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MINISTRY OF FINANCE How to Reform and be Re-elected? Chile’s Experience and Future Challenges MINISTRY OF FINANCE How to Reform and be Re-elected? Chile’s Experience and Future Challenges Rodrigo Álvarez Zenteno Undersecretary of Finance of Chile

Presentation Overview MINISTRY OF FINANCE § About Chile: an Economic background § Chile’s Reform Presentation Overview MINISTRY OF FINANCE § About Chile: an Economic background § Chile’s Reform § How to be Re-elected?

MINISTRY OF FINANCE § About Chile: an Economic background § Chile’s Reform § How MINISTRY OF FINANCE § About Chile: an Economic background § Chile’s Reform § How to be Re-elected?

The current economic scenario MINISTRY OF FINANCE • Population: 17, 1 MM (2010 estimate) The current economic scenario MINISTRY OF FINANCE • Population: 17, 1 MM (2010 estimate) • GDP 2009: • Total: US$164 bn • Per capita (current dollars): US$9. 525 • Per capita (PPP): US$14. 341 • Human Development Index 2007: 0, 878 (high, rank: 44/182, 1 st in Latin America) • Life expectancy at birth (years): 78, 5 • Adult literacy rate (% aged 15 and above): 96, 5

Quarterly Economic Growth Highest growth rate in the last 5 years (GDP, annual % Quarterly Economic Growth Highest growth rate in the last 5 years (GDP, annual % change) 8 6. 6 7. 0 6 4. 6 MINISTRY OF FINANCE 4 4. 6 3. 4 2. 1 2 1. 6 0. 2 0 -1. 4 -2 -2. 1 -4 -4. 5 -6 08. III Source: Central Bank of Chile 08. IV 09. III 09. IV 10. III 5

Monthly Economic Activity: Highly Dynamic Highest monthly growth rate since July 1996 (IMACEC, annual Monthly Economic Activity: Highly Dynamic Highest monthly growth rate since July 1996 (IMACEC, annual % change) 10 Immediate effect of the earthquake 8 7. 5 6. 9 7. 4 6. 7 5. 4 6 4 MINISTRY OF FINANCE 2 0 -2 -2. 2 Source: Central Bank of Chile Sep/10 Jul/10 May/10 Mar/10 Jan/10 Nov/09 Sep/09 Jul/09 May/09 Mar/09 Jan/09 Nov/08 Sep/08 Jul/08 May/08 Jan/08 -6 Mar/08 -4

Strong Employment Creation Employment creation since January-March: 164. 780 MINISTRY OF FINANCE Since mobile Strong Employment Creation Employment creation since January-March: 164. 780 MINISTRY OF FINANCE Since mobile quarter January-March 2010 data are based on the New National Employment Survey. Due to the conceptual differences between the new survey and the older one, data can not be spliced. Source: INE

Inflation MINISTRY OF FINANCE Average 2000 -2009: 3. 3% Source: Central Bank of Chile, Inflation MINISTRY OF FINANCE Average 2000 -2009: 3. 3% Source: Central Bank of Chile, Monetary Policy Report, September 2010

Inflation: Total and Long range Inflación Septiembre: 0. 4% Inflación en 12 meses: 1. Inflation: Total and Long range Inflación Septiembre: 0. 4% Inflación en 12 meses: 1. 9% Inflación Acumulada 2010: 2. 7% MINISTRY OF FINANCE Fuente: INE

Fiscal Deficit During Global Recession MINISTRY OF FINANCE Source: Eurostat, OECD, IMF and DIPRES Fiscal Deficit During Global Recession MINISTRY OF FINANCE Source: Eurostat, OECD, IMF and DIPRES

MINISTRY OF FINANCE § About Chile: an Economic background § Chile’s Reform § How MINISTRY OF FINANCE § About Chile: an Economic background § Chile’s Reform § How to be Re-elected?

The “old” Reform MINISTRY OF FINANCE • A huge first step to reform our The “old” Reform MINISTRY OF FINANCE • A huge first step to reform our economy was given on the 80´s 90´s, when an extensive program of privatizations and State modernization. During the last 20 years there was stability and development. • As a result we have a solid and healthy Public Finance • All is reflected in today’s Chile’s economic performance…

Chile´s Declining Macroeconomic Volatility MINISTRY OF FINANCE Source: Own elaboration based on Central Bank Chile´s Declining Macroeconomic Volatility MINISTRY OF FINANCE Source: Own elaboration based on Central Bank of Chile

Chile´s Very Favorable International Credit Conditions MINISTRY OF FINANCE Source: JP Morgan and Bloomberg Chile´s Very Favorable International Credit Conditions MINISTRY OF FINANCE Source: JP Morgan and Bloomberg

Public Debt Burden: A Comparison MINISTRY OF FINANCE Source: Eurostat, OECD, IMF and DIPRES Public Debt Burden: A Comparison MINISTRY OF FINANCE Source: Eurostat, OECD, IMF and DIPRES

The Government of Chile: A Net Creditor MINISTRY OF FINANCE Source: DIPRES The Government of Chile: A Net Creditor MINISTRY OF FINANCE Source: DIPRES

Chile’s Economic and Social Stabilization Fund (Sovereign Fund) July 2010: 11. 1 MINISTRY OF Chile’s Economic and Social Stabilization Fund (Sovereign Fund) July 2010: 11. 1 MINISTRY OF FINANCE Source: DIPRES

