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Global Emerging Markets Chile Macro Strategy

21 April 2008

Monthly Market Monitor (M3)
Global Markets Research

Chile: open for business!
We have published our fourth Monthly Market Monitor (M3). Our M3 report focus on Equity Strategy and Economics for a specific country We have published our fourth Monthly Market Monitor (M3). Our first, second and third reports, entitled “Colombia: waiting for lift-off”, “Peru: the dawn of a golden era?” and “Argentina: a fragile juggling act”, were published in early 2008. Every month, we will publish an M3 report with our Equity Strategy and Economics views for one of the six countries that are part of the MSCI Latin America index. Top-down equity investment ideas and market analysis The M3 can be divided in two main sections: A forward-looking segment in which we highlight: a) our index target and recommendation for the equity market, b) the medium-term macro-economic outlook for the country and c) investment themes and related stocks; and An equity market and economic guide in which we highlight: a) the main equity indices and their constituents, b) liquidity and corporate governance considerations and c) the macroeconomic and policy background of the country. Our 2008 year-end target for the IPSA index is 3,200 points (8% ETR in pesos) We recommend a small overweight in Chilean stocks for three reasons: 1) solid double-digit earnings growth (14% in 2008 and 17% in 2009) with little downside risk; 2) leverage to global growth with counter-cyclical policies that mitigate slowdowns and 3) fair equity valuations which should not prevent further re-rating. We highlight two investment themes and four related stocks Food inflation (2 stocks): Soquimich (chemicals) and Multiexport Foods (fish farm); and Commodity boom (2 stocks): CAP (iron ore & steel) and Vapores (shipping). The most open and leveraged to global growth economy in Latin America In the long term, we believe the country has the best macroeconomic fundamentals and the brightest growth outlook in the region. In the short term, we have revised down our 2008 GDP forecast to a still robust 4.4%, as the Chilean economy continues to battle the negative supply shock from higher oil prices. The latest inflation readings have been benign but we don’t believe we are out of the woods yet. Our base-case scenario for interest rates envisions the Central Bank on hold during the next few quarters. However, the risk to our forecast is to the upside, as the Central Bank should maintain a tightening bias as long as inflation remains above target. Guilherme Paiva, CFA Andres Orlandi
Strategist (1) 212 250 2873 guilherme.paiva@db.com Strategist (1) 212 250 2975 andres.orlandi@db.com

We highlight 2 themes and 4 stocks: 1) Food inflation: Soquimich (chemicals) and Multiexport Foods (fish farm); and 2) Commodity boom: CAP (iron ore & steel) and Vapores (shipping).

Latin America research team Head of Research
Rizwan Ali
1 (212) 250 3712

Strategy
Guilherme Paiva, CFA
1 (212) 250 2873

Construction and Transport
Daniel McGoey, CFA
52 (55) 5201 8017

Bernardo Carneiro, CFA
55 (11) 2113 5975

Energy & Utilities
Marcus Sequeira
1 (212) 250 3255

Financial Services
Mario Pierry
1 (212) 250 6957

Food & Beverage and Retail
Reinaldo Santana
52 (55) 5201 8016

Media
Miguel Garcia
1 (212) 250 7977

Metals & Mining
Jorge Beristain, CFA
1 (212) 250 2723

David S.Martin
1 (212) 250 5580

Pulp & Paper and Conglomerates
Marcelo Luna
1 (212) 250-7911

Telecom
Rizwan Ali
1 (212) 250 3712

Small & Mid Caps
Josh Milberg, CFA
55 (11) 2113 5971

Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to request that a copy of the IR be sent to them. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1

21 April 2008

Monthly Market Monitor (M3)

Table of Contents

Overview ............................................................................................ 3
Chile: Open for business! ......................................................................................................... 3

Equity Strategy .................................................................................. 4
Target and recommendation..................................................................................................... 4 Valuation ................................................................................................................................... 5 Investment themes ................................................................................................................... 9 Correlations............................................................................................................................. 10

Macro outlook.................................................................................. 11
Economic activity .................................................................................................................... 11 Inflation ................................................................................................................................... 12 Monetary policy ...................................................................................................................... 12 Fiscal accounts........................................................................................................................ 13 External sector ........................................................................................................................ 14

Equity guide ..................................................................................... 16
Indices..................................................................................................................................... 16 Index performance .................................................................................................................. 16 Market size and liquidity.......................................................................................................... 18 Market participants ................................................................................................................. 19 Corporate governance............................................................................................................. 19 Index sector weights and market cap ..................................................................................... 21 Stock weights ......................................................................................................................... 22 Stock liquidity.......................................................................................................................... 22 Stock performance.................................................................................................................. 23 Appendix – Company descriptions.......................................................................................... 25

Macro background .......................................................................... 29
Economic activity .................................................................................................................... 29 Inflation ................................................................................................................................... 31 Monetary policy ...................................................................................................................... 32 External sector ........................................................................................................................ 35 Fiscal accounts........................................................................................................................ 38

Latam Equity Strategy reports guide ............................................ 40

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Deutsche Bank Securities Inc.

21 April 2008

Monthly Market Monitor (M3)

Guilherme Paiva, CFA +1 (212) 250-2873

Overview
Chile: open for business!
We have published our fourth Monthly Market Monitor (M3)1. Every month, we will publish a M3 report with our Equity Strategy and Economics views for one of the six countries that are part of the MSCI Latin America index (Brazil, Mexico, Chile, Argentina, Peru and Colombia). The M3 report can be divided in two main sections: A forward-looking segment in which we highlight: a) our index target and recommendation for the equity market, b) the medium-term macro-economic outlook for the country and c) top-down investment themes and related stocks; and An equity market and economics guide in which we highlight: a) the main equity indices and their constituents, b) liquidity and corporate governance considerations and c) the macroeconomic and policy background of the country.

We have published our fourth Monthly Market Monitor (M3) The M3 report can be divided in two main sections

Our year-end target for the IPSA index is 3,200 points

Equity strategy Our 2008 year-end target for the IPSA index is 3,200 points for an estimated total return (ETR) of 8% in local currency terms – dividends included. Moreover, we recommend a small overweight position in Chilean equities based on three arguments: 1. 2. Solid double-digit earnings growth (14% in 2008 and 17% in 2009) and little downside risk to our earnings estimates as cyclical stocks only account for 20-25% of the market; Leverage to global growth with counter-cyclical policies that should mitigate slowdowns. We forecast the Chilean economy should grow 4.4% in 2008 and accelerate to 4.7% in 2009, while Latin America should decelerate from 4.4% to 4.2%; and Fair equity valuations which should not prevent further multiple expansion. We estimate Chilean stocks currently trade at forward 9.9x EBITDA and 16.5x earnings.

3.
We highlight two top-down investment themes and four related stocks

We also highlight two investment themes and four related stocks that we deem interesting: Food inflation: Soquimich (chemicals) and Multiexport Foods (fish farm); and Commodity boom: CAP (iron ore & steel producer) and Vapores (shipping).

We have revised down our 2008 GDP forecast to a stillrobust 4.4%

Economics Recently, we have revised down our 2008 GDP forecast to a still-robust 4.4% as the Chilean economy continues to battle the negative supply shock from higher oil prices. The latest inflation readings have been benign but we don’t believe we are out of the woods yet. Our base-case scenario for interest rates envisions the Central Bank on hold during the next few quarters. However, the risk to our forecast is to the upside as the Central Bank should maintain a tightening bias as long as inflation remains above target. Lastly, we analyze at length the macroeconomic trends that have impacted Chilean fundamentals over the past decade. Our analysis can be divided in five sections: 1) economic activity, 2) inflation, 3) monetary policy, 4) external sector and 5) fiscal accounts. Overall, Chile has the most open economy in Latin America and it is leveraged to global growth. We believe the country has the best long-term macroeconomic fundamentals and the brightest growth outlook in the region.

We provide an analysis of the macro background of Chile

1 Our first three M3 reports entitled “Colombia: waiting for lift-off”, “Peru: the dawn of a golden era?” and “Argentina: a fragile juggling act”, were published on January 16, February 20 and March 26, 2008, respectively.

Deutsche Bank Securities Inc.

Page 3

21 April 2008

Monthly Market Monitor (M3)

Guilherme Paiva, CFA +1 (212) 250-2873

Equity Strategy
Target and recommendation
We forecast a 3,200 points year-end target for the local IPSA index. Our 2008 estimate for Chilean equities embeds an 8% ETR in local currency. We derive our index target from: 1) bottom-up earnings growth forecasts (for the following 12-24 months) generated by our fundamental analysts and 2) the forecast change to the market forward-looking P/E multiple. Our 2008YE target for the IPSA is based on 1) a 17% earnings growth estimate for 2009 and 2) an 11% de-rating (P/E multiple contraction) for Chilean stocks during the current year. Figure 2: Chile equity returns (upside), earnings growth and P/E multiple change
100% 50% 0% -17% -50% -100% 78%

We forecast a 3,200 points year-end target for the local IPSA index

Figure 1: Chilean IPSA index (2002-present) and DB 2008 target
4,000 3,000 2,000 1,000 0 2002
Source: Deutsche Bank

20%

19%

19%

28% 5%

-2%

-12%

2003

2004

2005

2006

2007

2008

2000A 2001A 2002A 2003A 2004A 2005A 2006A 2007A 2008E NTM PE Re/(De) Rating EPS Grow th (12-24 m onths) NTM return
Source: Deutsche Bank

We recommend a small overweight position in Chilean equities

We recommend a small overweight position in Chilean equities for three reasons: Earnings growth and visibility: We forecast Chilean companies will post a solid 14% earnings growth rate in 2008 and 17% in 2009. Furthermore, we see little downside risk to our earnings estimates as volatile cyclical stocks only account for 20-25% of MSCI Chile and IPSA – despite the leverage that the Chilean economy has to global growth via copper; Economic growth: We estimate the Chilean economy should grow a robust 4.4% in 2008 and accelerate to 4.7% in 2009, while we expect Latin American growth to decelerate from 4.4% to 4.2% for the same years. Moreover, the Chilean economy is among the few in the region that can implement effective counter-cyclical macro policies; Valuation: Chilean stocks currently trade at 12-month forward looking 9.9x EV/EBITDA and 16.5x earnings. These multiples are on average roughly in line with their 8-year historical mean (between minus and plus one standard deviation) and therefore have room for further expansion (re-rating).

Figure 3: DB Latin America forecasted index targets and returns
4/21/08 Current Brazilian Bovespa Mexican Bolsa Chilean IPSA Argentine Merval Peruvian IGBVL Colombian IGBC MSCI Latin America
Source: Deutsche Bank

2008 LC target 70,000 35,000 3,200 2,200 18,000 10,000 Upside 7.8% 10.1% 4.4% 0.6% 3.0% 3.6%

Div yield 2.2% 3.4% 3.2% 0.8% 5.3% 1.6% 2.5%

ETR local currency 10.0% 13.5% 7.7% 1.4% 8.3% 5.2%

FX spot 1.66 10.51 457 3.17 2.75 1,782

FX forecast 1.75 10.9 464 3.26 2.87 2,231

2008 USD target 40,000 3,211 6.9 675 6,272 4.5 4,900 Upside 2.6% 6.2% 2.9% -2.1% -1.4% -17.3% 3.1%

ETR USD 5.2% 10.0% 6.2% -1.2% 4.1% -14.9% 5.6%

64,923 31,796 3,064 2,186 17,470 9,657 4,750

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Deutsche Bank Securities Inc.

Chilean stocks trade at 9. The coverage breadth of our fundamental equity research department is representative of the overall market.5% ROE Deutsche Bank Securities Inc. Chilean stocks trade at 2.5x forward earnings. Deutsche Bank equity research department covers 18 companies in Chile. and they account for approximately 80% of the MSCI Chile and 70% of the IPSA indices.5x 14x 6x 2000 Chile 2002 Avg.9x 9x 18x 16.8 standard deviations above the historical mean. Source: Bloomberg and Deutsche Bank Source: Bloomberg and Deutsche Bank Chilean stocks trade at 2.5%. Figure 5: Chile forward P/E (2000-2008) 22x DB equity research covers 18 companies in Chile Our market multiples are calculated by adding nominal values of individual companies Chilean stocks trade at an attractive 9.6x 8-year historical average. is 15. measured by return on equity (ROE).8x forward book value (+65% or 2.1x standard deviations) in October 2007.6x forward book value.5x forward earnings Figure 4: Chile forward EV/Ebitda (2000-2008) 15x 12x 9. the ROE generated by Chilean companies almost justifies their price-tobook valuation level. Therefore. We should note that Chilean stocks reached a recent peak of 10.1 standard deviations above the historical mean.8x forward Ebitda (+2% or 0.6 standard deviations above the historical mean. it tends toward infinity when earnings tend to zero). this methodology better reflects reality because of the non-linearity of the price-to-earnings ratio (i. current profitability is 1. Alternatively. which is 10% higher than the 15.6x forward earnings (+24% or 2. our equity composite reached a recent peak of 18. 2004 2006 +1 S. Furthermore. The current profitability of Chilean equities. Alternatively. We should note that Chilean stocks reached a peak of 2.6x forward book value… Meanwhile. The Chilean market trades at 16. Alternatively. and therefore allows us to aggregate bottom-up financial data in order to calculate country valuation metrics.7x standard deviations) in October 2007. Chile and Argentina). These stocks have a combined market capitalization of approximately USD136bn. Alternatively.3% 8-year historical average.D. 2008 -1 S. the price-to-earnings ratio is the aggregate market cap divided by the aggregate net income) rather than a market-cap-weighted multiple.e. …and generate a 15.0x standard deviations) in October 2007. which is 50% higher than the 1.2 percentage points (37%) higher than the 11. 2008 -1 S. Mexico. Our market multiples are calculated by adding nominal values of individual companies (for example. which is approximately 4.9x forward Ebitda… …and 16.D.5 standard deviations below the historical mean. Page 5 . which is 7% lower than the 10. the market trades at 0. In our opinion.9x forward-looking Ebitda estimates.D. the market trades at 2.21 April 2008 Monthly Market Monitor (M3) Valuation DB has a proprietary valuation model for four Latin equity markets Country Deutsche Bank has a proprietary valuation model for four Latin American equity markets (Brazil.7x 8-year historical average.0x 8year historical average. 2004 2006 +1 S. the stocks trade at 0. 10x 2000 Chile 2002 Avg.D.

