Chile Handbook

Latin America Equity Research
08 April 2015
Chile 101
The 2015 Country Handbook
We are confident this third version of our Chile Country Handbook will
continue to serve as a useful primer and reference guide. We thought it
worthwhile to revisit key metrics and some of Chiles history and
processes to better understand the macro and capital markets local
dynamics. There is also pertinant information about the initiatives of
President Bachelets second mandate. We have included a new section
regarding copper's relevance to Chile, and another section regarding
Chile's exposure to China. We have added relevant information about
corporate governance and ownership structure, along with some relevant
political and corporate cases seen in the country recently.
SC/AN Equity Strategy

Diego Celedon
AC
(56-22) 425-5245
[email protected]
Bloomberg JPMA CELEDON <GO>
Inversiones J.P. Morgan Limitada
Pedro Martins Junior, CFA

(55-11) 4950-4121
[email protected]
Banco J.P. Morgan S.A.
Emy Shayo Cherman

(55-11) 4950-6684
[email protected]
Nur Cristiani, CFA

(52-55) 5540-9374
[email protected]
J.P. Morgan Casa de Bolsa, S.A. de C.V.,
J.P. Morgan Grupo Financiero
Chile Economist
Iker Cabiedes
(1-212) 834-2349
[email protected]
J.P. Morgan Securities LLC
Other LatAm Country Handbooks:

Argentina 101, March 17, 2015
Mexico 101, April 10, 2014
Colombia 101, March 7, 2014
Peru 101, June 3, 2014
See page 102 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, 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.
www.jpmorganmarkets.com
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Table of Contents
Our View in a Nutshell..............................................................3
Things to Know.........................................................................4
Overview ...................................................................................5
Area........................................................................................................................5
Population...............................................................................................................6
Politics....................................................................................................................8
Political scandals.....................................................................................................9
Bachelets Second Term........................................................................................10
A government of reforms ......................................................................................10
Health System .......................................................................................................13
Education..............................................................................................................16
Labor ....................................................................................................................19
Income Distribution ..............................................................................................20
Competitiveness....................................................................................................21
Copper.....................................................................................24
China .......................................................................................29
Economy .................................................................................31
GDP......................................................................................................................31
Currency...............................................................................................................43
External Accounts.................................................................................................45
Fiscal Policy .........................................................................................................54
Public Debt ...........................................................................................................56
Sovereign Credit Ratings.......................................................................................58
Capital Markets.......................................................................58
Stock Market.........................................................................................................58
Market composition Ownership structure............................................................60
Market composition Corporate governance .........................................................64
Our view on the market .........................................................................................65
Equity Issuance .....................................................................................................66
Flows....................................................................................................................66
Special thanks to Ignacio Venezian of Inversiones J.P. Morgan Limitada for his
contribuition to this report.
Cover Image: Morgue File
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Our View in a Nutshell

