009 budget on a price of $60.

Chile's rainy-day savings from copper should be enough to fill any budget holes for three or four years, said Julio Dittborn, a congressional finance committee member. Government spending next year will prop up an economy that otherwise would stagnate or shrink, he said.

More SpendingIn November, Congress approved a spending increase of 5.7 percent to 20.7 trillion pesos ($33 billion) for 2009. Chile will likely have a budget deficit of 0.5 percent of gross domestic product, or $850 million, which can be financed from the funds, said Juan Pablo Castro, an economist at Banco Santander Chile SA in Santiago.

Latin American governments will face average deficits of 2.1 percent in 2009, after an estimated 0.4 percent this year, Credit Suisse Group AG said Dec. 11.

"When there was a boom, there wasn't a flood of wealth," Castro said. The drop in copper "isn't going to mean poverty."A drop in investment in mines will restrain Chile's GDP. The economy will expand 0.7 percent in 2009, slowing from estimated 3.8 percent growth this year, said David Duarte, an analyst in New York at 4Cast Inc.

'Main Driver'

"The main driver of the economy, which is investment, appears to be coming to a halt," Duarte said. "We see a lot of projects being halted or postponed."Phoenix-based Freeport-McMoRan Copper & Gold Inc., London- based Anglo American Plc and BHP Billiton Ltd., headquartered in Melbourne, have shelved or delayed $3.1 billion of Chilean projects in the past month.

Copper for March delivery rose 1.4 percent to $1.3455 a pound yesterday on the Comex division of the New York Mercantile Exchange. It touched a record $4.2605 a pound on May 5.

The price may fall 26 percent more to $1 a pound, said Cesar Perez-Novoa, a managing director at brokerage Celfin Capital SA.

Even so, homemaker Rojo isn't alone in lacking concern.

At a pedestrian walkway in downtown Santiago, street vendor Estela Rivero, 53, said she didn't know what copper is used for or how much it costs.

"I don't have the slightest idea," Rivero said, as she sat a few blocks from the copper-trimmed headquarters of state-owned Codelco, the world's biggest producer by output last year.

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pt 3/3 David Tice on King World News December 19, 2009