We should note that Chilean stocks reached a recent bottom of 2. 2008 -1 S. price-to-book value. 15. 2004 2006 +1 S. it displays 2008 valuation multiples based on our analysts’ financial forecasts.5x 2.D. 2008 -1 S.6x 2. and depicts 2007 valuation multiples based on a database created using historical company fillings and other data sources. and The second table includes the 40 constituents of MSCI Chile and IPSA.D. Alternatively. 2006 +1 S.D. Page 6 Deutsche Bank Securities Inc.21 April 2008 Monthly Market Monitor (M3) Figure 6: Chile forward P/BV (2000-2008) 3.4% forward-looking dividend yield Finally. enterprise value-to-EBITDA. Chilean stocks trade at 3. dividend yield and ROE ratios for the forty companies of the MSCI Chile and IPSA indices. 2004 2006 +1 S. Furthermore. 2008 -1 S.5x 1. Source: Bloomberg and Deutsche Bank Source: Bloomberg and Deutsche Bank We calculated valuation ratios for 40 stocks Stocks We calculated price-to-earnings.0x standard deviations) in December 2005. We depict the data in two tables: The first table encompasses the 18 Chilean stocks currently covered by Deutsche Bank fundamental equity research department.1 standard deviation below the historical mean. . Chilean stocks trade at 3.2% 8-year historical average.0x 1.8% forward dividend yield (-35% or -2.0x 0.D.4% 3% 2% Figure 7: Chile forward return-on-equity (2000-2008) 17% 15% 13% 11% 9% 7% 5% 2000 Chile 2002 2004 Avg. Figure 8: Chile forward dividend yield (2000-2008) 6% 5% 4% 3.5x 2000 Chile Source: Deutsche Bank 2002 Avg.0x 2.D.D. the market trades at 1.5% 2000 Chile 2002 Avg.4% forward-looking dividend yield. which is 20% lower than the 4.

131 PE 18.7 2.3 2.4 2.147 6.9 10.1 16.7% 2.21 April 2008 Monthly Market Monitor (M3) Figure 9: Chile 2008 valuation multiples – companies under Deutsche Bank coverage 4/21/08 Company Falabella Socovesa Consumer Discretionary Cencosud Cervecerias Unidas Distribucion y Servicio Embotelladora Andina LA Polar Ripley Consumer Staples Banco de Chile Banco Santander Chile Financials Copec LAN Airlines Industrials Empresas CMPC Materials Cia Telecom de Chile Entel Telecom Colbun Endesa Enersis Utilities Chile *Sector valuations are market-cap weighted.7 7.7 18.623 12.214 2.6 3.854 8.0 nm 5.4 3.1 1.0% 1.0 1.6 EV/ Dividend EBITDA 5.9 2.6 11.3 2.2 11.2 1.609 15.7 4.9 6.6 2.9 9.6 0.292 561 14.828 29.5 5.6 0.7% 6.798 7.6 0.0 2.9 yield 1.9 2.686 13.0 37.6 4.0 38.1% 2.5% 2. Source: Deutsche Bank Price Bbg ticker FALAB CI SOCOVESA CI CENCOSUD CI CCU CI DYS CI ANDINAB CI LAPOLAR CI RIPLEY CI CHILE CI BSAN CI COPEC CI LAN CI CMPC CI CTCA CI ENTEL CI COLBUN CI ENDESA CI ENERSIS CI Rating Hold Buy Hold Buy Sell Buy Hold Hold Hold Buy Hold Buy Hold Hold Buy Sell Hold Buy USD 5.4 4.0 18.8 4.1 0.895 7.3 20.019 4.6 0.2 7.6% 4.7 2.4% 2.2% 6.7 4.1 17.6 2.4 21.0 18.6 19.7 0.4 1.5 7.0% 2.7 1.895 2.8% 2.9 2.724 2.7% ROE 22% 11% 15% 10% 17% 10% 31% 23% 13% 15% 26% 23% 24% 13% 26% 15% 7% 7% 3% 21% 15% nm 16% 9% 11% 15% Deutsche Bank Securities Inc.3 2.6 2.4% 1.7 1.352 1.780 26.3 16.8 nm nm nm 5.5 Upside -5% 40% 12% 26% -20% -8% 2% 73% 11% 12% -1% 22% 9% 18% 32% -13% -4% 17% Mkt Cap (USDm) 14.1 nm 24.7 11.3 2.6% 4.1% 0.868 19.9 14.7 2.2 1.8 11.0% 2.3 1.1 4.0 0.5% 4.1% 1.5% 5.627 1.7% 2.3 6.3 P/BV 4.3 23.4 7.4 2.6 19.0 21.0 3.2 14.5 13.7 17.208 9.1 0.1 3.137 120.2 1.2 1.9% 1.9 14.7 4.415 6.5 3.5 7.1 1.9 0.3 1.0 6.8% 1.1 16.818 22.9 27.068 4.0 0.7% 8.402 2.4% 1.8 2.7% 1.3 5.2% 1.1 18.5 0.9 11.9 14.8 13.442 2.4 Target USD 5.6 0.0 41.7 9.5 23.0 18.6 5.0 15.6% 6.1 4. Page 7 .

0 0. Aguas Metropolitanas IAM CI Page 8 Deutsche Bank Securities Inc.572 10.2 0.4 1.1 19.3 nm 13.330 9.21 April 2008 Monthly Market Monitor (M3) Figure 10: Chile 2007 valuation multiples – 40 members of MSCI Chile and IPSA 4/21/08 Company Falabella Forus Parque Arauco Salfacorp Socovesa Consumer Discretionary Embotelladora Andina Cencosud Cervecerias Unidas Concha y Toro Distribucion y Servicio Empresas Iansa LA Polar Multiexport Foods Ripley Consumer Staples Banco de Chile Banco de Creditos e Banco Santander Chile Corpbanca Financials Banmedica Health Care Almendral Antarchile Copec LAN Airlines Madeco Sigdo Koppers Vapores Industrials Sonda Information Technology CAP Empresas CMPC Masisa Soc.4% 4.8 1.1% 1.9 1.8% 3.0% 2.9 9.2% 11.9 16.7% 0.1% 1.1 0.0 15.9% 4.2% 2.2 3.454 6.1% 6.0 1.9 4.068 4.0 2.8% 1.6 35.2% 1.402 2.2 2.5 15.2 0.4 1.3 2.5 0.208 3.4 2.4% 0.0 26.895 1.6 63.1 22.0 1.2 15.9 18.0 0.7 5.3 1.5% 3.3 20.1 27.4 4.9 4.8% 4.4% 1.7 11.1 8.4 1.686 2.2 14.7 1.519 20.6 16.0% 1.0% 1.0 1.1 31.1 0.623 12.0% 2.0 39.8 14.2% 1.1 2.2 28.9 1.541 23.8 25.8 P/BV 4.815 22.8 2.6 0.2 50.8 16.6 1.5 23.442 1.1 17.5% 4.7 18.2 7.0% 5. company data Price Bbg ticker FALAB CI FORUS CI PARAUCO CI SALFACOR CI SOCOVESA CI ANDINAB CI CENCOSUD CI CCU CI CONCHA CI DYS CI IANSA CI LAPOLAR CI MULTIFOO CI RIPLEY CI CHILE CI BCI CI BSAN CI CORPBANC CI BANMED CI ALMEN CI ANTAR CI COPEC CI LAN CI MADECO CI SK CI VAPORES CI SONDA CI CAP CI CMPC CI MASISA CI SQM/B CI CTCA CI ENTEL CI GENER CI COLBUN CI EDELNOR CI ENDESA CI ENERSIS CI Rating Hold NC NC NC NC Buy Hold Buy NC Sell NC Hold NC Hold Hold NC Buy NC NC NC NC Hold Buy NC NC NC NC NC Hold NC NC Hold Buy NC Sell NC NC Hold Buy NC USD 5.2 25.0% 4.7% ROE 18% 14% 3% 12% 8% 17% 29% 12% 20% 15% 8% 3% 24% 8% 12% 15% 23% 19% 21% 11% 21% 28% 28% 13% 12% 13% 28% 7% 10% 13% 15% 10% 10% 27% 9% 3% 15% 15% 1% 21% 14% 4% nm 14% 15% 14% 9% 5% 11% 15% Cia General de Eletricidad CGE CI Inv.7 19.4 11.4 12.5 34.2 7.6 2.275 5.021 1.6 2.780 660 755 1.2% 4.7 1.350 PE 26.5 0.9 26.8 nm 5.3 2.147 6.1 7.1% 3.4 2.286 36.5% 6.3 Mkt Cap (USDm) 14.0% 0.2 0.8% 1.4 4.1% 1.2% 4.4 38.7 4.2 2.6 12.3 0.3 12. Source: Deutsche Bank.0 10.4 1.6% 1.5% 2.7 2.4 6.8 2.2 1.2 4.4% 1.4 1.1 1.7 2.4 13.4 4.4 21.1 6.7 4.6% 0.609 1.2 23.4 2.4 1.0 3.0 11.9 14.7 17.7 29.4% 0.411 7.5% 2.2 14.7 2.724 161 1.3 1.4 2.4 0.225 2.6% 0. .9 1.379 8.2 28.6 2.3 4.0 0.5 38.275 1. Quimica y Minera Materials Cia Telecom de Chile Entel Telecom AES Gener Colbun Edelnor Endesa Enersis Utilities CHILE *Sector valuations are market-cap weighted.828 1.4 1.7 22.435 2.4 11.5 2.627 8.1 18.4 86.1 12.3% 3.3 1.292 396 798 551 561 16.4 13.5% 1.5 11.5 1.1% 6.868 21.421 42.5 14.0 2.0% 1.1 14.3% 2.4% 5.599 2.6 EV/EBITDA Div yield 2.214 3.352 443 1.0% 7.019 4.9 1.2 13.7 nm nm nm nm nm 18.3 1.2 30.666 989 989 1.6 0.025 2.0% 2.9% 1.907 169.9 2.8 1.1 33.9 15.8 3.4 4.9 15.0% 2.5% 7.0% 6.1 0.712 746 13.

we analyzed the four main drivers of soft grains demand: 1) population growth. 4. 2) higher GDP per capita.0 for beef. Deutsche Bank Securities Inc. published on March 11.000 1. The gradual improvement in income per capita levels continues to drive individuals from the countryside to the main cities. The company has benefited from the increase in freight rates driven by Chinese demand despite its exposure to higher oil prices. CAP intends to basically double its iron ore output from 8. There are two vehicles in the Chilean equity market to gain exposure to food inflation: Soquimich: the company produces specialty fertilizers (50% of company’s sales and 50% share of the global potassium nitrate market in 2007) – besides iodine. The key is the competitive advantage of fish versus poultry. and Multiexport Foods: the firm operates fish farms and it is the third largest Chilean salmon exporter. Page 9 . 3) ethanol consumption and 4) global warming.8% 2002-07 CAGR Figure 12: Baltic capesize freight index (rebased: 2002=100) 2.000 500 Industrial crops 20% Vegetables 40% Fruits 25% Source: Deutsche Bank and Soquimich 0 2002 Source: Deutsche Bank 2003 2004 2005 2006 2007 2008 China has grown at an impressive pace Commodity boom China has grown at an impressive pace in the 21st century.0m mtons in 2010 and its crude steel capacity from 1. pork and beef.0 for pork and 7. operating more than 100 vessels. In our report entitled “Soft grains can earn hard cash”. Vapores’ main service is container transport for which demand has grown at an average 10% per year between 2002 and 2006.53. Figure 11: Potassium nitrate main end markets and demand growth Others 15% 4.21 April 2008 Monthly Market Monitor (M3) Investment themes We highlight two top-down investment themes Food inflation is a current global phenomenon We highlight two top-down sector investment themes and four related stocks: Food inflation Food inflation is a current global phenomenon. supported by secular trends. Soquimich has a sustainable competitive advantage with its exclusive access to two superior natural endowment: 1) caliche and 2) salar brines located in the Atacama desert. Multiexport Foods is short grains but could benefit from an eventual increase in protein prices driven by cost inflation.2m mtons in 2007 to 15. Our conclusion was food inflation is mainly a structural investment theme on staple goods.5m mtons in 2007 to 2.0m mtons in 2012. Two vehicles to gain exposure to the Chinese urbanization theme through Chilean stocks are: CAP: the company is an integrated long and flat steel producer. The transformation ratio (number of kilos of grains equivalent to produce one kilo of protein) is only 1. The iron ore division accounted for ~40% of the 2007 consolidated EBITDA while the steel division accounted for ~60%. lithium and industrial chemicals – and could benefit from an increase in global arable land.500 1. and Vapores: the firm is the largest shipping company in Latin America.0 for poultry.2 for fish versus 2.

34 -0. Meanwhile.5 range.5 to +0.S. the correlations between the local equity benchmark with country risk and copper prices are weak and fall in the -0. and regional stocks.69 0.35 IPSA 0. Interestingly.80 0.34 0.5) with the IPSA (+0.69) prices. country risk and copper prices using weekly data.34 -0.26). Lastly.55 0.30 -0.80 1.00 0.69 0.53 0. S&P500 (+0. Figure 13: Correlations between Chilean equities and selected assets 04/21/08 MSCI Chile IPSA MSCI LA S&P500 CLP 5y CDS Copper Source: Deutsche Bank MSCI Chile exhibits strong correlations with IPSA.73) and with the U.79 0.79 0.79) and with the U.40 -0. S&P500 (+0.93).S.44 1. with MSCI Latin America (+0.07 1.26 MSCI LA 0.00 0.30 0.93 0. similarly.5 and +0.02 1.5 or lower than -0.S.73) prices. .00 -0. the local equity benchmark does not have a strong relationship with the foreign exchange rate (+0. MSCI Latam.37 -0.26 0.55).55 -0. country risk (-0.21 April 2008 Monthly Market Monitor (M3) Correlations We calculated correlations for Chilean equities versus selected assets We calculated 2-year correlations for Chilean equities versus U.not a surprise despite the difference in index compositions and currency returns – with MSCI Latin America (+0.73 0.73 0.40 5y CDS -0.53 -0.79 0. similarly. even though correlations do not necessarily imply causality. the international equity benchmark also has a strong positive relationship with the foreign exchange rate (+0.38 S&P500 0. the foreign exchange rate.00 Page 10 Deutsche Bank Securities Inc.00 0. The analysis is useful to have a better understanding of the potential macro drivers of Chilean stocks.38 0.93 1. also exhibits strong correlations with other equity indices but not with the currency MSCI Chile 1.00 -0. U.20 CLP 0. the IPSA.34 0.93) .26 -0.5.20 0.S.37 0. MSCI Chile exhibits strong correlations (higher than +0. However. exhibits strong correlations with MSCI Chile (+0.35 0.73 1.30) and copper prices (+0.00 0. Furthermore.44 -0.35) exhibited weak correlations between -0. S&P500 and the peso The IPSA.07 Copper 0.26 0.02 0.

