Chile May Tap Savings, Sell Debt to Pay Quake Losses (Update2)
March 12, 2010, 5:10 PM EST(Adds economist’s comment in ninth paragraph.)
By Sebastian Boyd
March 12 (Bloomberg) -- Chile plans to tap its copper savings funds and may borrow abroad to pay for the estimated $30 billion cost of repairing damage caused by the 8.8-magnitude earthquake that struck the country Feb. 27.
“We don’t have a definitive estimate, but estimates indicate that the damage caused by this earthquake could be close to $30 billion,” President Sebastian Pinera told reporters in Santiago today.
Pinera said he plans to rewrite the 2010 budget to free up resources for a reconstruction fund, adding the government will also tap its savings. Chile has $11.3 billion invested overseas in an economic stabilization fund that the government can use to finance a budget deficit. Using money from the fund could mean selling dollars to buy pesos, boosting the Chilean currency.
“We will study the possibility of contracting debts overseas,” Pinera said. “Chile has hardly any public sector debt.”
Chile is a net creditor, with more in its offshore savings funds than it owes. The country has $1.75 billion of international bonds outstanding, all due before 2013, according to data compiled by Bloomberg.
The high price of Chile’s main export, copper, may also help pay for reconstruction, the president said. Pinera took office yesterday.
Chile’s new government will need to weigh the advantages of borrowing in dollars, which may push up the peso, and borrowing in pesos, which could push up the cost of selling bonds for Chilean companies.
Trade-Off
“If they tap too much domestically, they’ll crowd out the private sector, which needs funds for reconstruction,” said Rafael de la Fuente, chief Latin American economist at BNP Paribas SA in New York. “If they go abroad, they put pressure on the currency. That’s the trade-off.”
The peso rose 3.1 percent in the five days following the quake, the most of any of the seven Latin American currencies tracked by Bloomberg, on speculation the government would need to sell dollars to pay for rebuilding. Since then it has depreciated 1.8 percent, the most of 26 emerging-market currencies, after central bank President Jose De Gregorio said it may have “overshot.”
The currency was little changed today at 517.75 pesos per dollar.
“The market is already discounting that some offshore funds will have to be used” De La Fuente said. “Whether it is fully discounted remains to be seen.”
--Editors: Brendan Walsh, Richard Jarvie.
To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net
To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net
