Chile’s earthquake, which had its epicentre approximately 370 kilometres south of Santiago and a magnitude of 8.8 on the Richter scale, may cause at least a 6% GDP loss in terms of stocks. While this forecast from Citigroup’s Chile economist, Marcos Buscaglia, suggests economic activity may fall at first, it should rebound quickly as construction spending rises. As a result, Citigroup sees the total impact on GDP in 2010 at just 1%.
“Chile has strong fundamentals; the country may be better able than most to cope with this tragedy,” the investment bank said in a report. “In line with our views on other asset prices and, given the forecast of an eventual solid rebound in activity, any selling pressure on the equity market arising from the earthquake should be short-lived.”
Inflation, however, is likely to spike in the near term and the trade surplus may fall as output from key export sectors takes a hit. Citigroup notes that there is plenty of room for increased government spending from Chile’s Stabilization Fund. As for the peso, it is expected to hold up fairly well, but interest rate hikes may be delayed until the fourth quarter.
President-elect Sebastian Piñera also happens to be taking office on March 11. However, the disaster poses a major challenge for the incoming administration in terms of leading the long-term re-construction process.
Citigroup highlights pulp and paper as the industry that will likely be most adversely affected by the earthquake and its aftermath. The operations of most of Chile’s pulp and paper companies are located in the most affected area of the country, south of the capital, Santiago.
While any loss of production should be temporary, Citigroup nontheless anticipates this will make a notable dent on results for the first half of 2010. On the positive side, pulp prices could benefit as Chile represents roughly 8% of total market pulp production. And if pulp production facilities go offline and production comes out of the market for a month or so, the March pulp price increase announced last week may be more easily implemented.