According to the press release.4% The economic outlook remains worrisome… 3. Page 11 . they do not change our view that this year’s economic outlook remains worrisome because: 1.6% YoY. and The short-term energy situation does not look promising and the likelihood of rationing keeps mounting. the Nehuenco power station is going to remain off-line for a few more months. Finally. The outlook for the global economy is deteriorating. and the positive effect that the new pulp plants had over industrial production in 2007 is expected to fade away as we are not aware of additional investments. or above our expectation of 5. the uncertainty regarding natural gas imports from Argentina keeps increasing. We revised our 2008 GDP growth projection to a stilloptimistic 4. current forecasts suggest another dry year for 2008 (La Niña-related). Even though these activity numbers surprised on the upside. The Central Bank announced that February’s economic activity indicator (Imacec) increased by 5. …partially because the short-term energy situation does not look promising On the last point in particular.1% YoY. Figure 14: Chilean industrial production and economic activity indicator (Imacec) 15% 10% (annual growth) 5% 0% -5% 2004 2005 Industrial production Source: Deutsche Bank 2006 2007 Im acec 2008 Deutsche Bank Securities Inc. as a result of operational problems.21 April 2008 Monthly Market Monitor (M3) Andres Orlandi +1 (212) 250-2975 Macro outlook Economic activity We revised our 2008 GDP growth projection to a still-optimistic 4. 2. Recent real exchange rate appreciation is expected to harm some manufacturing sectors. Record high inflation will impose an additional drag on households’ disposable income and consumption should decelerate further in the quarters ahead. 4. this reading was positively affected by one additional working day in February 2008 versus 2007.4% from 4. as that country is facing its own energy crisis. which exacerbate the problem caused by already low water reservoir levels.8% we had before. Additionally. Our estimate had already been revised upward recently on the back of the stronger-than-expected industrial production figures posted during the second month of this year.

That is. In sum.8% MoM.4% MoM (versus our flat estimate).8% month-on-month. Meanwhile.5% annually. Importantly. the Board removed the tightening bias given that in March they said that “even though monetary policy will depend on the new information… further tightening could not be ruled out”. core inflation met expectations at 0.7% and 2. our projections now suggest that annual inflation will most likely decline in the months ahead. the CB recently kept the overnight interest rate unchanged at 6. we continue to believe we are not out of the woods. or 40bp lower than during the same month last year. We expect the Central Bank to start a prolonged pause Page 12 .8% monthly or 7.40% deflation forecast) and 2) housing prices dropped by 0. IPCX1 Monetary policy The CB recently kept the overnight interest rate unchanged at 6. the CB said that “recent information confirms expectations that annual inflation has already peaked and will start declining in the months ahead”. non-tradable inflation came out at 1.21 April 2008 Monthly Market Monitor (M3) Inflation March inflation came out at 0. IPCX 2009 Core.3% MoM (versus our 0.25% but removed the tightening bias.25% In line with our expectations. energy rationing remains a real Deutsche Bank Securities Inc. however.” In our opinion. We expect the Central Bank to start a prolonged pause (i. barring another domestic supply shock.2% sequentially. This positive surprise (lower-than-expected figures) was due to the fact that 1) transportation cost decreased by 1. or well above the target range. Figure 15: Chilean annual headline and core inflation 10% 8% 6% (annual) 4% 2% 0% -2% 2004 CPI Source: Deutsche Bank We continue to believe we are not out of the woods on the inflation front yet 2005 2006 CPI Forecast 2007 2008 Core. the impressive year-to-date peso appreciation and the use of the gasoline stabilization fund. or 30bp lower than market expectations according to Bloomberg survey. Additionally.0-4. have certainly helped tame inflation. they just said that “future changes in the monetary policy rate will depend on new information. but it should still be above the target range (2. this statement suggests that most likely the tightening cycle is over. The Central Bank (CB) will need to continue to closely monitor inflation expectation in order to prevent second-round effects. even though these readings suggest the recent government efforts in reducing fuel taxes.: a couple of quarters) as inflation starts converging towards the target band. As expected.7% year-on-year) while tradable inflation declined by 0.3% month-on-month.e. Moreover. This reading brought inflation to 1. Barring another domestic supply shock.2% year-to-date and 8. This time. or 30bp lower than market expectations INE reported that March inflation came out at 0. even though the outlook for the economy does not look promising (consumption is slowing down.3% sequentially (9.0%) at the end of the year.7% yearly. inflation last month was mainly driven by education and foodstuffs prices which advanced by 3.

but has not increased further. as copper prices remain at very high levels and despite the gloomy growth outlook. As last time. Additionally. . Furthermore it could lead to lower taxes to promote investment and employment. Additionally. continued to appreciate and that wage inflation has been consistent with official projections. The Central Bank reiterated that growth was lower than expected in 1Q08… On the domestic economy. In late 2007. the CB reiterated that economic activity during the first quarter has been less dynamic than initially anticipated mainly on the back of a deceleration in consumption as investment remains relatively strong. perishables and some regulated prices) remains high.0% of GDP.5% …while the international scenario is not favorable 6. we project 2007’s fiscal surplus above 8. as more funds will be dedicated to social areas (such as education and health) that create positive externalities not well accounted for in private investment decisions.4% of GDP. as inflation remains well above the target range and uncertainty from international food and energy prices remains high.5% from 1.S. On the inflation front. As expected too. they also suggested that in line with their expectations. they said that growth in emerging economies has been revised downward despite the fact commodity prices have remained at high levels.0%.5% 5. the latest information shows that inflation remained limited to a few products. recent real FX appreciation is expected to harm some manufacturing sectors and the global economic picture keeps deteriorating). On the international economy. starting in 2008. they also acknowledged that core inflation (IPCX-which excludes gasoline. Chile is a country that has built a strong reputation and has enough macro-buffers to allow a sustainable fiscal expansion without jeopardizing macroeconomic stability. economy is already in a recession. they noted that the Chilean peso. the statement stated that even though March inflation surprised on the downside.21 April 2008 Monthly Market Monitor (M3) threat. the monetary authority will not be able to ease monetary policy in the near future. the government decided to reduce the structural fiscal surplus rule to 0. Figure 16: Chilean overnight policy interest rate 6.0% 4.5% 2007 Policy Rate Source: Deutsche Bank 2008 2009 Forecast Fiscal accounts Fiscal solvency is not an issue We forecast this year’s fiscal surplus in Chile will beat 2007’s record figure.0% 5. as the government’s revenues to GDP ratio climb to 26. In particular. in real terms. Page 13 Chile’s fiscal policy is prudently managed Deutsche Bank Securities Inc. annual figures remained elevated. Chile’s fiscal policy is prudently managed with a structural surplus rule that ties expenditure growth to Chile’s long-term revenue capacity. We believe this decision was welfare improving. the board stated that recent information suggests the U.

the board has been very vocal in rejecting capital controls as the economic costs (microeconomic distortions. Moreover.) are far greater than the potential benefits2. although political pressures could increase further. the House of Representative. etc. under the FTA agreement with the U. That is. amplification of external shocks. asked the CB to consider intervening in the local currency markets and/or imposing capital controls to foreign inflows. the Board stated that “within the inflation target regime with flexible exchange rate this measure is justifiable given the significant uncertainty surrounding the evolution of the international financial markets. right after the March monetary policy meeting. local economists and. should the real exchange rate be inconsistent with macroeconomic fundamentals. the monetary authority will buy around USD50m on a daily basis by a competitive action mechanism. While the CB has never discarded the option of intervening in the FX market.0bn in the currency until the end of the year 2 Moreover. export sectors. . this is consistent with the fact that the real exchange rate is currently misaligned (stronger) with macroeconomic fundamentals. we believe the CB will not hurt its reputation by imposing capital controls as the board. the Central Bank stated that between April 14 and December 12 of 2008. especially the President. strongly believes in a flexible exchange rate regime.” Between April 14 and May 9. they could only be in place for one year.S. the Central Bank will buy USD8. Page 14 Deutsche Bank Securities Inc.0bn in the currency market to increase international reserves in order to “strengthened the international liquidity position of the Chilean economy to better face further deterioration in the international condition.“ Additionally. more importantly.21 April 2008 Monthly Market Monitor (M3) External sector We believe the CB will not hurt its reputation by imposing capital controls On the back of the impressive year-to-date real exchange rate appreciation of the Chilean peso. The CB will buy USD8. Indeed..

3 17.5 17.8 4.3 8.1 3M 6.1 35.6 5.5 11.4 8.1 7.9 22.7 4.8 External Accounts (USD bn) Exports Imports Trade balance % of GDP Current account balance % of GDP FDI FX reserves Debt Indicators (% of GDP) Government debt Domestic External Total external debt in USDbn Short-term (% of total) General Industrial production (YoY%) Unemployment (%) Financial Markets (end period) Overnight rate (%) 6-month rate (%) CLP/USD Source: DB Global Markets Research 58.9 32.8 20.6 22.6 17.4 10.8 8.8 12.7 18.6 4.4 19.5 18.6 11.50 6.768 2009F 217.3 7.9 6.0 4.1 19.8 4.5 22.6 12. consumption Gov't consumption Investment Exports Imports 4.0 8.8 Current 6.9 18.989 Real GDP (YoY%) Priv.0 19.4 68.3 Prices.7 21.7 20.3 52.8 7.5 26.8 4.4 5.959 2007F 166.5 4.5 12M 6.1 7.9 22.5 4.3 7.2 5.50 6.8 0.6 47.1 19.9 2.60 433 3.2 52.8 8.7 14.1 3.2 9.3 21.0 6.1 16.6 7.4 16.2 17.2 2.7 19.4 16.4 15.2 71.1 2.4 7.4 6.6 31.25 6.7 20.5 27.21 April 2008 Monthly Market Monitor (M3) Figure 17: Chile economic forecasts 2006 Nominal GDP (USD bn) Population (mn) GDP per capita (USD) 145. Page 15 .120 2008F 195.1 5.1 18.0 8.3 Fiscal Accounts (% of GDP) Consolidated budget balance Gov’t spending Gov’t revenues 7.7 13.2 15.3 48.9 21.6 0.3 3.2 45.0 4.2 2.5 70.1 20.4 5.25 470 Deutsche Bank Securities Inc.9 50.6 19.6 25.5 8.2 5.3 8.9 16.7 15.2 5.50 450 5.6 16.9 3.4 6M 6.0 6.25 6.5 25.4 16.0 22. Money and Banking CPI (Dec YoY%) Broad Money Credit 2.5 6.50 440 5.3 8.6 2.4 5.9 19.5 48.0 7.8 16.8 22.0 2.

. dollars (2002-2007) 140 332 308 Figure 18: MSCI Chile and IPSA indices performance in U. The gains have been solid but Chilean equities have also had their share of volatility—see Figure 19.S. as can be seen in Figure 18. dollars since then. The index was created in 1977 and its portfolio is revised every quarter (March. CFA +1 (212) 250-2873 Equity guide Indices There are two main benchmarks in Chile: 1) The Selected Stocks Price index (IPSA): the local benchmark is a liquidity-weighted index composed of the most relevant stocks traded in the Santiago Stock Exchange. after a local regulatory body stated that local pension funds. 2) Page 16 Deutsche Bank Securities Inc. dollars and local currency.S. The IPSA usually has 40 companies—with market capitalization higher than USD200 million—and their weights are calculated based on financial turnover over the past 12 months and free float. and The second serious correction occurred from October 2007 to mid-January 2008. subprime crisis unfolded and spilled-over to Chilean equities—the main Chilean equity benchmarks shed 12% in less than 45 days. when the U. Both the local IPSA and MSCI Chile indices have been 2-baggers or more in U. dollars (2002-2007) 450 350 250 150 50 2002 2003 2004 2005 2006 2007 IPSA USD Source: Deutsche Bank and Bloomberg 128 120 100 80 64 60 2002 2003 2004 2005 2006 2007 M SCI Chile vs Latin Am erica M SCI Chile USD Source: Deutsche Bank and Bloomberg The equity market underwent two periods of turbulence in 2H 2007 The equity market has experienced a series of mini (bull market) corrections over the past five years. The MSCI Chile index currently has 27 constituents and it is calculated in both U. September and December). Figure 19: MSCI Chile versus MSCI Latin America relative performance in U. and The MSCI Chile index: the international benchmark is a free-float adjusted capitalizationweighted index whose goal is to include 85% of the free-float adjusted market capitalization in the country. would have one-year to comply with the statutory equity holding allocation caps—the main Chilean equity indices lost 24% in less than 90 days.S. which were heavily invested in equities.S.21 April 2008 Monthly Market Monitor (M3) Guilherme Paiva. June. and two more serious ones in 2007: 1) The first serious correction happened from June to mid-August 2007.S. The index was developed in December 1987 with a base value of 100. There are two main benchmarks in Chile 2) Index performance Chilean stocks have experienced a long-lasting bull market since late 2002 Chilean stocks have experience a long-lasting bull market since late 2002.

