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Financial Services and Preferential Trade Agreements
market that was open to foreign competition and a financial system that was supervised by strong institutions. The financial system was well capitalized, and foreign-owned institutions and institutional investors provided depth to the market. Similarly, Chile’s macroeconomy was characterized by stable economic conditions and prudent fiscal management. Because they are important in determining the consequences of liberalizing financial services, each of these aspects is discussed in turn. In 2000 and 2001, the Chilean economy grew by 4.5 and 3.4 percent, respectively. Although the economy recovered fast from the effect of the Asian crisis in 1998, in 2002 it was hit by deteriorating external conditions, and GDP growth fell to 2.2 percent (see table 5.1). Inflation was low and fell toward the lower bound of the Central Bank’s target range of 2 to 4 percent, while the public sector’s net debt reached 11 percent of GDP.13 In the three years from 2000 to 2002, Chile ran small current account deficits, amounting to 1.2 percent, 1.6 percent, and 0.9 percent of GDP, respectively. The financial sector was equally stable. In 2000, the solvency indicators were strong, and the share of nonperforming loans in the banking sector was relatively low (see table 5.2). Commercial bank assets exceeded 90 percent of GDP, insurance company assets and net assets of mutual funds were growing, and pension funds represented just under 60 percent of GDP. The state’s participation in bank assets and securities trading through its single bank was 13 percent and 2 percent, respectively. An important feature of Chile’s domestic financial market is the high participation of foreign-owned financial institutions. In the early years of this decade, it was just under 50 percent in terms of banking assets and above 50 percent in securities trading, insurance premiums, and pension fund management. The country of origin of foreign investment in financial Table 5.1
Basic Macroeconomic Indicators of the Chilean Economy, 2000–05
Macroeconomic variables
2000
2001
2002
2003
2004
2005
GDP per capita (purchasing power parity, current US$) Nominal GDP (US$ billion) Real GDP growth (% annually) Inflation rate (end of period) Current account balance (% of GDP) Public sector net debt (% of GDP) Central government balance (% of GDP)
9,268 75.8 4.5 4.5 –1.2 10.8 –0.6
9,696 68.6 3.4 2.6 –1.6 10.9 –0.5
9,967 67.3 2.2 2.8 –0.9 11.0 –1.2
10,461 73.7 3.9 1.1 –1.3 13.1 –0.5
11,290 95.0 6.2 2.4 1.7 10.8 2.2
12,173 115.3 6.3 3.7 0.6 7.7 4.7
Sources: Data from the World Bank and International Monetary Fund.