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Capital Markets

Fiscal stimulus: Chile signals pump-priming

Chile is on track to weather the financial crisis and avoid a recession. “Chile managed the boom years incredibly well and now they have the funds to help smooth the financial cycles and work through this crisis. We have a pretty favourable outlook on Chile for 2009,” says Casey Reckman, associate director in Fitch’s Latin American sovereign group.

Like many other countries, Chile is resorting to pump-priming in a bid to protect jobs and businesses. Last month, the government announced a $4 billion fiscal stimulus package, small beer compared with the programmes announced in China, the US and Europe but still a sign that the authorities are keen to be seen to be doing something.

The counter-cyclical package is the equivalent of 2.8% of GDP and includes direct support for low-income families, investment in public infrastructure, tax cuts and other incentives for private investments. Small and medium-sized companies will receive financing too. Funds will also be used to help in training and retraining new labour. Codelco, Chile’s state-owned copper mining company, will receive $1 billion of the package so it can maintain and strengthen its investment plans.

Another part of the plan includes measures to ease pressure on the banking system. At its heart is the abolition of stamp duty paid on loans. This tax stands at 1.2% of the principal and without it the Chilean government stands to lose $628 million in 2009. The tax is expected to return at 0.6% in 2010. The tax is often cited as the reason why individuals and SMEs do not change banks and refinance loans despite being offered lower interest rates.

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