Chilean stocks have exhibited a relatively high correlation to regional equities.7. there is a widening gap between the two benchmarks over the period. However.S. Chilean stocks have a low beta to regional equities Historically. The defensive low-beta Chilean equity market recorded gains. Chilean equities always moved in the same direction that their regional peers did. As can be seen. over the past six years. 3 Chile is the largest producer of copper in the world. (Interestingly. Page 17 . Chilean equities received a boost after the U. The only exception was in 2003 when Chile outperformed on the way up. Deutsche Bank Securities Inc. Furthermore. dollars (2002-2007) 90% 308 236 Figure 20: MSCI Chile indices performance in local currency and U. 2) The Chilean peso has been a major source of gains for foreign equity investors The Chilean peso has been a major source of gains for foreign equity investors. dollar terms between 2002 and 2007.S. However. it underperformed the region which recorded even larger gains driven by commodity stocks3. Figure 21: MSCI Chile versus MSCI Latin America annual returns in U. in 2003. when the election of President Lula in Brazil dragged down regional stocks.S. and From October 2003 to December 2007: MSCI Chile (up ~130%) massively underperformed MSCI Latin America (up an impressive ~370%) by ~240%. Meanwhile.) For instance. Chilean stocks underperformed Latin American stocks during the 2004-2007 bull market. the beta of the country indices versus the regional benchmark is between 0. invaded Iraq.4 and 0. there have been two distinct periods of relative performance: 1) From January 2002 to October 2003: MSCI Chile (up ~30%) outperformed MSCI Latin America (basically flat) by ~30%. as investors believed that the global economy was about to turn a corner and would benefit commodity-producing countries like Chile. dollars (2002-2007) 400 300 200 100 0 2002 2003 2004 M SCI Chile CLP 2005 2006 2007 M SCI Chile USD 80% 67% 45% 18% 26% 39% 47% 60% 30% 0% -30% -22% -25% 2002 2003 M SCI Chile USD Source: Deutsche Bank and Bloomberg 25% 35% 21% 2004 2005 2006 2007 M SCI Latin Am erica USD Source: Deutsche Bank and Bloomberg Historically. The defensive characteristic of the Chilean equity market shone during 2002.21 April 2008 Monthly Market Monitor (M3) Chile underperformed Latin America by ~180% during 2002-07 Chilean equities have underperformed regional stocks by ~180% between 2002 and 2007. However. there are few cyclical stocks listed in its equity market. The global economic upturn ripened and drove commodity prices to new all-time nominal highs. The Chilean currency has been in a steady appreciation trend over the past six years. In Figure 20 we depict the MSCI Chile index in both local currency and U.S. and outperformed during the bear market in 2002. from the CLP750 per USD level reached in late 2002/early 2003 to below the CLP500 level breached in late 2007.

. therefore investors can also gain exposure to Chilean stocks via some liquid ADR instruments. Figure 22: MSCI Latin America breakdown by country ARG COL PER 2% 2% 3% The average daily trading volume of the Santiago Stock Exchange was USD190m in 2007… CHL 6% M EX 21% BRZ 66% Source: Deutsche Bank . Figure 24: Latin America stock exchanges average daily trading volume composition (12-month moving average) 100% 75% 50% 25% Figure 23: Santiago stock exchange average daily trading volume (12-month moving average) 200 150 (US$m) 100 50 0% 0 2002 2003 2004 2005 2006 2007 2008 2002 Brazil 2003 2004 Chile 2005 Peru 2006 2007 2008 Argentina M exico Colom bia Source: Deutsche Bank and Bloomberg Source: Deutsche Bank and Bloomberg Page 18 Deutsche Bank Securities Inc. Meanwhile. . The liquidity has gradually increased from less than USD15m in 2002 to the current 6-year high supported by a higher share turnover and the bull market.0% of the regional average daily trading volume. the Santiago Stock Exchange accounted for a 6-year high 9.5% of the aggregate trading volume of the six main stock exchanges in Latin America in 2007. The Santiago Stock Exchange accounted for ~5.5 trillion. but it has been in a steady fall since then. MSCI Latin America has a current market capitalization of USD1.21 April 2008 Monthly Market Monitor (M3) Market size and liquidity MSCI Chile is the third largest country constituent of MSCI Latin America MSCI Chile is the third largest country constituent of MSCI Latin America with a 6% weight— USD130 billion market capitalization. Back in early 2005. but its share has gradually fallen since then. The country’s weight increased during the 2002-2004 period to low double-digit levels. The average daily trading volume of the Santiago Stock Exchange was USD190m in 2007. a silver lining is that local trading represents “only” about 80% of total volume.which also ranks Chile in third place in Latin America Chile is the third largest equity market in terms of average daily trading volume in Latin America.. Lastly.

However. we calculate that pension funds traded on average close to USD100m per day (52%). Page 19 . etc). Chile has a private corporate sector dominated by a few economic groups.e. we estimate that foreign investors traded on average USD40m per day (or 21%). Figure 25: Chile: local trading volume breakdown by participants (2007) M utual funds 6% USD190m Foreigners 21% Local investors accounted for ~80% of the local volume Pension funds 52% Individuals 21% Source: Deutsche Bank. We discuss corporate governance practices in Chile by focusing on three related topics: 1. and Tender offer regulations. Meanwhile. the Santiago Stock Exchange doesn’t provide a breakdown of traded volume by type of investor (i. pension funds. individuals. which are present in several industries but operate through holding companies. while individuals traded USD40m (21%) and mutual funds USD12m (6%) last year. 2. we calculated the weight of foreign and local investors in on-shore trading using Chilean Central Bank (CCB) and “Superintendencia de Valores y Seguros” data.21 April 2008 Monthly Market Monitor (M3) Market participants We analyze the Chilean institutional investor base The average daily trading volume of the Santiago Stock Exchange was USD190m in 2007. The local investor base is relatively concentrated. Tag along rights. 3. Superintendencia de Valores y Seguros. We estimate that local investors traded on average close to USD150m per day (or approximately 80% of the onshore volume) in 2007. Deutsche Bank Securities Inc. Share classes. corporate governance practices are important to safeguard the interests of these economic groups. Nevertheless. Chilean Central Bank and Bloomberg Corporate governance Corporate governance practices are investor friendly in Chile Corporate governance practices are investor friendly in Chile as the country has a robust set of laws and regulations that protect minority shareholders. Therefore.

The investor has to acquire these shares through a mandatory tender offer. Meanwhile. There are two types of tender offers in Chile The standard distribution method for mandatory tender offers is pro-rata The standard distribution method for mandatory tender offers is pro-rata. 2) Minority shareholders have tag along rights via mandatory tender offers Tag along rights Minority shareholders have tag along rights whenever a mandatory tender offer is triggered. Voluntary: these tender offers can be made at any time for any amount of shares. . The tender offer size has to be for the entire free float. peers and have full voting rights.S. The tender offer price should be the maximum of 1) the price agreed with the controlling shareholder or 2) the highest price the acquirer paid to buy stock in the market during the previous 90 and following 120 days of the offer. the size of the tender offer is discussed in the next section. These shares have “preference” over common shares in some aspects like 1) receiving dividends or 2) being reimbursed in case of bankruptcy.21 April 2008 Monthly Market Monitor (M3) There are two types of listed shares in Chile Share classes The “Ley de Sociedades Anónimas 18. Tender offer (“Oferta Publicas de Adquisicion – OPA”) The “Ley de Mercado de Valores” (number 18. and Mandatory: these tender offers are triggered by three conditions: An investor purchases 50% plus one share of the voting capital over the past twelve months and acquires control of the company.045) establishes two types of tender offers in Chile: 1. each shareholder will tender an equal proportion of their original amount. The tender offer size has to be 50% plus one share minus its current stake.046” establishes two types of listed shares in Chile: 1) Common shares (“acciones de pago”): they are similar to their U. An investor’s stake surpasses two-thirds of the voting capital. 2. Local regulations prohibit shareholders to have more than one vote per each share. Page 20 Deutsche Bank Securities Inc. An investor acquires control of a holding company whose publicly traded subsidiary represents 75% or more of the holding company’s consolidated assets. The tender price and distribution method are determined by the acquirer. and Preferred shares: they have limited or no voting rights. if the amount of shares tendered exceeds the offer size. For instance.

These industries account for close to 50% of the MSCI Chile and IPSA indices. 4) Consumer staples (13%). Page 21 . 3) Industrials (21%). Telecom Info Tech Deutsche Bank Securities Inc.21 April 2008 Monthly Market Monitor (M3) Index sector weights and market cap We analyze the sector composition of the main two indices We analyze the sector composition of the MSCI Chile and IPSA indices: MSCI Chile: the benchmark has seven sectors: 1) Utilities (with a 25% weight). 5) Financials (10%). Financials. The Industrials sector has USD42 billion in market capitalization while the Utilities sector has USD37 billion. Disc. 4) Consumer staples (13%). 6) Telecom (6%) and 7) Consumer discretionary (4%). Figure 28: Chile sector market capitalization 50 42 40 37 (US$bn) 30 23 20 21 21 17 10 6 1 1 Health Care 0 Industrials Utilities M aterials Source: Deutsche Bank and Bloomberg Cons. 3) Materials (17%). Materials and Consumer staples are next in line with USD20-24 billion. Financials Staples Cons. Figure 26: MSCI Chile sector breakdown CD 4% Figure 27: IPSA sector breakdown CD 5% UT 25% CS 13% FN 8% UT 23% CS 13% TC 6% IN 21% TC 5% FN 10% MT 23% Source: Deutsche Bank and Bloomberg MT 17% Source: Deutsche Bank and Bloomberg IN 27% The two biggest sectors in Chile are Industrials and Utilities The two biggest sectors in Chile are Industrials and Utilities. 2) Utilities (23%). 6) Telecom (5%) and 7) Consumer discretionary (5%). 2) Materials (23%). Information Technology and Health care round up the list. followed by Consumer discretionary with USD17 billion and Telecom with USD6 billion. and IPSA: the benchmark also has seven sectors and similar weights: 1) Industrials (with a 27% weight). 5) Financials (8%). The index is very diversified as the biggest sectors account for only 25%. Lastly. but they are in a different league with less than USD2 billion.

These companies are the largest stocks in both MSCI Chile and IPSA with combined 38% and 32% weights. 2) Lan Airlines. the top 3 stocks accounted for only around 30% of the overall volume. 6% CAP. CTC and Colbun) that traded more than USD5m per day during the past 12 months. 3) Enersis (11%). SQM. while the other 80% (US$200m) is traded onshore via local stocks. 5% CM PC. Moreover. EOC. Market liquidity is much dispersed. Falabella. 9% ENERSIS. 16% NEXT 10 29% ENDESA. The next figure depicts average daily trading volume for the top 30 companies present in both the MSCI Chile and IPSA indices broken down in onshore and offshore instruments. 2) Lan Airlines. there are 12 Chilean companies with a sponsored level three ADR program. 5) Santander Chile. Its top five members are: 1) Copec (with a 16% weight). . The main constituents of MSCI Chile and IPSA are: MSCI Chile: the index has 27 companies. Endesa and Enersis are the main blue chips in Chile. SAN. 4) Soquimich and 5) Endesa. Finally. Liquidity then dries up quickly with the average daily trading volume for the other ADRs being lower than the USD2m level. Its top five members are: 1) Copec (with a 16% weight). Liquidity is of less consideration for foreign institutional investors interested in Chilean stocks because of the decent absolute turnover of the local equity market (close to USD200m). 3) Enersis (8%). 4) CMPC (6%) and 5) CAP (6%). Furthermore. COPEC and DYS have an ADTV bigger than USD10m There are five ADRs with an average daily traded volume bigger than USD5m Page 22 Deutsche Bank Securities Inc. 18% COPEC 16% ENDESA 11% COPEC. Endesa and Enersis are the main blue chips Copec. La Polar. 35% ANTAR. CENCOSUD. there are six other relevant stocks (CAP. Entel. through which roughly 20% (USD50m) of the overall volume is traded offshore. 5% CENCOSUD. 7) Copec and 8) DYS. CAP and Cencosud are also important stocks with relevant weights. CMPC. and IPSA: the index has 40 companies. 2) Endesa (11%). 6) Cencosud. respectively. 4) Soquimich (8%) and 5) CMPC (7%). while the top 10 stocks accounted for about 65%. 2) Endesa (9%). There are eight stocks with an overall average daily traded volume bigger than USD10m over the past year: 1) Enersis. LAN. 4) Soquimich. ENI. 3) Santander Chile.21 April 2008 Monthly Market Monitor (M3) Stock weights Copec. 3) Endesa. Figure 29: MSCI Chile: main individual constituents OTHERS 5% Figure 30: IPSA: main individual constituents OTHERS. There are five ADRs with an average daily traded volume bigger than USD5m over the past year: 1) Enersis. 8% CENCOSUD 7% CAP 6% Source: Deutsche Bank and Bloomberg ENERSIS 11% SQM /B CM PC 8% 7% NEXT 10. 6% Source: Deutsche Bank and Bloomberg Stock liquidity Chilean equities have recorded an ADTV of US$250m over the past year Chilean equities have recorded an average daily turnover of approximately USD250m over the past 12 months.

Page 23 . Consumer discretionary (+21%).5 1.0 2.6 8.3 0.8 13.0 0.2 3.9 2.0 5. Financials (+5%).8 1.0 13.3 10.1 1.9 1Y 28.0 0.6 10.3 3.8 5.0 23.4 5. the best performing stock has been Soquimich (+70%) while the worst performing stocks have been DYS and Iansa (-20%).4 17.7 2.8 10. At the sector level Materials is ahead of the pack (+36%) in 2008 Deutsche Bank Securities Inc.6 2.6 Local 18.3 2.5 7.0 4.0 0.1 5.0 2.0 21.9 2. year-to-date.7 1. Source: Deutsche Bank and Bloomberg Average Daily Trading Volume (USDm) Company Enersis LAN Airlines Endesa Sociedad Quimica y Minera Banco Santander Chile Cencosud Copec Distribucion y Servicio CAP Falabella LA Polar Entel Cia Telecom de Chile Colbun AES Gener Embotelladora Andina Ripley Vapores Empresas CMPC Banco de Chile Cia de Cervecerias Unidas Socovesa Masisa Corpbanca Sonda Inv.5 3.0 2.0 0.8 3.8 7.5 27% 67% 231.0 49% 90% 52.4 2.8 0.9 1.9 2.5 4.5 14.2 0.5 4.2 3.8 11.7 8.3 7.7 3. respectively.5 1.0 1.2 19.4 40.0 0.1 5.3 2.9 ADR 9.0 0.0 0.3 7.7 1M 29.2 29% 68% 211.9 15.4 3.9 1.7 4.3 0.5 1.7 1.3 5.0 2.1 13.4 1.2 3.2 3.4 4.6 10.21 April 2008 Monthly Market Monitor (M3) Figure 31: Chile average daily trading volume for top 30 MSCI Chile and IPSA constituents 04/21/08 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Short name ENERSIS LAN ENDESA SQM/B BSAN CENCOSUD COPEC DYS CAP FALAB LAPOLAR ENTEL CTCA COLBUN GENER ANDINAB RIPLEY VAPORES CMPC CHILE CCU SOCOVESA MASISA CORPBANC SONDA IAM MADECO MULTIFOO CONCHA BCI Top 3 / Total* Top 10 / Total* CHILE *Total includes 40 constituents of the MSCI Chile and IPSA.6 6M 31.2 7.0 9.3 2.5 2.9 17.6 20.4 8.7 21.4 12.4 3.0 1.5 24% 58% 196.2 3.1 3.4 6.5 2.5 1.6 14.5 30% 65% 248.3 7. Copec is down 5%.5 0. while Endesa and Enersis are up 31% and 22%. At the sector level.0 2.8 7.2 1.5 1.3 5.4 4.9 2.9 0.3 5.4 19.3 2.3 0.0 6.3 3. Aguas Metropolitanas Madeco Multiexport Foods Concha y Toro Banco de Creditos e Inversiones Sector Utilities Industrials Utilities Materials Financials Consumer Staples Industrials Consumer Staples Materials Consumer Discretionary Consumer Staples Telecom Telecom Utilities Utilities Consumer Staples Consumer Staples Industrials Materials Financials Consumer Staples Consumer Discretionary Materials Financials Information Technology Utilities Industrials Consumer Staples Consumer Staples Financials 1W 38.1 2.0 4.1 2.0 0.7 8.7 18.0 7.7 10.5 1.0 4.0 4.6 6.5 0.3 7. Consumer staples (+1%) have recorded only singledigit gains year-to-date.9 14.6 5.3 0.7 3.2 10.6 5.1 1.5 7.5 7.1 1.3 Stock performance We depict the recent performance of the main Chilean stocks We depict the performance of the constituents of the MSCI Chile and IPSA indices sorted by sector.0 0.3 4.5 1.2 3. Utilities (+20%) and Telecoms (+13%) in 2008.0 0.0 3.2 8.1 2.7 4.2 4.6 11.8 4.5 27% 72% 265.2 14.1 0.4 2.4 2.2 19. Materials is ahead of the pack (+36%).8 4.3 9.0 0.3 4. Turning to the blue chips.9 3.7 0.0 0.2 3.8 17.0 3.1 3.8 3M 25.7 13.7 13.4 0.5 9.8 4.4 7.0 11.3 3.9 2.6 0. Meanwhile.3 3.1 2.3 3.8 1.4 12.5 13.8 11.5 4.0 0.5 1.9 4.4 0.7 15.0 0.2 36.0 21.0 9.7 25.8 15.0 0. Year-to-date. while Industrials (-2%) and Health care (-10%) are the only sectors with negative returns.3 1.3 7.6 10. followed closely by Information Technology (+27%).3 3.4 29% 66% 258.9 0.4 1.2 8.3 4.9 9.9 23.1 1.6 7.0 2.