On the macro side, the economy seems to have bottomed in 3Q14. December
economic data offered a confirmation of the expected turning point in Chile's
business cycle. Excluding mining output, the economy expanded 2.8% in 4Q, from
1.2% in 3Q. On the supply side, growth drew support from services and commerce
sectors and a soft improvement in mining. On the demand side, consumers are
starting to enjoy a lift in purchasing power originating in the pass-through of lower
oil prices to headline CPI inflation. That transitory but strong stimulus to retail sales
(and cost efficiency for manufacturers) will continue to benefit aggregate growth
readings early in the year, in our view. The fall in global oil prices constitutes one
likely source of lift for Chiles economy as it stands out as the major net importer of
energy among its neighbors (4.7% of GDP). And lacking a state-owned oil company
(that elsewhere in the region has held domestic fuel prices high), Chilean consumers
and businesses are benefiting from visible disinflation. Therefore, our economic team
recently raised 2015 real GDP growth forecast to 2.7% (instead of prior 2.3%
outlook).
The reforms agenda is not over; fiscal stimulus should linger. After achieving the
approval of an ambitious fiscal reform the government is likely to continue pushing
for a reform to public education, the labor market, and the pension funds system this
year. We believe the market focus will be on changes in the labor market (potential
increases in minimum wage) and pension fund industry, for which the
implementation of a new state-owned pension fund is being assessed. Meanwhile,
fiscal policy will remain stimulative with a fiscal deficit programmed this year at
2.0% of GDP, in line with the 2014 fiscal balance.
Despite some improvements on the macro side, we remain UW Chile, on
downside risk to EPS estimates and weak business confidence. We see two risks
that could continue hurting stock performance. The first one relates to EPS growth
estimates, as they remain at the top of LatAm and reflect too optimistic expectations,
in our view. This is particularly evident in the materials sectors (Copec), industrials
(LatAm Airlines), consumer staples and discretionary. All of these sectors have
estimates of double digit consensus EPS growth for 2015 and 2016, which seem like
they will be hard to reach in a year of still slow economic environment and
increasing corporate tax. The second risk we perceive relates to business confidence
and private investment. The sentiment from the private sector in Chile is close to the
one seen in 2009, and the current political environment makes it hard to improve, in
our view. The discussion of the labor reform in congress added to the impact of the
scandals related to tax evasion, and irregular politician financing (Penta and SQM)
will keep the level of confidence under pressure, in our view. While 2015 macro
recovery has more to do with an aggressive expansionary fiscal policy, private
investment not picking up poses a risk for 2016 growth.
The bottom-up. At the stock level, we keep Endesa (OW, Marcos Severine) in our
LatAm portfolio, given the current deficit of generation capacity in Chile and its
attractive optionality to an improvement in Argentina, as it has close to 25% of
installed capacity in that country. We are also positive on Santander Chile (OW, Saul
Martinez), as we believe it will continue showing attractive growth, valuations
remain discounted and inflation should be higher in upcoming months given
currency weakness.
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Things to Know
Varied geography & climate
Chile is a long and narrow country, ranging from the worlds driest desert in the
north, to the tallest peaks in the Andes, to the archipielagos and glaciers in the south,
all along 6,000km of coastline by the Pacific. It borders Peru and Bolivia to the
North and Argentina to the East.
Santiago is Chile's capital and

population is highly
concentrated there
Chile has almost 18mn inhabitants (7th in LatAm), of which 41% are older than 40
years. Santiago is home to more than 40% of Chileans, and is the most significant
city in terms of economic activity.GDP per capia amounts to US$15.400 PPP.
Iconic cities and landmarks
Valparaiso, the historic port-city was named a World Heritage Site by UNESCO in
2003, it is also home to La Sebastiana, one the three houses owned by Pablo Neruda.
The famous Moais are located in Easter Island, some 3.500 km off the coast.
Open economy and capital

account
Chile has trade agreements with nearly all major trading blocks and countries,
including the US, EU, China, Japan and India. Chile has a floating currency with
little intervention from the central bank. There has been full freedom for exchange
operations and international capital movements since September 1999, when the last
restrictions on foreign exchange operations were lifted by the BCCh.
Credible and autonomous

Central Bank
The BCCh was founded in 1925 and has been autonomous since 1990. It is a highly
regarded institution in Chile. The Central Bank organic law establishes that under
no circumstances can the bank provide a guarantee or acquire documents issued by
the State, its bodies or companies.
Copper reliant
Chile is the worlds leading copper exporter. Copper exports account for 51% of
total exports. Fiscal budget is set in relation to the long-term forecast of copper
price. The state owned CODELCO contributes with around 15% of fiscal revenues.
Benefiting from lower oil prices
Chile imports nearly all of its fuel, primarily in the form of crude oil, diesel and
liquefied natural gas (LNG). This has a direct impact on inflation metrics, as well as
the exchange rate and priamry balance (1.5% improvement due to lower prices).
Domestic stock market losing

steam
Chiles IPSA Index is 60% comprised of domestic oriented sectors with no exposure
to copper mining. DATV has shrinked in the past year, from around US$150mn in
2013 to US$89mn in 2015.
Pension Funds reducing

exposure to local equities
In the 80's Chile introduced an individual capitalization accounts pension system

managed by private companies. The systems US$168 billion in AUM is the highest
in the region (and strong worldwide), representing 59% of GDP.
Counter-cyclical Fiscal Policy
Fiscal rule requires that proceeds from above potential GDP growth and above
average copper prices are put away in sovereign wealth funds, which currently total
US$14.7bn (6% of GDP). Chile is a net creditor and has the highest sovereign rating
in the region (Aa3 by Moodys and A+ from S&P). The peso has depreciated about
20% since December 2013.
Reformist Government
President Michelle Bachelets government has begun a strong reform agenda,

