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Chile Braces for a Major Economic Slowdown

Tuesday, March 16, 2010
By ALEXEI BARRIONUEVO, The New York Times

TALCAHUANO, Chile -- Just a few weeks ago, some 2,000 fishermen who ply the waters of this port city for sardines and mackerel were busy mending their nets and testing their rigs in preparation for the start of the four-month fishing season.

But the tsunami that barreled through here after last month's 8.8-magnitude earthquake washed away the fishing industry before the fishermen could cast their first net.

The waves tossed around fishing boats and truck-size shipping containers as if they were wood blocks in a toddler's sandbox. Boats landed several blocks inland, resting battered and broken on city streets. The waves deposited multicolored containers one-third of a mile up the beach.

The effect on the economy of this city of 250,000 residents, for whom fishing is the main industry, will be far-reaching, with city officials estimating that it could take up to a decade to rebuild homes and port facilities. And this year's fishing season, which was to begin last Monday, is lost, fishermen said.

"The disturbance in the sea caused the fish to emigrate, to disappear from here," said Alfonso Alvear, 69, a fisherman and president of a neighborhood association here. "It's as if we have to discover this fishing region all over again."

How severely the Feb. 27 earthquake will rattle Chile's overall economy, which has been the envy of Latin America for the past decade, remains to be seen. Most economists are betting that Chile's prudent economic management leading up to the disastrous quake, and the intense rebuilding effort now needed in some parts of the country, will help it weather the economic shocks better than most countries could.

But for a few months at least, a major slowdown is expected in several Chilean industries, including fishing, pulp and paper, wine and agriculture. Seaside areas like Talcahuano that were ravaged by the tsunami could take much longer to pick themselves back up.

"The harder part will be in small villages and towns along the coast, many of which lost their local economy like the fishermen did, and the lady that owned a mini market, and the guy who owned a campground," said Rodrigo Jordan, chairman of the Foundation for Overcoming Poverty, a research institute in Santiago, the capital. "They can rebuild their homes and find clothes, but how can they sustain their families without a local economy?"

The quake devastated nearly a third of the fishing industry in the south-central part of the country, where the tremor struck hardest. It destroyed more than 12 percent of the stock of Chile's wine industry. And it knocked out an important pulp and paper mill in Constitución that could take six months to repair.

Then there were the more subtle effects. The seemingly endless aftershocks -- more than 300 by Friday -- have kept many on edge, and even stressed out cows, which are producing less milk since the quake, said Marta Lagos, a Santiago economist and pollster.

The two regions affected most by the quake -- Maule and Bío Bío -- account for 13 percent of Chile's gross domestic product and nearly 20 percent of its industrial output. Concepción, Chile's second largest city and an industrial hub, was close to the quake's epicenter and was extensively damaged.

Chile's most important industry, copper, was relatively unscathed, as the quake did little to most mines, especially those in the far north of the country. Several ports will need to be repaired, which could slow exports in a variety of goods, although copper is not expected to be affected. The south-central zone damaged by the quake handles more than 20 percent of the cargo in and out of Chile, said Claudio Ortiz, frigate captain of the maritime government of Talcahuano.

"The movement of goods to ships is going to slow down," said Sebastian Edwards, an economics professor at U.C.L.A. who specializes in Latin America. "Chile is a country that relies heavily on exports, so this is going to be a factor."

But Dr. Edwards and other economists also contend that Chile could emerge with a stronger economy a year or so after the earthquake than it had before last month. The nation owes much of that rosy prognosis to the fiscal management of the past two moderate leftist governments, which have given the new president, Sebastián Piñera, palatable options for financing reconstruction, which is expected to exceed $30 billion.

Former President Michelle Bachelet's government hewed to a program of automatic savings during the boom years for global commodities, including copper. The program, along with prudent investment of the savings abroad, allowed two sovereign funds to amass more than $14 billion, money that can now be tapped for reconstruction.

"You save for a rainy day, and this is a rainy day," Andrés Velasco, then Chile's finance minister, said last Monday in an interview.

Chile also has a barely negative inflation and an enviable public debt of 6 percent of gross domestic product, among the lowest in the world, that would allow the country to borrow in foreign markets at very low interest rates.

"There are investors throughout the world that would be willing to add Chilean debt to their portfolios," Dr. Edwards said.

Most economists see Chile's economy losing about a half a percentage point to growth projections of about 5 percent this year. But by next year, projects to rebuild bridges and highways, and homes damaged and destroyed by the quake, could end up accelerating growth to even higher levels, said Eduardo Engel, an economist at Yale University.

Mr. Velasco said the government's main focus, for now, needed to be on building temporary housing to replace tens of thousands of dwellings that were badly damaged or destroyed by the quake and tsunami. In Talcahuano alone, city officials said that 106,000 people were left homeless.

Rebuilding local economies will require more creativity, said Mr. Jordan of the Foundation for Overcoming Poverty. "There needs to be a master plan for reinvesting subsidies into the local economy, to bring back tourism, to rebuild the economic cycle," he said.

Talcahuano, which means "thundering sky" in the indigenous Mapuche language, has been home to hardy sailors and fishermen for more than 200 years. But residents said Talcahuano had never experienced a wave like the seven-footer that swept over the city in early on Feb. 27.

Three people drowned along the coast, with two more still missing, Captain Ortiz said. A total of eight people died in the area, the government says.

In a seaside section of the city, residents worked earlier this month to clean up the mess. Luis Alberto Ayala, who works in a fish cannery, toured warehouses filled with thousands of tons of canned mackerel bound for export, including to the United States. Workers walked through piles of bent and rusted cans, seeing which ones could be saved.

Nearby, Marcelo Alvear, a fisherman and the nephew of Alfonso Alvear, pondered the future.

"Many of us need to work during the season to earn money to pay for school supplies for our children," said Mr. Alvear, 39. "But we can't generate anything this year. If we don't work, how are we going to take care of our children?"

His uncle shook his head.

"Right now we don't have a plan for how we are going to make a living," said the elder Mr. Alvear. "All we have is uncertainty."