519 20.2 0.9 1.4 21.895 1.907 169.6 2.828 1.599 2.147 6.0 1.627 8.214 3.350 1 week 4% 4% 1% 9% 8% 4% -2% 4% 1% 4% 6% -2% 5% -2% 11% 4% -1% -1% 1% -1% 0% 1% 1% 0% 4% -2% -1% 5% 5% 2% 0% 3% 3% 4% 1% 0% 7% 4% 5% -1% 1% 5% 1% 1% 3% 3% 4% 0% 3% 2% Price change in USD % 1 month 10% -5% 13% 3% 9% 9% 5% -2% 7% 6% -4% -15% 3% 4% 6% 1% -11% -5% 7% -2% -1% 2% 2% 2% -3% -6% 2% 6% 4% 1% -3% 15% 15% 7% -4% 9% 39% 15% 2% 1% 2% 11% 4% 7% 8% 9% 16% 1% 11% 5% 3 months 24% 25% 42% 29% 36% 25% 24% 11% 22% 12% -14% -7% 17% -4% 8% 10% 9% 16% 15% 7% 13% 5% 5% 29% 15% 4% 22% 30% 15% 13% 11% 55% 55% 60% 13% 29% 94% 55% 30% 26% 28% 33% 4% 8% 50% 50% 49% 21% 41% 26% 6 months -1% -17% 7% -16% NA -2% 3% -4% -7% -24% -32% -36% -14% -35% -23% -12% -2% 0% -2% -12% -2% -9% -9% -3% 2% -9% -13% -4% 0% -33% -7% 10% 10% 12% -4% -2% 59% 23% -10% -1% -4% -6% -21% -7% -9% 7% 0% 5% 0% -1% YTD 23% -2% 12% 6% 6% 21% 23% 5% 10% -5% -20% -20% -6% -17% -13% 1% 7% 12% 4% -3% 5% -10% -10% 9% 3% -5% 0% 4% 11% -12% -2% 27% 27% 32% 5% 21% 70% 36% 14% 12% 13% 12% -12% -1% 13% 31% 22% 7% 20% 12% Banco de Creditos e Inversiones BCI CI Page 24 Deutsche Bank Securities Inc.666 989 989 1. .1 0.868 21.9 14.330 9.686 2.9 1.21 April 2008 Monthly Market Monitor (M3) Figure 32: Chile price performance for selected stocks 04/21/08 Company Falabella Forus Parque Arauco Salfacorp Socovesa Consumer Discretionary Embotelladora Andina Cencosud Cia de Cervecerias Unidas Concha y Toro Distribucion y Servicio Empresas Iansa LA Polar Multiexport Foods Ripley Consumer Staples Banco de Chile Banco Santander Chile Corpbanca Financials Banmedica Health Care Almendral Antarchile Copec LAN Airlines Madeco Sigdo Koppers Vapores Industrials Sonda Information Technology CAP Empresas CMPC Masisa Sociedad Quimica y Minera Materials Cia Telecom de Chile Entel Telecom AES Gener Colbun Cia General de Eletricidad Edelnor Endesa Enersis Inv.6 35.3 Mkt Cap (USDm) 14.815 22.1 22.623 12.724 161 1.275 1.6 1.4 2.7 1.3 2.1 33.780 660 755 1.021 1. Aguas Metropolitanas Utilities CHILE Source: Deutsche Bank Price Bloomberg ticker FALAB CI FORUS CI PARAUCO CI SALFACOR CI SOCOVESA CI ANDINAB CI CENCOSUD CI CCU CI CONCHA CI DYS CI IANSA CI LAPOLAR CI MULTIFOO CI RIPLEY CI CHILE CI BSAN CI CORPBANC CI BANMED CI ALMEN CI ANTAR CI COPEC CI LAN CI MADECO CI SK CI VAPORES CI SONDA CI CAP CI CMPC CI MASISA CI SQM/B CI CTCA CI ENTEL CI GENER CI COLBUN CI CGE CI EDELNOR CI ENDESA CI ENERSIS CI IAM CI Rating Hold NC NC NC Buy Buy Hold Buy NC Sell NC Hold NC Hold Hold NC Buy NC NC NC NC Hold Buy NC NC NC NC NC Hold NC NC Hold Buy NC Sell NC NC Hold Buy NC USD 5.0 0.1 17.421 42.6 0.1 0.411 7.379 8.5 0.2 30.4 1.435 2.1 6.572 10.5 38.025 2.2 7.454 6.3 0.712 746 13.019 4.225 2.1 0.6 0.275 5.068 4.2 0.5 0.541 23.2 7.4 0.0 0.292 396 798 551 561 16.352 443 1.402 2.9 1.9 4.4 1.5 1.0 0.208 3.8 16.442 1.286 36.609 1.

In addition. and petroleum. and distributes iron and manganese ores for commercial and industrial uses. Gener extracts coal. Cencosud is the second largest food retailer through its Jumbo hypermarkets and Santa Isabel supermarkets. a 60% direct interest in Tecnocap and a 53% interest in Novacero. 4 Source is Bloomberg and Deutsche Bank.000 agreements with various health service providers. Edwards in January 2002. Antarchile also distributes fuel and operates fishing and shipping businesses. insurance brokerage and investment management. It also invests in communications. Banco de Credito e Inversiones attracts deposits and offers retail and commercial banking services. its primary holdings are in Almendral Telecomunicaciones. Pesquera Iquique-Guanaye. Inmobiliaria El Almendral and Compañia Hispano Americana de Servicios. Forestal Cholguan. real estate and the sanitation services sector. Miami and Hong Kong. It also manufactures liquid. CAP is a holding company that through its subsidiaries mines. real estate and energy sectors. Cencosud also operates Chile's second largest and Argentina's largest home improvement chain under the brand name Easy. Antarchile invests in financial instruments and operating companies. securities brokerage. a department store and consumer finance business. and transports cargo. Astilleros Arica and Celulosa Arauco y Constitucion. Its product mix includes local and foreign-currency-denominated loans. Through subsidiaries. foreign currency forward contracts and credit lines. particularly in the forestry and energy industries. laminated.057 ATMs nationwide. and lease financing services. securities brokerage services. Sao Paulo. In Chile. Banco Santander Chile is a bank that provides commercial and retail banking services. Through its subsidiaries. Banmedica is a holding company principally active in the provision of health and life insurance services. It also manages ports. but as the largest private bank of local capital. elsewhere in Latin America. The bank has a retail network of 247 branches and 1. The bank offers credit cards. It offers a range of health plans designed to cover specific needs through a chain of 90 branches. The company is a primary holder of Entel Chile. Page 25 . The company's primary subsidiaries are Copec. health and life insurance. offers ship agency and chartering services. and the third largest department store operator in Chile. mutual fund management. It has 243 offices in Chile and also has presence in Lima. a national contact center. Cencosud is one of the leading multi-format retailers in Chile and Argentina. the company holds an interest in a portfolio of clinics and other health service providers. Mexico City. The company operates thermoelectric and hydroelectric plants.21 April 2008 Monthly Market Monitor (M3) Appendix – Company descriptions4 AES Gener generates and distributes electricity to customers in Chile. With a loan market share of 18% the bank ranks as the second largest in the country. and more than 8. It recently acquired Almacenes Paris. financial advisory services. processes. In addition. natural gas. Almendral is a holding company engaged in investment in telecommunications. and the United States. a major telecommunications service provider in Chile. and finished steel products. the bank also offers financial leasing. The company holds an 11% direct interest in both Intasa and Cintac. Deutsche Bank Securities Inc. Banco de Chile was formed through the merger of Old Banco de Chile with Banco de A.

In 2004. folding boxboard. transports. Edelnor is a company that is principally engaged in the generation. The company’s principal trademarks include Concha y Toro. Colbun produces. such as pay TV (DTH and IP-TV) to offer triple play services (voice. and Gasmar. mining and energy generation. distribution and supply of electricity. Page 26 Deutsche Bank Securities Inc. Sunrise and Frontera. including loans and leasing services to businesses. as well as maintenance and repair of electronic systems. Copec holds a minority stake in Metrogas.5 million DSL subscribers.364 megawatts. credit card services and mortgages to individuals. Compañia General de Electricidad generates and distributes electricity and gas to residential. DYS has also ventured into the consumer finance business through its proprietary Presto credit card. Uruguay. The company also maintains electrical networks. In the forestry sector. and a wine distribution network. the company provides consulting services in the engineering field. The company operates hypermarkets under the Lider banner. It is based in Chile. solid and gaseous. multiwalled paper sacks. and industrial customers in southern Chile. Colbun participates in the electricity and natural gas sectors. On the soft drinks side. Its gas sector spans through eight companies in Chile and Argentina. More recently. tissue products. In addition. broadband internet and pay TV). Corpbanca offers banking services to both businesses and individuals in Chile. distributes and supplies electric energy and natural gas with an installed capacity of 2. Arauco is one of the largest pulp and forest products producers globally. newsprint. Other investments include IGSA (real estate) and Tusan (transformers). Don Melchor. CTC has been focusing on segmentation and new businesses. CCU is the second largest bottler in Chile including its proprietary brands and brands under license from Pepsi. transportation and sale of all types of fuel: liquid.0m fixed lines and over 0. The company is controlled by Telefonica de Espana. bottling plants. and sparkling wines. mutual fund management. CTC is Chile's incumbent wireline telecommunications operator. CTC sold its cellular business to Telefonica Moviles. Copec is a diversified Chilean holding company whose main business areas are in the forestry and energy sectors. Marques de Casa Concha. mini-hypermarkets under the Lider Vecino brand and supermarkets under the Lider Express banner.21 April 2008 Monthly Market Monitor (M3) CMPC is the second largest forestry company in Chile. Trio. In the energy sector Copec is the leader in the Chilean fuel distribution business. vinification plants. Edelnor offers advising services in engineering and management. CCU is the leading brewer in Chile and the second largest in Argentina. CMPC also holds investments in Argentina. Terrunyo. and rents and markets electrical equipment. and has a little over 2. CCU has also diversified into spirits through a JV with the leading Pisco producer in Chile. Compañia de Cervecerias Unidas brews beer and produces and distributes nonalcoholic beverages in Chile and Argentina. Casillero del Diablo. insurance brokerage and securities brokerage services through its subsidiaries. commercial. and also participates in other sectors such as commercial fishery. . and bottles mineral water. The bank also provides financial advisory services. It is an integrated paper producer whose main products are market pulp. Concha y Toro owns and operates vineyards. supplying electric energy to the 1st and 2nd regions. Edelnor is also engaged in the purchase. both in the domestic Chilean market and abroad. Metrogas. privatized in 1988. including Gasco. Viña Concha y Toro produces and exports worldwide its premium. It also grows and markets fruit. corrugated cardboard boxes and P&W papers. varietal. Peru and Mexico. Distribucion y Servicio is Chile's leading food retailer. transportation. the natural gas distributor of Santiago. becoming a pure fixed line operator. and loans.

and offers civil. is also present in the generation business in Argentina. operating 46 generation plants with an aggregate installed capacity of 11. including 36 domestic routes and 63 overseas destinations. It provides domestic and international passenger and cargo air transportation services. environmental. The company also provides long distance. commercialization. Endesa and its subsidiaries generate and supply electricity. The company operates more than 140 store locations through three subsidiaries: Uruforus. mainly on data and long distance services. Europe and the South Pacific. The company owns and operates generating plants. and through its subsidiaries. Page 27 . Cordoba and Rosario. Empresas Iansa is engaged in the production of sugar. business and project administration related to management and operations in sanitation. It also has a presence in Peru. La Polar is the fourth largest department store with approximately 13% market share (sales). Enersis is a holding company with investments in generation. architectural. Brazil. Chile. distribution and transmission of electricity throughout Latin America. Entel is Chile's second-largest wireless telecommunications provider by number of subscribers and the largest by revenues. mechanical. and electrical engineering. The company also provides technical assistance. Peru and Colombia. It operates five plants. Falabella is the largest department store operator in Chile and one of the largest in Latin America. Andina's controlling shareholders hold close to 50% of the company while The Coca-Cola Company holds an 11% stake. clothing and accessories via retail stores around the country. Peru and Colombia. Forus is engaged in the manufacturing. The company is also the largest independent credit card operator in Chile. LAN's headquarters are located in Santiago. Deutsche Bank Securities Inc. to extraction of the sugar. operating in Uruguay.000 m2 of selling space. Linares. located in Curico. La Polar has a strong financial division which offers credit to its clients and accounts for 25% of sales. data and Internet services in Chile through its limited wired network and its NGN and Wimax networks. Brazil's second largest city (Rio de Janeiro) and a large portion of Argentina's central region including the cities of Mendoza. operating in Argentina. export and distribution of footwear. Enersis subsidiaries are also present in Argentina. import. The company is involved in all stages of production from selection of the individual sugar beet. Chillan Los Angeles and Rapaco. Inversiones Aguas Metropolitanas is a holding company with a controlling interest in Aguas Andinas and also engaged in the offering of all classes of audit. local. It is the country's largest generation and distribution company. Colombia and Peru. consulting and other services related to sharing of technology and know-how. It has recently branched out into the food retail segment in Peru and Chile. Andina's franchised territories include Chile's capital (Santiago) and its metropolitan area. through its subsidiaries Endesa Chile and Chilectra.21 April 2008 Monthly Market Monitor (M3) Embotelladora Andina is the second largest Coca-Cola bottler in Latin America with 34 million potential consumers. and Topsafety. its packaging and its distribution to all regions of Chile.727MW. LAN Airlines is one of the largest airlines in Latin America and also the principal freighter operator in the region. Argforus. as well as a packaging plant in Santiago. and project management services. integrating points throughout America. Argentina and Peru as well as home improvement stores in Chile. The company has 31 stores and 110. La Polar is a Chilean lower and middle-income segment department store retailer. Falabella operates department stores throughout Chile. Endesa is Chile's largest generation company.

