April 18, 2006

Chile has an enviable dilemma: too much money

By Fiona Ortiz

SANTIAGO, Chile (Reuters) - Chile's new President Michelle
Bachelet is facing her first big political test, one some might
envy: too much money from the country's rich copper exports.

Opposition leaders, wine makers and fruit growers are
calling on Bachelet to stem a flood of mining dollars that
could spell disaster for many exporters, Chile's economic
motor, by strengthening the local currency too much.

The controversy has given Bachelet, the fourth consecutive
president from the center-left coalition that has run Chile
since the Augusto Pinochet dictatorship ended in 1990, her
first tough challenge as leader.

"We can't just sit around and wait for a disaster to occur,
which is going to happen if our agricultural sector continues
to be hit by this," Sen. Juan Antonio Coloma, of the opposition
right-wing Independent Democratic Union, told Reuters.

Chile, a country of 16 million people and Latin America's
star economy, is the biggest world producer of copper, whose
price has shot sky high due to heavy Chinese demand for
material for buildings and power plants.

Zooming copper income has inundated Chile with greenbacks,
making the local peso currency appreciate and handing the
government fat budget surpluses and a chance to pay down debt.

That's great for consumers snatching up cheap imported
electronics but the strong local currency spells disaster for
exporters of wine, table grapes, berries and salmon whose
dollar-denominated revenues are worth less and less in pesos.

Wine makers have put the brakes on investment and the
billion dollar table-grape industry says thousands of jobs are
threatened and that growers will lose more than $1,000 per
hectare (2.5 acres) of grapes this year as the peso nears
six-year highs.

"We're seeing a total lack of sensitivity by the economic
authorities... I don't believe they have any interest in taking
more drastic measures to correct the problem," Luis Schmidt,
president of the Federation of Fruit Producers, told local

Sen. Coloma said the government should get the peso under
control by holding copper dollars in offshore investments so
they don't enter the country, and by letting let Chile's
private pension fund system invest more outside the country.

The government and the central bank are being very cautious
about intervening in the foreign exchange market. That is
typical of austere, fiscally conservative Chile, which has a
law that forces the government to spend in bad times to
stimulate the economy and save in boom times to control

Bachelet says she will not yield to the temptation to go on
a spending binge, but she has not said what she will do about
the strong peso.

"It's her first big challenge because she usually works by
consensus and now she has to show that she has a view and will
defend that view, she's hearing contradictory advice from (her
ministers)," said Patricio Navia, political scientist with New
York University.

Navia said Bachelet will likely follow Finance Minister
Andres Velasco's nonintervention stance which will win her
"criticism from the small exporters, the ones she claims she's
there to help, who are suffering a lot."

Juan Carlos Sepulveda, another fruit grower leader, said
the government must look after the country's 13,800 fresh fruit
producers, who provide 420,000 direct jobs compared with 50,000
in mining and whose exports were worth $2 billion last year.

"The government kept saying this was a passing thing, but
copper keep going up," Sepulveda said.

Chileans say the government should spend some of the
windfall on education or technological development yet are wary
wanton spending stimulating inflation.

"I get the sensation there's lots of money and it's not
being invested, you don't know what the government is doing
with it," said Veronica Werner, a 38-year-old financial advisor
on a cigarette break outside her office.