Chile
CONFIDENTIAL
xiv
44
Following Pinochet's defeat in the October plebiscite, the omens appear good for
a fairly smooth transition to civilian government. The military government has
announced it will take no direct part in the December 1989 Presidential and
Parliamentary elections. Pinochet has said he will not himself contest the
Presidential election. There seems to have been little loss of business confidence
since the plebiscite, though investment is expected to slow in 1989. The economy
continues to perform well. Demand is buoyant and real GDP rose by 5.8% in the 12
months to July. At present inflation continues to fall, (a 12 month rate of 11% in
November of 21.5% in December 1987) although real wage growth and rapid monetary
expansion could reverse this trend. There was a trade surplus of $1.5 bn for
January to September (cf $0.76 bn in the same period in 1987) partly reflecting
higher copper prices. Following the amendments to debt contracts agreed with the
banks in August, the Central Bank has purchased $299 mn of bank debt at an average
price of 56.3 cents/$: annual interest payments will now be some $29mn lower. NO
further buybacks by the Central Bank are planned.
Peru
45
A watered-down version of the measures announced in early September (intended to
reduce the fiscal deficit from 10% to 6% of GDP) was supplemented by a further
package in late November. The latter included a 50% devaluation, further large
increases in the prices of basic goods, and a 60% rise in the minimum wage.
Interest rates will be more flexible but no real tightening of fiscal policy is
implied. This change of tack appears to have only the half-hearted support of
Garcia and a rapprochement with the Fund and World Bank still seems a long way off;
in late November, Finance Minister Salinas resigned over the Government's failure to
implement fully the measures he proposed. Although arrears to the IADB have been
settled, it is by no means clear who will provide financing to clear huge arrears to
the IFIS which would be a pre-condition for new Fund or Bank credits. Even more
unclear is how Peru and its commercial bank creditors might be reconciled.
46 12 month inflation exceeded 1300% in November, the trade deficit has widened
substantially, real GDP has fallen and cash reserves are all but exhausted.
Against this unpromising background, a restricted debt: equity programme has been
| announced. The attempt to nationalise the banks is now dead.