using both owned and chartered vessels. Chile. Vapores provides both shipping and port services. the company has a bank in Chile. Parque Arauco Kennedy and Mall Arauco Maipu. Multiexport's products include Atlantic salmon. Socovesa is focused in the prospecting. vertically integrated specialty chemical and specialty fertilizer producer. smoked salmon. the company provides interior decoration. Southeast Asia and Latin America. landscape design services and financing support. Additionally. and ports in North America. It also provides internal and external supplies. Brazil. through the company's subsidiaries Geosal and Inmobiliaria Austral. solid wood products. Central Europe and Russia. and 3) Lithium. Socovesa serves a highly diversified geographical area and socioeconomic population strata. entertainment. and aluminum profiles. The main malls controlled or owned by the company are: Mall Parque Arauco. 2) Iodine. copper alloys. offers general and bulk cargo transport. as well as industry and business process applications and IT platform distribution services.21 April 2008 Monthly Market Monitor (M3) Madeco manufactures non-ferrous products from copper. as well as China. including transportation and installation on site. development. 2) Real Estate. copper cables for telecommunications operators. In addition. The company. Masisa is a vertically integrated wood boards company that grows and harvests timber in plantations and sells its manufactured products primarily to the construction and furniture industries. Ecuador. the United States. fresh and frozen product transport. The company produces flexible packaging for the food industry. Mexico. Sociedad Quimica y Minera is a Chilean-based diversified. sawn lumber and saw and pulp logs. Approximately 75% of sales are generated in Chile and the rest in Peru. tourism and transport. brass bars and coin blanks for coin manufacturing and construction.8 million credit card holders. and other commercial real estate investments. and Australia. industrial machinery. engaged in the design and building of various structures from small houses to thermal power stations. Multiexport Foods operates a salmon fish farm. Colombia. Ripley is a department store with operations in Chile and Peru. Africa. Sonda provides IT services and systems integrations.and hot-smoked fish products. Madeco is based in Chile and also operates in Argentina. which is engaged in management services. offering consultancy and software development. mussels and cold. The company exports to Japan. Korea. Parque Arauco develops and operates commercial centers in Chile that provide shopping. Sigdo Koppers specializes in engineering. and automobile shipping services to both coasts of South America. In Chile it is the third-largest department store chain and in Peru it is the second largest. The company's investment activities include all type’s of assets and businesses. and aluminum. Brazil. sales and management of residential property (buildings and houses). Its main products include wood boards for furniture. which are the most significant commercially exploitable known source of iodine and natural nitrates. construction and real estate business. Salfacorp operates three business areas: 1) Engineering and Construction. SQM has three main business areas: 1) Specialty Fertilizers. Europe. Costa Rica. salmon trout. SQM is one of the most relevant and lowest cash-cost producers in its three main business areas. SQM's competitive advantages stem from access to unique caliche ore reserves. and mining exploration. . Peru and Uruguay. Page 28 Deutsche Bank Securities Inc. and Peru. Ripley provides credit to customers and has over 5. The company has more than 200 customer service centers worldwide and main operations in Argentina. and 3) Management. Parque Arauco also holds interests in shopping centers in Argentina and Peru. construction and engineering company. Asia. Salfacorp is a real estate. and eating facilities.

That said.S. Between 1987 and 2007. Before this period. spending sharply declined and output dropped by almost 1% in 1999. as a result of the deterioration in the international environment in the late 1990’s and a rigid exchange rate regime. per capita income more than tripled in U. the 5% current account deficit was seen as difficult to be financed.1% and explaining as much as 40% of the steady growth in aggregate demand. advancing on average 9. . independent monetary policy. That is. had led to a decline in annual output by around 13%. human capital (quality of education) below and inequality above international standards.5% on average Aggregate demand has expanded at an average rate of 5. Chile’s rate of economic growth averaged 5. public spending growth rate has been the most stable contributor with a growth rate between 2. In line with responsible fiscal policy. For instance. Chile was not immune to macroeconomic crisis during this period. Nonetheless. and the poverty rate was cut in half.5% over the past 20 years. Exports have also played a pivotal role. the country also faces several challenges in order to spur longterm growth such as low innovation and development expenditures. with consumption contributing with more than 50% of this growth performance.2% (before Page 29 Deutsche Bank Securities Inc. in comparison with other countries in the region. Together with a countercyclical based-rule fiscal policy and sound and deep financial markets. Figure 33: Chilean annual GDP growth 15% 12% 11% 10% 6% 5% 7% 8% 10% 7% 6% 4% Chile has enjoyed enviably stable rates of economic growth and low inflation Chile decided to implement an inflation targeting framework with flexible exchange rate in 1999 7% 7% 4% 3% 3% 2% 4% 6% 6% 4% 5% 0% -1% -5% 1987 Source: Deutsche Bank 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 During the last 20 years.21 April 2008 Monthly Market Monitor (M3) Andres Orlandi +1 (212) 250-2975 Macro background Economic activity Fiscal restraint. business cycles in Chile have been less pronounced. a sound and deep financial system. dollar terms. Given a combination of inflation below 3. this approach allowed the Chilean economy to grow on average by 5.0% between 2002 and 2007 with low volatility (0. aggregate demand expanded at a rate of 5. which has ultimately helped foster long-term growth and social progress. fragile financial sector and disturbance in international markets.8%). and an outward-looking trade policy have provided Chile with enviably stable rates of economic growth and low inflation. a rigid exchange rate regime.0% and the fact that most of the crises in Chile have been associated with exchange rate rigidity. in 1982. should capital inflows decline. the local currency suffered strong depreciation pressures. Chilean authorities decided to implement an inflation targeting framework with a flexible exchange rate in 1999. Thus.9% a year.

its share has fallen from 58% to 49%. the mining sector.0% 9.6% 9.8% -5.0% 2.7% n.1% 3. n.7% 2.6% 2.3% 2.4% 2.7% 6.6% 3.5% 3.4% 2.1% 1996 15% n.8% 19. 3.4% 6.3% 4.4% 2004 7.6% n.1% 1.2% 8.6% 5.a.9% 2.3% 4.3% 11.5% -2.5% -0.9% 13.2% 8.6% 17.7% 4.3% in GDP.a.3% -15. 3.9% 11.6% -5.2% 8.1% n.3% 3. n.8% 13. n. it has been exports which have claimed a larger share.9% 1.5% 12. Figure 34: Chile aggregate supply and demand Annual growth 1996 Aggregate Demand Domestic Demand Consumption Private Public Investment Exports Aggregate Supply Imports GDP Source: Deutsche Bank Contribution 2003 5.2% 2.7% 3. 10% 12% n.4% n.) Meanwhile. suffered production lags in 2005 and 2006 due to labor strikes and technical bottlenecks. 7% n.a.a.9% 17.0% 2005 8.9% 4. n.3% 1999 -2.8% 3.7% 2.9% 4. The manufacturing and the construction sectors also had a decent aggregate share of 23.a.0% n. n.4% 2. Non-mining natural resources also retained their share in GDP without any rise or decline.1% n.0% -19.9% 2.2% 6.a.5% 2.9% n.9% -18.6% 1998 4.7% 9.3% 7. 6% 4% 3% 2% 3% 1% n.4% 3. 2. 4.4% 3.a.6% n.4% 1.5% n.0% -8.a.a.7% -10. 2.4% 3.5% 4.1% 4.7% 4.1% 6.7% 2000 5.a.7% 5. (The construction sector went through a slump in 2006 generated by a deceleration in mortgage loan growth and tighter monetary policy.2% n.a.8% -9.a.a.a.5% 2001 3.9% 4.1% 18. 0.5% 7.8% 7.3% 14. n.5% 2.a.3% 5.a.0% 8.4% 7.3% 1.4% 6.1% 18.1% 4. 4.9% 2.1% 7.a.3% 0.a. n.a.a.5% 4.0% 2005 8.4% 5.7% 8. n.a. n.21 April 2008 Monthly Market Monitor (M3) the 1999 recession) and 6.4% 9.6% 6.0% weight in 2007.8% 6.7% 2.5% 3. 3.7% -9.2% n.4% 3.a.7% n.7% 6. 6.6% 0.9% The composition of the Chilean economy has remained stable The composition of the Chilean economy has remained stable over the past 20 years.a.1% 2006 5. n.3% 2.0% 7.5% n.8% 10.1% n.5% -0.a. n.7% 3.6% 3.9% -4.9% 10.4% 9.a.0% 23.2% 6.8% 14.8% -0.2% 10.5% 2.a.a.4% 6.7% 3.a.a.a.3% 3.a.1% 3.1% 10. n.a. investment has been the most volatile component of the aggregate demand with real growth rates going from -18% to 24%.5% 5.a.a.7% 4. -0.6% 10.a.5% 5.9% 3.2% n.8% 8.1% 5.3% 7.7% -11.2% 1. 4. 3. 4.5% 1. n. On the other hand.a. 100% 2007 16% 16% 11% 11% 7% 6% 1% 7% 7% 5% 4% 4% 3% 2% 1% -1% 100% 1998 5. hotel & restaurants Personal services Mining Copper Other mining Construction Transport & storage Home ownership Public administration Agricultural Communications Electricity.3% -0.4% 2000 5.5% 5.7% 4.9% n.0% 9.6% 3.3% 4.2% 8.4% 7.4% 6.5% 2002 3.0% 3.1%.4% 6. 2.9% 1.6% 15.a.1% 13.2% 7.3% 9.8% 8.0% 0.4% 8. concentrated in copper.2% 13.7% 3. 2.9% 3.2% 1.0% 7.1% 7.3% 2002 2.a.6% 2006 6.8% -6.1% n.2% 8.7% n.a.3% 11.0% 1.2% 2. Figure 35: Chile sector growth Annual growth 1997 Financial services Manufacturing Trade.5% 6.2% 5.2% 3.a. .0% -10.5% 1.a.1% 5.9% 2.a.9% n.5% -11.2% 13.5% 4.4% -1.a. 8% n.1% 6. n.9% 14. 4.1% 7.3% 5.2% n.2% 6.0% 7.3% 5. 100 2001 15% n. n.5% 6. 2. 3.4% 5.7% n. gas and water Fishing Other GDP Source: Deutsche Bank Contribution 2003 3.8% 13.a.4% 4.7% 3.5% 6.2% n.9% 2.5% n.3% 1999 -0.a. 4.8% 14.4% -3. 2. 6% 5% 3% 1% 3% 1% n. 3. n.0% 2004 9. The services sector is the most relevant with around a 50.1% 3. -4.7% 2007 7.8% 7.a. -0. but it recovered in 2007. Thus the services sector remained the chief driver of Chilean economy.2% 6.5% 3.9% 3. Hence with the contribution of investment to growth lower in 2007 than in 1996.3% 2007 7.6% 7.7% 5.1% 6.4% 1.2% n.1% 4.4% 7.a.3% 7. Although consumption was still the largest component of aggregate demand in 2007.0% 5.6% 8.1% 2. n.a.a.7% Page 30 Deutsche Bank Securities Inc.1% 3.7% 3. 2.0% 8.9% 2.a.5% 4.2% 2.9% 7.1% 1.a.1% n.1% n.2% 5.2% 8.6% 5.4% 5.1% 1996 100% 79% 58% 49% 9% 21% 21% 100% 23% 77% 2001 100% 75% 58% 48% 9% 16% 25% 100% 24% 76% 2007 100% 65% 49% 41% 8% 15% 35% 100% 25% 75% 1997 8. n.7% 10. n.5% 2.8% 7.8% 7.9% 10.5% 2001 3.0% 3.a.a.1% 6.7% 10.8% 8.3% 6. 10% 12% n.5% 3. 6. 7. though mining and manufacturing can be potentially decisive contributors.a.0% -0. n.

The price of perishable fruit and vegetables declined on average by 2. rather than suggest increasing demand pressures (as generally core indices do). inflation in Chile has systematically been below the average of the region. but it surged by more than 30.0% last year.0%) and converged to Latin American standards. the lack of natural gas imports from Argentina (as that country is facing its own gas crisis) and the low level of reservoirs because of scarce rainfall last year (50% of the electricity is generated in hydroelectric plants) has escalated the use of expensive diesel-based generators. increased by 15. Page 31 . recently. an important item.0% last year. Deutsche Bank Securities Inc. other cost increments are generally pass on to consumer prices. Non-perishable food rose by nearly 15.0% during the 2000-2006 period. Moreover. Chile is a very open economy so commodity prices pass-through is much higher than in the rest of the region.0% during the six-year window starting in 2000.0% last year 2000 2002 2004 2006 Latin Am erica 2008 Core inflation has also been trending up recently Core inflation has also been trending up recently.21 April 2008 Monthly Market Monitor (M3) Inflation Inflation in Chile has systematically been below the average of the region As a result of prudently managed macroeconomic policy. Finally. in Chile. As stated by the monetary authority. As a result. However. second-round effects of higher inflation. Gasoline prices. the 2007 increment mainly reflects the usual. inflation in Chile has increased well above the target range (2. Additionally. which have significantly raised upstream costs and therefore consumers’ electric bill. even though the use of the gasoline stabilization fund has ameliorated the domestic fluctuation of fuel prices. Several factors help to explain this phenomenon. Figure 36: Chile and Latin America annual headline inflation 30% 25% 20% 15% 10% 5% 0% -5% 1996 1998 Chile Source: Deutsche Bank Chilean has experience massive negative supply shocks lately Gasoline prices increased by 15. with the rise in oil prices along with an upward surge in commodity prices and unfavorable and extreme weather conditions that affected fresh fruit and vegetables production significantly. it has not stopped their upward trend. the impressive scale of supply shocks and their transmission to the Chilean domestic prices can be appreciated by comparing the unusual increases of some prices in 2007 with their average since the year 2000. The main reason is the significant weight that goods and services indexed to past inflation has in the core inflation index.0% in 2007. and unavoidable. while the rate was only around 2.0% and 4.

