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March 2000

On debt, flows and Eric Clapton


Chilean Finance Minister




       
Nicolas Eyzaguirre
If supporters of Chilean president-elect Ricardo Lagos are banking on some sort of cultural revolution during his six-year term, they can probably look first to the unlikely figure of Nicolas Eyzaguirre, the new finance minister.
Because behind the perfect curriculum vitae, which includes degrees from the University of Chile and Harvard, and then stints with the Chilean central bank and the IMF, is a former student radical who idolizes Eric Clapton and loves nothing better than to pick out a melody on one of his four guitars. "I grew up listening to the Beatles, the Rolling Stones, Bob Dylan...people like that. But my big influence is still Eric Clapton."
Between proselytizing on the merits of fiscal prudence and a strong currency, Eyzaguirre, now 46, recalls with a smile the combative days of the dictatorship, when impromptu street performances by his folk rock band were cut short by members of the constabulary.
"A lot of our songs were anti-military," he says. "I can remember a few times running down the street with a great big double bass."
Ten years later Eyzaguirre figured in the democratic movement which forced general Augusto Pinochet to call a plebiscite on continued military rule, a role which also bought him into conflict with the authorities.
These days the father of three is probably more likely to fall foul of the international investment community, or the country's hard-right technocrats than men in uniforms. But even natural detractors have had to admit, that at least on paper, Chile's new finance minister is a sound choice to take one of the region's most robust economies into the new millennium.
Before joining the central bank in 1990, Eyzaguirre spent four years at the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), where he specialized in macroeconomic and financial policy.
His work with ECLAC took him all over the region, where he advised governments on how to implement structural reforms to control currency movements, inflation and capital flows.
His monetarist skills were more recently put to work as executive director for Argentina, Bolivia, Chile, Paraguay, Peru and Uruguay at the IMF, a post he assumed in November 1998, 18 months after joining the fund.
Before that, from 1990-1997, he held various posts at Chile's autonomous central bank, the last of which was research director and chief economic counsellor. During this time he monitored, and helped design changes to, the country's then-rigid system of capital and currency controls.
These have been substantially modified in the past few years, and Eyzaguirre has promised the international investment community a fresh look at those restrictions which have been made redundant by globalization of capital and universally low inflation. "I would say that in the medium term Chile will no longer need capital controls," he says.
Central bank sources say the first barrier to fall will be the rule which forces foreign portfolio investors to commit for a year, a measure designed to prevent the type of sudden capital flight from which Mexico and Brazil are still recovering. The reserve requirement, under which these same investors had to leave a certain percentage of their capital on deposit with the central bank, was effectively eliminated in 1998, although it can be reactivated at a moment's notice.
The 15% tax on capital gains is also in the out tray, although it is not clear how soon the tax will disappear. Despite all these actual or possible changes, foreign investors waiting for the capital account floodgates to suddenly fling open may have to bide their time.
Eyzaguirre is exercized by the private sector's $28.2 billion in foreign debt, out of a national total of about $34 billion. Although most of the debt is medium or long term, and the currency has been firming against the dollar, he fears the consequences of a shift in market sentiment and a corresponding depreciation in the peso.
"A lot of corporations are going to find themselves in trouble," he says. "And through that a lot of Chilean banks with exposure to these companies will get into trouble too, and this can knock on to the state financial system."
Although further curbs on private sector borrowing abroad are out of the question, Eyzaguirre is promoting more transparent relationships between companies and domestic banks and perhaps tougher credit criteria. His dream is to oversee the eventual issuance of peso-denominated debt in international markets.
"If I can hedge the aggregate risk of foreign debt, then movements in the exchange rate won't be such a headache for the country," he says.
Another one of his goals is to reverse last year's fiscal deficit, estimated at about 1.5% of GDP, and produce a surplus of more than 1% next year.
He said the target called for two years of fiscal austerity, and assumed economic growth of 6% to 7%, low unemployment, and strengthening prices for copper, on which the country relies for about 40% of its $15 billion in export revenues.
"Social, political and economic discipline in any country is founded on the idea that the public sector has to be at least in balance, if not in surplus," he said.






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