The Budget: Structural Balance Rule • The SBR isolates the impact of the economic The Budget: Structural Balance Rule • The SBR isolates the impact of the economic cycle on public finances • The SBR commits to a balanced budget (zero deficit) when MINISTRY OF FINANCE • The economy grows at its potential rate • Copper price is at its long-term level • In practice, this means • Saving during economic booms, when extraordinary revenues are received • Dissaving in downturns, when fiscal revenue drops

Central Government Balance 1987 -2009 Before the Structural Balance Rule MINISTRY OF FINANCE Source: Central Government Balance 1987 -2009 Before the Structural Balance Rule MINISTRY OF FINANCE Source: DIPRES After the Structural Balance Rule

The “new” Reform MINISTRY OF FINANCE • The overall Chile’s experience in crisis situation The “new” Reform MINISTRY OF FINANCE • The overall Chile’s experience in crisis situation is positive • The world face us with new challenges • Preventive measures should be considered within political reform schemes

Modernization of the State • Human Resources (Senior Public Management (ADP) and Civil Service) Modernization of the State • Human Resources (Senior Public Management (ADP) and Civil Service) MINISTRY OF FINANCE • Evaluate new services to be incorporated Review advertising and requirements for applications to increase turnout in contests 21

Reforming Chilean Administration MINISTRY OF FINANCE • New State comission for the reform of Reforming Chilean Administration MINISTRY OF FINANCE • New State comission for the reform of Public Administration. • Delivery Unit to fulfill the Government compromises • New agency for the revision of Public Policies 22

Strong reforms on Analisys: Reform of the Corporate Governance for Public Companies MINISTRY OF Strong reforms on Analisys: Reform of the Corporate Governance for Public Companies MINISTRY OF FINANCE Reform of the Corporate Governance for Private Companies Reform of the Regulatory Agencies: Financial, Banking, Capital Market Strong Policy in The International Arena. We will continue the negociations regarding free trade agreements and tax treaties

Bicentennial Market Capital Reform Tax MINISTRY OF FINANCE Risks and Financial Stability Institutional reform Bicentennial Market Capital Reform Tax MINISTRY OF FINANCE Risks and Financial Stability Institutional reform Consumer protection Transparency and information Markets and new financial models Middle class and Small and middle Companies

Tax Incentives for R&D • MINISTRY OF FINANCE • • • Tax incentive which Tax Incentives for R&D • MINISTRY OF FINANCE • • • Tax incentive which allows companies to use 35% of expenditure in R&D (extramural) in contracts with research centers registered as a tax credit (established 2008) Only generated 19 contracts totaling US$ 1, 5 MM Will create an additional tax incentive for private investment in R&D conducted within the enterprise (intramural) Will extend the limit of investment tax credit for extramural R&D 25

MINISTRY OF FINANCE § About Chile: an Economic background § Chile’s Reform § How MINISTRY OF FINANCE § About Chile: an Economic background § Chile’s Reform § How to be Re-elected?

Chile choose to change MINISTRY OF FINANCE • From 1990 until 2010 a center-left Chile choose to change MINISTRY OF FINANCE • From 1990 until 2010 a center-left coalition governs. • People wants a new political performance, “a new way of govern” • President Sebastián Piñera, assumed his position on 11 march 2010.

GOVERNMENT PROGRAM 2010 -2014 MINISTRY OF FINANCE • Grow at 6% average annual rate GOVERNMENT PROGRAM 2010 -2014 MINISTRY OF FINANCE • Grow at 6% average annual rate • Create 200. 000 jobs annually (2010 -2014) • Increase investment (Gross Fixed Capital Formation) from 21% of GDP (2009) to 28% of GDP in 2014 • Eliminate extreme poverty by 2014 • Lay the ground to become a developed country by 2018

RECOVERY OF THE CAPACITY OF GROWTH AND JOB CREATION OF CHILE • Recover investment RECOVERY OF THE CAPACITY OF GROWTH AND JOB CREATION OF CHILE • Recover investment § Accelerated depreciation § Tax incentives for small businesses § Reduce costs of bureaucracy MINISTRY OF FINANCE • Increase employment § § § Incentives to hire Emergency jobs National training plan Adaptability of the workforce Protection of labor rights • Improve productivity § Promotion of science and technology § Promotion of innovation and entrepreneurship § Modernization of the state

Basic Principles • Financing the government program does not require tax increases MINISTRY OF Basic Principles • Financing the government program does not require tax increases MINISTRY OF FINANCE • A temporary tax increase is only needed to finance about one third of the reconstruction effort

Resources Needed for the Government Program: US$9. 3 bn MINISTRY OF FINANCE Resources Needed for the Government Program: US$9. 3 bn MINISTRY OF FINANCE

Chile’s Road to Development by 2018 MINISTRY OF FINANCE Chile’s Road to Development by 2018 MINISTRY OF FINANCE

High Economic Growth Expected in 2011 2009: -1. 5% MINISTRY OF FINANCE Source: IMF, High Economic Growth Expected in 2011 2009: -1. 5% MINISTRY OF FINANCE Source: IMF, Consensus Forecast and Central Bank of Chile

MINISTRY OF FINANCE How to Reform and be Re-elected? Chile’s Experience and Future Challenges MINISTRY OF FINANCE How to Reform and be Re-elected? Chile’s Experience and Future Challenges Rodrigo Álvarez Zenteno Undersecretary of Finance of Chile