Appointments are made every two years and last for ten years. one at a time. With full autonomy over management its budget and policy decisions. and as long as medium-term inflation expectations do not deteriorate. the Board did not want to overreact to the 2007’s spike in inflation as they were driven by transitory forces. the Central Bank’s Board reports to the President of Chile and the Senate. except in the case of external warfare or danger thereof. published in the Official Gazette (Diario Oficial) on 10 October 1989. The Governor of the Board is also appointed by the President of Chile from among Board Members. The Board is entrusted with the Central Bank’s management and direction… …with full autonomy over its budget and policy decisions 5 This section is based on: “Central Bank of Chile: Monetary Policy in an Inflation Targeting Framework”. [which] has full legal capacity. Moreover. and is ruled by LOC Section 27.”5 The Board is entrusted with the Central Bank’s management and direction. its Basic Constitutional Act expressly requires “justified reason with the prior approval of the Senate” before the President of Chile can remove any or all Board Members. Its five members are appointed. Figure 38: Chilean headline. and holds this position for five years or the remainder of the term. IPCX1 2007 2008 Non Tradable -5% 2004 CPI Source: Deutsche Bank 2005 2006 Food 2007 2008 Ex-food Monetary policy The Central Bank objective is the normal functioning of the internal and external payment systems The Central Bank’s Basic Constitutional Act (Ley Orgánica Constitucional.” Moreover. food and non-food annual inflation 20% 15% 10% 5% 0% Figure 37: Chilean headline. possesses its own assets and has an indefinite duration. Banco Central de Chile. and makes decisions keeping in mind “the general orientation of the Government’s economic policies. by the President of Chile and approved by the Senate.” Central Bank autonomy is reinforced by the fact that the Chilean constitution (Article 109) does not allow it to make loans to the public sector. to comply with Article 108 of Chile’s National Constitution. it establishes the objective of this new authority as “to look after the stability of the currency and the normal functioning of the internal and external payment systems. a new Board Member is appointed for the remainder of the period. Indeed. non-tradable and core annual inflation 10% 8% 6% 4% 2% 0% -2% 2004 2005 CPI Core. they should not spill-over to other sectors. turned the Central Bank into “an autonomous entity of technical nature created in accordance with constitutional provisions. LOC). January 2007. whichever is less.21 April 2008 Monthly Market Monitor (M3) There is limited room for the Central Bank to mitigate inflation driven by supply shocks There is limited room for the monetary authority to mitigate inflation driven by supply shocks. Food inflation is a global phenomenon. Page 32 Deutsche Bank Securities Inc. IPCX Source: Deutsche Bank 2006 Tradable Core. In the case of a vacancy. tradable. given the Central Bank's reputation. The challenge for the monetary authority is to allow the adjustment in relative prices to take place and avoid undesired second-round effects. .

the Central Bank set the overnight real rates (linked to UF index). the monetary policy in Chile is based on inflation targeting with a floating exchange rate. Regarding the first one. the Central Bank applied a partial inflation targeting framework. within which the interbank lending rate operates. but since then it has set nominal interest rates. the September Monetary Policy Report includes an annual evaluation on the progress of policies and programs for the year to date. an operation that requires collateral (repo). at the MPR minus 25bp. The Central Bank’s Board makes monetary policy decisions at monetary policy meetings. the monetary authority has executed monetary policy by setting the interbank overnight rate. The second mechanism involves holding commercial bank deposits at the Central Bank for one business day. with the implementation of a floating exchange rate regime in 1999. policy interest rate and headline inflation 15% 10% 5% 0% -5% -10% 1998 2000 Policy Rate Source: Deutsche Bank 2002 2004 Im acec 2006 CPI 2008 The Central Bank has set nominal interest rates since August 2001 Between 1991 and 1999. the monetary policy framework based on inflation targeting was completed. The inflation target range is 2-4% Monetary policy decisions normally occur every month There are two main mechanisms to regulate daily liquidity Deutsche Bank Securities Inc. The Central Bank has chosen two years as a policy horizon because this reflects the average lag between changes in policy instrument and their impact on output and prices. Page 33 . since May 1995. when it determines the value of a reference interest rate referred to as the monetary policy rate (MPR). and any deviations from the baseline scenarios stated on those reports result in adjustments to monetary policy. it controls the supply of liquidity or monetary base to ensure that the resulting interest rate is close to the MPR. In other words. every year the Central Bank produces three Monetary Policy Reports that are presented to the Senate. The Central Bank carries out its monetary policy by influencing the daily (overnight) interbank interest rate. Actually. The Central Bank uses its instruments in order to guarantee that annual inflation will be plus or minus one percentage point of the three percent target rate. Before August 2001. There are two main mechanisms to regulate daily liquidity: 1) the liquidity credit line and 2) the liquidity deposit. These two rates establish a symmetrical automatic stabilization band of 25bp plus or minus the MPR. Actually. However.21 April 2008 Monthly Market Monitor (M3) The Central Bank produces three Monetary Policy Reports every year By law. which normally occur every month. within the two-year monetary policy horizon. Currently. Figure 39: Chilean economic activity. commercial banks obtain funds from the Central Bank at the MPR plus 25bp. and proposals for the next calendar year.

motivated by excessive volatility of the international financial markets and its potentially adverse effects. when the monetary authority believes that the exchange rate is misaligned with macroeconomic fundamentals. rather than an attempt to manage the exchange rate at levels that could end up in a misalignment. Page 34 . More recently. Two such episodes occurred in 2001 and 2002.21 April 2008 Monthly Market Monitor (M3) The Central Bank has the right to intervene in the local currency market As stated above.) 2008 Interventions in Chile have been announced It is interesting to highlight that contrary to other countries.H.0bn in the currency market to increase international reserves in order to “strengthen the international liquidity position of the Chilean economy to better face further deterioration in the international condition. and More important. According to the monetary authority. For this reason.” Deutsche Bank Securities Inc. it will buy USD8. 2. announced a package of intervention measures to provide more liquidity and foreign currency coverage. but it has always reserved the right to intervene in the local currency market under exceptional circumstances.” especially in a country with a high levels of reserves. the Board stated that “within the inflation target regime with flexible exchange rate this measure is justifiable given the significant uncertainty surrounding the evolution of the international financial markets. Thus. and this introduces some costs to the decision-making process. If this were the case. There must be a full assessment before intervening This strategy avoids becoming “addicted to intervention.0bn in the currency market in 2008 115 CLP600 100 CLP400 85 CLP200 1990 1993 CLP Source: Deutsche Bank 70 1996 1999 2002 2005 REER (R. rather than to speculation containment. There must be a full assessment before intervening. the Central Bank has opted for a floating exchange rate regime.” Additionally. Moreover. and the beginning and the end of the intervention period have been made public. the monetary authority stated that between April 14 and December 12 of 2008. the interventions main objectives of liquidity supply and market stabilization. the conclusion would be that the movement in the exchange rate is much closer to an equilibrium phenomenon than an overreaction. “the rationale for the choice of high transparency is twofold: 1. this is consistent with the fact that the real exchange rate is currently misaligned (stronger) with macroeconomic fundamentals. it has never been ruled out that an intervention could be ineffective.” Figure 40: Chilean nominal and real foreign exchange rate CLP800 130 The monetary authority stated that it will buy USD8. when the Central Bank. interventions in the foreign exchange market in Chile have been announced. intervention is more of a test for a potential bubble. The authorities’ commitment to intervene in a transparent manner rather than to surprise the market.

the United States in 2004 and China in 2006. being the vital elements. The following are the main categories of Chilean exports: 1. 2. Page 35 . account for 6% of total exports and has increased its relevance in the Chilean export basket because of historically high prices. salmon and trout (3%) and basic metals (3%). Europe (24%). and their main constituents are industrialized food (9%). In particular. Chile mainly sells its products to Asian countries From a geographical point of view. Industrial goods: they constitute the second largest category of exports with a 27% share. In addition to the sound macroeconomic policy. exports to GDP ratio has increased from 26% in 2001 to above 40% in 2007. aggregate exports and imports of goods and services as percentage of GDP were 69%. exports of molybdenum. Canada and the United Kingdom are next in line but their combined share is less than 10%. Other countries account for the balance 14%. Macau. Copper and molybdenum: the red metal is the largest product exported by Chile and it accounts for almost 55% of total exports. Figure 41: Latin America export and imports of goods and services in 2007 (% GDP) 100% 75% 69% 65% 50% 33% 20% 44% 18% 39% 18% 35% 18% 17% Col Imports 21% 9% 12% Brz 50% 27% 25% 41% 32% 30% 26% 21% 0% Chl Mex Exports Source: Deutsche Bank Ven Per Arg Chilean exports totaled USD68bn in 2007 Exports: Chilean exports totaled USD68bn in 2007 (41% of GDP) and were dominated by commodities. Meanwhile. the United States (16%) and Latin America (13%). 3. Chile is the largest producer of copper in the world and therefore the red metal accounts for more than half of total exports. the main byproduct of copper extraction. and Agricultural products: they account for approximately 5% of total exports and fruits are their main component with a 4% share. which compares with an average of 42% for the region. Chile mainly sells its products to Asian countries (27% share). the trade volumes in Chile have benefited from a growing number of trade agreements with countries from the European Union in 2003. As of 2007.21 April 2008 Monthly Market Monitor (M3) External sector Chile has the most open economy in Latin America Chile has the most open economy in Latin America. Deutsche Bank Securities Inc.

Chile mainly buys its products from other Latin American countries (33% share). between 2005 and 2007.00 per pound during 2005-2007 Page 36 Deutsche Bank Securities Inc.S. the United States (16%). Angola. Chile imports almost all its fuel needs and lubricants.00 per pound between 1990 and 2005.S. 16% The Chilean trade balance has posted a growing surplus since 1999 The Chilean trade balance has posted a growing surplus since 1999.K. . which constitute about 77% of all intermediate goods imports. Chile also imports capital goods (16%). particularly copper. Nigeria and the United Kingdom are next in line but their combined share is less than 10%. Copper prices have averaged more than USD3.00 per pound – an impressive +200% increase – and therefore generated a windfall of revenues for the Chilean economy. 1% Nigeria 1% Canada 1% Angola 4% Euroland 12% Interm ediate 63% Source: Deutsche Bank Asia 14% Source: Deutsche Bank U. Copper prices averaged approximately USD1. The county trade surplus reached an all-time high USD21bn in 2007 because of strong commodity prices.21 April 2008 Monthly Market Monitor (M3) Figure 42: Chilean exports by product (2007) Agriculture 5% M anuf. Figure 45: Chilean imports by region (2007) USD46bn Others 18% Latam 33% USD46bn Chile mainly buys its products from other Latin American countries Figure 44: Chilean imports by product (2007) Capital 16% Consum er 21% U. From a geographical point of view. Asia (14%) and Europe (12%). Since then. Canada. Chile has maintained a very open trade regime and has continued with the unilateral phased reduction of its uniform external tariff rate. Apart from these. 27% Copper 54% M ining (others) 8% Source: Deutsche Bank Figure 43: Chilean exports by region (2007) USD68bn UK 1% Canada 2% M acau 3% Latam 13% Others 14% USD68bn Asia 27% M oly 6% Source: Deutsche Bank U. the price of the red metal averaged more than USD3. However. when a floating exchange rate regime was introduced by the government. Other countries account for the balance 18%. 16% Euroland 24% Chilean imports totaled USD46bn in 2007 Imports Chilean imports totaled USD46bn in 2007 (27% of GDP) and were comprised primarily by intermediate (63% share) and consumer goods (21%).

Goods and services have generated a surplus. Local banks and pension funds have played an important role in determining the capital account balance. later on. overall. . whereas income has consistently generated a deficit because of negative investment income over the past years.H. which have more than outweighed the negative components of current account. as well as revenues from historically high copper prices. However. we see a formidable amount of net surplus on the account of solid copper export volumes. triggered by the Asian crisis turmoil in 1997-1998. pension funds did not hold many foreign assets because the policy mix of an exchange rate band and high local interest rates made local fixed income instruments attractive. pension funds rapidly reached their Deutsche Bank Securities Inc. Figure 48: Chilean capital account balance 15 10 Figure 47: Chilean current account balance 30 20 (USDbn) 0 -10 -20 -30 1996 Trade Transfers 1998 2000 2002 2004 2006 Services Incom e Current account (USDbn) 10 5 0 -5 -10 -15 1996 FDI 1998 2000 2002 2004 2006 Net flow Portfolio Others Source: Deutsche Bank Source: Deutsche Bank The capital account has had a positive FDI component The capital account has had a positive FDI component. The income deficit is attributable to government’s interest payments on external debt and the repatriation of profits by foreign companies. and afterwards the relaxation of capital controls and the floating of the peso during 1998-2001. imports and trade balance 100 80 60 (USDbn) 40 20 0 -20 1995 1997 Exports Source: Deutsche Bank 25 20 15 10 5 0 -5 1999 2001 Im ports 2003 2005 2007 Balance (R. Thus.21 April 2008 Monthly Market Monitor (M3) Figure 46: Chilean exports. Meanwhile.) (USDbn) Page 37 The Chilean current account balance has followed the same pattern of the trade balance The Chilean current account balance has followed the same pattern of the trade balance over the past 10 years. but still it was not enough to offset outflows from portfolio investments between 1996 and 2007. negative services payments are compensated by positive transfer payments. Early on.

