economics

March 2, 2010

Chile’s earthquake- In need of repair

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Chile counts the cost of a devastating earthquake and makes plans for recovery

Mar 1st 2010 | SANTIAGO | From The Economist online

RELIEF was the initial reaction in Chile to what seemed relatively limited damage given the scale of the earthquake that shook the centre and south of the country in the early hours of Saturday February 27th. That picture has been replaced gradually by dismay as the full extent of the cost begins to emerge. By Sunday evening, the number of confirmed deaths had reached over 700 and is still likely to rise, according to President Michelle Bachelet. This is still a low toll, however, for a quake of 8.8magnitude, one of the largest in the world since 1900.

Felt throughout almost all the country, the quake hit most strongly in six central regions, from the capital, Santiago, and the nearby port of Valparaiso in central Chile to the city of Temuco in the Araucanía region of the south. These parts of the country are home to about 60% of Chile’s 17m inhabitants and account for around 70% its GDP. An estimated 1.5m homes are thought to have been damaged and around a third may have to be demolished.

The greatest damage and loss of life, however, appears to have been caused not by the earthquake itself but by a subsequent tidal wave that washed over fishing towns on the coast of south-central Chile. In one such town, Constitución, rescue workers found over 300 bodies on Sunday. Much of the only town in the Juan Fernández archipelago in the Pacific Ocean, which belongs to Chile and is best-known as the place where Robinson Crusoe was marooned, was also destroyed.

Chile has developed an efficient disaster-response system to cope with what Ms Bachelet has described as “a history plagued with natural disasters”. However, looters, particularly in the southern city of Concepción and other nearby towns, have dented the image of a country swinging into action to relieve its suffering people. Though some looters may have merely been in search of scarce food and water others were out for what they could take. As a result, on Sunday, the government imposed a curfew in some of the worst-affected areas.

The earthquake struck just as the Chilean economy was beginning to recover after an estimated contraction of 0.9% in 2009. The after-effects will hamper the exports that drive the country’s growth. Copper, Chile’s biggest earner abroad, is produced mainly in the north of the country which was unscathed. But damage to ports further south may hamper shipments of forestry products, including wood pulp, while exports of fruit, now at the height of the harvest season in the southern hemisphere, will face delays as a result of damage to the main roads of central Chile.

Despite the earthquake’s likely impact on growth in the first and, possibly, the second quarter, it may actually provide a boost for the economy in the medium term as the government spends heavily to repair the damage. This is welcome news for the country’s president-elect, Sebastián Piñera, who is set to take office on March 11th and was voted in on an ambitious promise of average economic growth of 6% annually over his four-year term.

Until assessment of the damage is complete, it is hard to estimate the cost of reconstruction. Eqecat, an American catastrophe-management company, has suggested that it could total as much as $30 billion, equivalent to 20% of Chile’s GDP in 2009. Part of the cost can readily be financed out of the public purse, drawing on savings accumulated while copper price boomed between 2005 and 2008.

However, Mr Piñera, who has indentified increased private investment as one of the most important components of higher growth, has indicated that the government will not do all the work. He expects Chilean companies to play an important role in the reconstruction through a “Lift Chile” plan, which he outlined on Sunday. This may well include a revival of a public-works-concession scheme that Chile successfully launched in the mid-1990s precisely to build many of the motorways that were damaged by Saturday’s earthquake.

Chilean Stocks Post World’s Biggest Drop as Quake Closes Roads

By Tal Barak Harif and Ivan Weissman

March 1 (Bloomberg) — Chile stocks fell the most in almost a month, the biggest drop among the world’s 50 largest markets, after an 8.8-magnitude earthquake killed hundreds, severed the nation’s main highway and damaged 1.5 million homes.

Empresa Nacional de Electricidad SA, the nation’s biggest power generator, and Lan Airlines SA, the country’s largest carrier, dropped following electricity outages and airport closures. Salfacorp SA, Chile’s biggest building company, jumped the most in five months on speculation it will benefit from increased business as the nation recovers.

The Ipsa Index dropped 1.2 percent to 3,782.04, the biggest decline since Feb. 5, following the country’s biggest earthquake since 1960. Chile’s peso pared a retreat of as much as 1 percent in Santiago, losing less than 0.1 percent to 524.70 per dollar, on speculation the government will repatriate overseas savings to fund reconstruction.

“It’s a pretty horrific event,” said Urban Larson, who helps manage about $2.2 billion in emerging markets at F&C Management Ltd. in London. “Long-term Chile can handle this quite well, although the short-term looks difficult.”

