LatinFinance - May/June 2015 - 35

our baseline scenario, economic activity
should increase steadily during the year.
However, every adjustment process has
costs. In our case, because an important
change in relative prices was required, the
cost has been having inflation above the
target for some months. Indeed, in recent
months inflation slightly exceeded the
2%-4% tolerance range and we estimate
that it will remain above the 3% target for
some time, and that it will gradually return
to this level. To be clear, inflation has surprised us, but the surprise is mostly related
with the fact that the depreciation of the
peso has been greater and more persistent
than previously estimated. In the baseline
scenario, we assume that the exchange
rate will stabilize, so that its effects on inflation will decrease. Along with this, the fact
that the economy will continue to grow in
the next quarters below its potential, will
also contribute to the convergence of inflation. The effects of widespread indexation
and the tax reform on prices will also tend
to decrease in importance. Finally, low
inflation around the world and a low price
of energy will also help.
These have been years of great changes
in the world economy, and it seems that
this will not change anytime soon. For
now, the end of the commodities' super
cycle and the normalization of monetary
policy by the US Federal Reserve pose
significant challenges. Of course, these are
not the only challenges that our economy
faces. Chile is embarking on an ambitious
reform plan that aims to reduce inequality while maintaining high growth rates.
These processes involve, by nature, a great
degree of uncertainty that, if not correctly
managed, could hurt investment and
growth. The challenges we currently face
are, to a large extent, the consequences
of our own success. A more developed
society asks for more, is less patient and,
typically, more critical. Passing the test will
require thinking deeply into the origins
of the problems we want to solve and the
consequences of the measures taken.
Experience suggests that future challenges
will require a flexible economy; a financial
system that properly weighs risks and
helps new ventures grow as well; and,
intensified efforts to improve productivity.
The good news is that the conditions for
success in these endeavors are currently
present in the Chilean economy. LF
Rodrigo Vergara is governor of the Central
Bank of Chile.

Codelco continued from page 33

RODRIGO VERGARA
CHILEAN CENTRAL BANK

"CHILE IS EMBARKING
ON AN AMBITIOUS
REFORM PLAN THAT
AIMS TO REDUCE
INEQUALITY WHILE
MAINTAINING HIGH
GROWTH RATES. THESE
PROCESSES INVOLVE,
BY NATURE, A GREAT
DEGREE OF
UNCERTAINTY THAT,
IF NOT CORRECTLY
MANAGED, COULD
HURT INVESTMENT
AND GROWTH"

guardian of one among the country's most
profitable resources," says Jay Djemal,
director of Fitch's Latin America Corporate
Group. Ocampo from S&P adds that an
AA- rating reflects "the company's close
relationship and high importance to its
100% owner".
Codelco's size also allows it to leverage
contracts with suppliers and workers and
its long-term contracts have mitigated some
energy price fluctuations.
In addition, the depreciation of the
Chilean peso helped to bring down costs
in dollars: "In 2014 we had a positive effect
of $0.11 per pound, allowing us to balance
increasing operational costs, as ores grades
decreased by 4% last year," former CFO
Espinoza explains. "However, in large part
that 7.8% cost cut is due to our management
efforts worth for $209 million in savings for
energy and fuels."
Analysts at Barclays forecast a rise in
copper prices by year-end, predicting
that growing demand from the US, Japan,
and Europe will compensate for a slowing
consumption of the metal in China. Paulina Yazigi, head of fixed income research
and chief economist at Credicorp Capital,
explains that over a longer term, "prices
could increase by around 2% annually,
because we don't see supply increasing, but
demand should grow".
Codelco's financial administration is another ace for the company. Lemco observes
that "historically the company has been
very well managed". And Djemal says that
Fitch doesn't perceive liquidity problems,
considering that "last year it tapped the
international bond markets, raising €600
million in July and $980 million in November, taking steps to refinance debt due in
2015." According to the company's financial
statements, debt worth nearly $700 million
is due in 2015, while slightly more than $1
billion is owed in 2016.
The company has to overcome serious,
even "existential threats", claims Djemal.
The good news for Codelco and the copper
sector in general is that prices aren't likely
to fall below $2.50. Since the company has
managed to take its costs down to $1.50
a pound, that still provides "a significant
profitability level," concludes Djemal. He
adds that "capex will start to ramp up in
2018, and by 2020 we'll start to see higher
volumes coming out of the company. So
there's light at the end of the tunnel." LF

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