. the structural revenues are also adjusted for fluctuation in copper prices.21 April 2008 Monthly Market Monitor (M3) regulatory limit of foreign assets. in order to manage copper windfall revenues wisely.0 billion. 2. Page 38 Deutsche Bank Securities Inc. Also. The fiscal surplus rule has raised the government’s revenue and helped turn it from a net debtor to creditor. which was established with a initial deposit of USD 600 million. reflecting its stronger financial position. President Lagos introduced a fiscal rule based on structural surplus of 1% of GDP. Furthermore.7%) in 2006.H. in 1991. the net debt to GDP ratio was 7.7% in 2005 whereas it was (1. The rule tied expenditure growth to Chile’s long-term revenue capacity. Figure 49: Chilean net external liabilities 200 0 150 (USDbn) -10 (USDbn) 100 -20 50 -30 0 1997 Assets Source: Deutsche Bank -40 1999 2001 Liabilities 2003 2005 2007 Net Int'l Position (R. Chile is a country that has built a strong fiscal reputation and has enough macro buffers to allow a sustainable fiscal expansion without jeopardizing its economic stability. The structural balance reflects the amount of revenue and expenditure that would be achieved if the economy operated at its full potential and copper prices were at their long term trend. which was formed with an initial deposit of USD6. the government approved the Fiscal Responsibility Law in 2006 which created two funds for managing copper revenue surpluses: 1. and The Pension Reserve Fund (PRF). 2007. given the importance of copper. The Economic and Social Stabilization Fund (ESSF). Chile decided to reduce its fiscal surplus target to 0. the decision could lead to lower taxes which should promote investment and employment. In particular.) Fiscal accounts President Lagos introduced the structural surplus of 1% of GDP rule in 1991 To eliminate the pro-cyclical bias from fiscal policy. Additionally. The cyclical adjustment to copper prices is based on the gap between the actual export price reported by CODELCO – the state owned mining company – and an estimated long-term reference price.0% from 2008 onwards. only revenues and not the expenditures are adjusted for business cycle. as more funds will be dedicated to social areas (like education and health) which create positive externalities. The process generated a substantial capital outflow and thus worsened the capital and financial account balance.5% of GDP from 1. Chile reduced its fiscal surplus target to 0. We believe the decision should improve the welfare of the population. For instance.5% of GDP in May 2007 On May 21.

a third-party provider to Deutsche Bank of offshore research support services.6 6 The author of this section wishes to acknowledge the contribution made by Sourav Dasgupta and Naresh-X Kumar. The central government budgeted balance has risen from -0. as the bulk of the surplus was accumulated in deposits held abroad.21 April 2008 Monthly Market Monitor (M3) The Chilean fiscal outlook remains upbeat because of high copper prices The Chilean fiscal outlook remains upbeat because of high copper prices. The strict adherence to the structural surplus rule combined with export windfall has been the pillars of fiscal prudence in Chile. Deutsche Bank Securities Inc.5% in 2001 to 7. Page 39 . The fiscal surplus generated has been wisely used by the government to prepay Central Bank and external debt. employees of Infosys / BOP.7% in 2006.

Furthermore. Page 40 Deutsche Bank Securities Inc.21 April 2008 Monthly Market Monitor (M3) Latam Equity Strategy reports guide Latam Equities Flagship Our monthly Flagship analyzes the global fundamental backdrop and discusses a theme related to Latin American equities. Market Monthly Monitor (M3) Our M3 report encompasses our forward looking Equity Strategy and Economics views for one of the six countries that are part of the MSCI Latin America index. We keep tab of the results reported and analyze the data by country and sector in order to identify where we have seen the biggest surprises (vs estimates) and/or changes (vs previous year actuals). performance and liquidity data for the 120+ stocks that we cover in Latin America. fresh trading ideas and the economic outlook for the main six Latin American equity markets. The report includes the release date. . We also highlight the stock fundamental stories published by our company research department during the previous week. The Short Story (SS) We analyze the monthly short interest ratio data for 45+ Latin American and 100+ EM ADRs listed in the NYSE to assess what investors are thinking about individual stocks. Top Stock Ideas (TSI) We provide clients with a list of our top stock picks for the upcoming month. 3) the main risks associated with the stocks and 4) where DB earnings forecasts stand versus consensus. The data allow us to track the flows of the local pension fund industry and identify any potential technical overhang Weekly Valuation Matrix Our regional “stock guide” has comprehensive valuation. a condensed income statement and the main topics that could impact quarterly results. We also highlight the major changes that occurred over the past month and notable trends during the past trimester. 2) what are the potential catalysts for outperformance. sectors and countries. aggregate valuations. it provides a comprehensive view of our country and sector recommendations. Earnings Season Calendar Our quarterly preview report depicts our fundamental estimates for the 120+ companies that we cover in Latin America. Chile and Argentina on a monthly basis at the asset and individual stock level. Pension Fund Monitor (PFM) We analyze the portfolios of the pension funds in Mexico. We highlight 1) the reasons why we like the companies. Earnings Season Tracker We provide a bird’s eye view of the earnings season in Latin America. The product also has a detailed equity guide and historical analysis of the countries’ macroeconomic policies.

canonero@db.com tely. Piso 13 Buenos Aires.moraes@db. NY 10005 Phone: +1 212 250 2500 Fax: +1 212 250 7430 DEUTSC HE BA NK A G 1 Great Winchester Street London.com bernardo.garcia@db.com jessica.com francisco.com marcelo. Piso 17 Mexico. CFA Head of Americas Metals & Mining Research David Martin Steel Silvio Micheloto. INC .com nicolas.com geraint.frisone@db.figueiredo@db.arnaubru@db.13.com gary.pierry@db. Chile 7550288 Phone: +56 2 337 7700 Fax: +56 2 337 7751 sergio. Piso 5 Santiago.ackerman@db.com mark. Beristain.com andre.com nicole. CFA LA Senior Equity Strategist Hongtao Jiang Relative Value Strategist Geraint Jones EM Fixed Income Strategist David Duong EM Fixed Income Strategist Gustavo Canonero Head of Economics / Argentina Economist Jose Carlos de Faria Brasil Senior Economist Fernando Losada Mexico Senior Economist Andres Orlandi Chile Economist Felipe Hernandez Andean pact Economist Anne Milne Head of LA Corporate Bond Research Marcelo Menusso LA Corporate Bond Analyst DEUTSC HE BA NK A RGENTINA Tucuman 1.mcgoey@db.com ambrosio.com rupert.liberatore@db.com marcelo.taves@db.com noah.com ignacio.com marcello.labarta@db.com leonardo.jaubert@db.faria@db.fenton@db.com marcelo.com josh.com marcus.orlandi@db.lopes@db. 3900 .bagan@db.r.com guilherme.ali@db.beristain@db.addidam@db.gregory@db.com david.com guilherme.com david. Avila Camacho # 40. CFA Small/Mid Caps Research Nicole Bent Equity Research Assistant SA LES Rupert Hope Head of Sales/ Sales NY Jane Heap Sales NY Tely Catoggio Sales NY Cristiane Lemos Sales NY Rafael Di Giorno Equity Derivatives Sales NY Jessica Frisone Assistant NY Mark Fenton Sales London Helen Ilsley Sales London Andre Rosenblit Sales Brazil Guilherme Lopes Sales Brazil Leonardo Taves Sales Brazil Francois Jaubert Sales Mexico TRA DING A ND SA LES TRA DING David Liberatore Sales trader NY Joanne Bagan Sales trader NY Orlando Castaneda Sales trader NY Scott Ackerman Sales trader NY Chip Clingham Sales trader NY Marshall Burroughs Sales trader NY Noah D'Alessio Trader NY Gary Hill Trader NY Suleman Malik Trader NY Andre Suaid Synthetic Equity Trader NY Dennis Goh Synthetic Equity Trader NY Marcelo Miranda Synthetic Equity Trader NY Vinod Addidam Synthetic Equity Trader NY Marcello Siciliano Trader / Sales trader Brazil Rogerio Figueiredo Trader / Sales trader Brazil Pedro Gimenez Trader / Sales trader Brazil Guilherme Moraes Trader / Sales trader Brazil Marco Rojo Trader / Sales trader Mexico Monica Cardenas Trader / Sales trader Mexico Pablo Errazuriz Trader / Sales trader Chile Ambrosio Montt Trader / Sales trader Chile Ignacio Arnau Bru Head of Trading NY Francisco Carbajales Equity Derivatives Trading NY Nicolas Walon Equity Derivatives Trading NY Sean Gregory Equity Derivatives Trading NY STRA TEGY .com DEUTSC HE BA NK MEX IC O Blvd.menusso@db.martin@db.paiva@db.hill@db.com scott.santana@db.com dan.sequeira@db.com miguel-a.com hongtao.suaid@db.com sean.catoggio@db.walon@db.lemos@db.com monica.21 April 2008 Monthly Market Monitor (M3) LA TIN A MERIC A .com tito.constantini@db.com rafael.montt@db.errazuriz@db. Page 41 .hernandez@db.s.com suleman.carneiro@db.com francois.jiang@db.carbajales@db. DF Mexico 11000 Phone: +52 55 5201 8000 Fax: +52 55 5201 8105 RESEA RC H Rizwan Ali Head of Research / Telecom & Media Alexandre Constantini Telecom & Technology Miguel Garcia Telecom & Media Jorge M.rosenblit@db.com cristiane.luna@db.com rogerio.com joanne.com mario. BA Argentina 1049 Phone: +54 11 4590 2800 Fax: +54 11 4590 2897 DEUTSC HE BA NK BRA ZIL Avenida Brigadeiro Faria Lima.milberg@db. UK EC2N 2EQ Phone: +44 20 7545 8000 Fax: +44 20 7545 6155 EQUITIES Sergio Kostek Head of Equities +1 212 250 5422 +1 212 250 3712 +55 11 2113 5968 +1 212 250 7977 +1 212 250 2723 +1 212 250 5580 +1 212 250 1653 +1 212 250 7911 +52 55 5201 8016 +52 55 5201 8018 +52 55 5201 8017 +52 55 5201 8141 +55 11 2113 5975 +1 212 250 6957 +1 212 250 5944 +1 212 250 3255 +55 11 2113 5971 +1 212 250 3438 +1 212 250 6226 +1 212 250 4276 +1 212 250 4280 +1 212 250 4271 +1 212 250 5844 +1 212 250 5255 +44 207 545 7692 +44 207 545 7229 +55 11 2113 5962 +55 11 2113 5960 +55 11 2113 5959 +52 55 5201 8147 +1 212 250 7474 +1 212 250 5820 +1 212 250 5820 +1 212 250 5130 +1 212 250 7474 +1 212 250 7474 +1 212 250 5820 +1 212 250 5820 +1 212 250 5820 +1 212 250 5820 +1 212 250 5820 +1 212 250 5820 +1 212 250 5820 +55 11 2113 5603 +55 11 2113 5603 +55 11 2113 5063 +55 11 2113 5607 +52 55 5201 8077 +52 55 5201 8131 +56 2 337 7725 +56 2 337 7700 +1 212 250 7662 +1 212 250 7232 +1 212 250 6232 +1 212 250 5549 +1 212 250 7355 +1 212 250 2873 +1 212 250 2524 +1 212 250 5932 +1 212 250 6228 +1 212 250 7530 +55 11 2113 5185 +1 212 250 3162 +1 212 250 2975 +57 315 846 3061 +1 212 250 7568 +1 212 250 6135 DEUTSC HE BA NK C HILE Av.com michelle.losada@db.rojo@db.com helen.com chip.com alexandre.gimenez@db.dalessio@db.com felipe. CFA Mining. CFA Transportation Mario Pierry Financial Services Tito Labarta Financial Services Marcus Sequeira Energy & Utilities Josh Milberg. El Bosque Sur 130.com pedro.kostek@db.com drausio.com vinod.com david.miranda@db.com andre.com jane.burroughs@db.castaneda@db. 14 & 15 andar São Paulo.di-giorno@db.clingham@db.hope@db.com dennis.ilsley@db.com rizwan.com reinaldo.com guilherme.com marcella.giacomelli@db.micheloto@db.com anne.malik@db.com marshall.milne@db.siciliano@db.com jose. SP Brasil CEP 04538-132 Phone: +55 11 2113 5000 Fax: +55 11 2113 5958 Deutsche Bank Securities Inc.com jorge.com marco.com andres.cardenas@db.com gustavo.martuscelli@db.com silvio.bent@db. Steel Marcelo Luna Pulp & Paper & Conglomerates Reinaldo Santana Food & Beverage and Retail Marcella Martuscelli Food & Beverage and Retail Daniel McGoey. EC ONOMIC S & C ORP ORA TE BOND RESEA RC H Drausio Giacomelli Head of Strategy Guilherme Paiva.heap@db.GLOBA L MA RK ETS DEUTSC HE BA NK SEC URITIES. 60 Wall Street New York.jones@db. CFA Construction Michelle Dorea Construction Bernardo Carneiro.com orlando.duong@db.com pablo.com fernando.goh@db.dorea@db.

2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period Equity rating dispersion and banking relationships 600 500 400 300 200 100 0 66% 26% 14% 8% Hold 7% Sell 7% Buy Companies Covered Cos. 2.month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) . please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm. In addition. Newly issued research recommendations and target prices always supersede previously published research. we recommend that investors buy the stock.com. based on this time horizon. Guilherme Paiva Other Disclaimer The research analyst has a direct ownership position in securities issued by these companies or derivatives thereof. Ratings definitions prior to 27 January. w/ Banking Relationship Global Universe Page 42 Deutsche Bank Securities Inc. do not recommend either a Buy or Sell. the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Equity rating key Buy: Based on a current 12.db. Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s).21 April 2008 Monthly Market Monitor (M3) Appendix 1 Important Disclosures Additional information available upon request For disclosures pertaining to recommendations or estimates made on a security mentioned in this report. . we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and. Sell: Based on a current 12-month view of total share-holder return. Notes: 1.

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investment decisions solely based on the information herein may not result in expected outcomes.com/riskdisclosures. Page 44 Deutsche Bank Securities Inc. portfolio management companies and banks that are not authorized to accept deposits through an investment consultancy agreement to be entered into such corporations and their clients. The interpretation and advices herein are submitted on the basis of personal opinion of the relevant interpreters and consultants. Investment consultancy services are provided by brokerage firms. interpretation and advice submitted herein are not in the context of an investment consultancy service. Such opinion may not fit your financial situation and your profit/risk preferences. United Kingdom: Persons who would be categorized as private customers in the United Kingdom. . as such term is defined in the rules of the Financial Services Authority. should read this research in conjunction with prior Deutsche Bank AG research on the companies which are the subject of this research.21 April 2008 Monthly Market Monitor (M3) Turkey: The information. Accordingly. Disclosures relating to the firm's obligations under MiFiD can be found at http://globalmarkets.db.

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