Copper jumped to a seven-week high in New York after the quake in Chile, the world’s largest producer, forced Codelco, Anglo American Plc and Antofagasta Plc to halt mine operations after power cuts. Chile’s benchmark 10-year peso bond yield fell to the lowest since the end of October. The yield for a basket of Chile’s 10-year peso bonds in inflation-linked currency units, called unidades de fomento, slid four basis points, or 0.04 percentage point, to 2.96 percent, according to Bloomberg composite prices.

‘Catastrophe’

Roads and airports were shut due to damage. The total economic impact may be as much as $30 billion, or about 15 percent of the South American country’s gross domestic product, according to estimates by disaster-scenario modeler Eqecat Inc. At least 700 people were killed.

President Michelle Bachelet declared a “state of catastrophe,” saying that about 2 million people have been affected by the earthquake that the U.S. Geological Survey said was the world’s fifth strongest since 1900. The army is deploying about 10,000 troops, Defense Minister Francisco Vidal said.

Chile’s $11.3 billion savings fund will stabilize the peso after today’s “knee-jerk” decline, according to Goldman Sachs Group Inc. and Bulltick Securities Corp.

The government will likely tap the overseas fund, stockpiled with copper revenue, to finance reconstruction projects, bringing in dollars that will help offset a slump in exports, said Alberto Ramos, a Goldman Sachs economist.

‘Rapid’ Reconstruction

The peso rallied 26 percent last year, the most since at least 1982, as the government spent $9.3 billion of the savings to shore up growth amid the global recession.

Chile, whose debt is the highest rated in Latin America, is “by far” the country best suited in the region to fund the spending needed after a disaster, said Alberto Bernal, head of emerging-markets research at Bulltick in Miami. The government will disburse the money for reconstruction at a “rapid pace,” helping sustain growth and fuel a peso rally, he said.

Chile’s central bank will probably delay raising interest rates, analysts from Goldman Sachs and Moody’s Economy.com said. The quake is likely to disrupt growth in the $169 billion economy for two quarters as incoming President Sebastian Pinera focuses on getting assistance to the damaged area, said Alfredo Coutino, chief Latin America economist at Moody’s Economy.com.

‘Substantial’ Impact

The temblor was centered 200 miles (317 kilometers) southwest of Santiago near the main winemaking region and close to Concepcion, a metropolitan area of more than 500,000 people. More than 50 aftershocks followed the earthquake, which was stronger than the one in Haiti on Jan. 12 that may have killed 300,000 people.

“Given the extraordinary magnitude of this earthquake, its impact will be substantial,” Stacy Steimel, who helps manage $87.3 billion at PineBridge Investments in Santiago, wrote in an e-mailed note yesterday. “I expect to see a temporary pullback in the Ipsa, which I would consider a buying opportunity.”

Chilean telecommunication companies and banks will also be affected “as credit quality is disrupted,” Greg Lesko, who helps manage $750 million at Deltec Asset Management said yesterday. Banco Santander Chile, the country’s biggest lender, dropped 0.9 percent to 32.1 pesos. Banco de Credito e Inversiones lost 1.9 percent to 18,502 pesos.

Power Outages

Utilities such as Endesa Chile in Santiago will suffer “the biggest impact” because of power outages, Eric Conrads, a hedge fund manager at Armada Capital SA, said yesterday. Chilectra, the electric utility for the Chilean capital of Santiago, said electricity was restored to 80 percent of the city’s homes and businesses after the quake.

Endesa Chile fell 1.1 percent to 860 pesos and Lan declined 1.7 percent to 9,097 pesos.

Builders including Salfacorp and Besalco SA surged on speculation they may benefit from rebuilding efforts. Salfacorp, the nation’s biggest builder, climbed the most since Sept. 28, rising 5.9 percent to 995 pesos. Besalco jumped to a record, advancing 8.5 percent to 396 pesos. Cristalerias de Chile SA, the glass container producer known as Cristalchile, gained the most in almost six months, surging 10 percent to 6,850 pesos.

“We anticipate that the rebuilding effort will come to be the more lasting effect of the quake on the Chilean economy, providing an important positive stimulus later this year,” said Bill Witherell, who helps oversee $1.5 billion in exchange- traded funds and fixed income as chief global economist of Cumberland Advisors Inc. in Vineland, New Jersey. “We would view any pullbacks in the Chilean equity market as a possible buying opportunity.”

Chile’s Ipsa Index slumped as much as 2.9 percent earlier, the most intraday since Dec. 1, 2008. The measure is the most expensive in Latin America after Colombia’s IGBC Index, trading at 24 times the reported earnings of its companies, according to data compiled by Bloomberg. The Ipsa trades for 17.2 times analysts’ 2010 earnings estimates, compared with 13.6 times for the MSCI Latin America index.

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