fostering equity and inclusive growth. Her government already pushed through a
much resisted tax reform, and is moving forward with labor, education and
constitutional reforms.
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Overview
Area
Figure 1: Chile by Regions
Not a big country, but a very long coastline. Chile has a total area of 756,102 sq.
km, which includes Easter Island and Isla Sala y Gomez, but doesnt include 1.25mn
sq. km of claimed Antarctic territory. This places Chile 38th in the world and 8th in
Latin America, similar in size to Turkey and Zambia. Chile also boasts 6,435km of
coastline, similar to India (7,000km) and Italy (7,600km). It is the second longest
north-south country in the world (Brazil is the first) and it borders Peru to the north,
Bolivia to the northeast, Argentina to the east, and the Drake Passage in the far south.
Table 1: Top 10 countries in the Americas by total area
1
2
3
4
5
Country
Canada
USA
Brazil
Argentina
Mexico
Km
9,984,670
9,826,675
8,514,877
2,780,400
1,964,375
6
7
8
9
10
Country
Peru
Colombia
Bolivia
Venezuela
Chile
Km
1,285,216
1,138,910
1,098,581
912,050
756,102
Source: CIA World Fact book
Chile is located along a highly seismic and volcanic zone, part of the Pacific Ring
of Fire, due to the subduction of the Nazca and Antarctic plates in the South
American plate. This implies that the country has experienced some of the strongest
earthquakes in recorded history: 1960 Valdivia (9.5, Richter scale), 1985 Algarrobo
(8.0) and 2010 Concepcion (8.8).
Chile is divided into 15 regions, which are headed by an intendant appointed by
the president. Each region has a name and is also designated by a number, which
originally was assigned from north to south (in 2006 two new regions were created
and consequently region XV in the north and XIV in the south do not follow that
pattern). The Santiago Metropolitan Region is the only one that does not have a
number and is designated RM (Regin Metropolitana).
Source: Prochile
After its independence in 1810, Chile experienced significant changes in its

political map. During the Guerra del Pacifico (1879-83), in which Chile defeated
Peru and Bolivia, the current northern Regions XV (Arica), I (Tarapac) and II
(Iquique) were added to Chilean territory. However, during a parallel conflict with
Argentina in 1881, Chile ended up surrendering 3/4 of the Patagonian region to
Argentina.
A minor change to Chiles border. In 2014 Chile lost a territorial dispute in the
International Court of Justice against Peru. The dispute arose as a result of dubious
international treaties that were signed between both countries after a war in 1889, in
which Chile took position of the mineral rich northern territories. Peru argued that
the treaties in question were merely commercial agreements and did not set
international frontiers, while Chiles argument was that the agreements did set limits
and that historically Chile had controlled and exploited these lands. The Court met
both countries demands halfway, as it divided the disputed territory (around
38.000skm) roughly in half, by tracing a 45 line as the new limit. It is not an
economically significant territory, as it is only maritime territory; the main economic
activity is small scale fishing. There is still some controversy in this subject as the
court only divided the oceanic territory and did not pronounce itself on land divides
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
so there is some subjectivity to the interpretation. As of now Chile still exerts

sovereignty over the concerning land territory.
Diverse climate. According to the Kppen system, Chile within its borders has at
least seven major climatic subtypes. It ranges from the world's driest desert in the
north (Atacama), through a Mediterranean climate in the center, humid subtropical in
Easter Island, an oceanic climate in the coast, and alpine tundra and glaciers in the
east and south. This also determines the main economic activities in each region:
mining in the north, agriculture in the center, forestry and fish farming in the south.
Population
Table 2: Largest countries in
Americas
Millions, 2011
Country
United States
Brazil
Mexico
Colombia
Argentina
Population
310
193
109
46
41
Source: UN and J.P. Morgan
According to 2012 census and projections, Chile has 17.8 million people, making
it the 59th most populous country in the world, just ahead of the Netherlands.
Annual population growth has slowed to almost 1% per annum and is expected to
gradually slow further until 2050. From total population, 50.5% are women and
49.5% men. Slightly more than 10% of Chileans belong to an ethnic group, the
Mapuche being the most relevant minority, representing 84.6% of the ethnic groups.
Mapuches are an original ethnicity from the central-south part of the country.
Data from 2012 census must be read with a grain of salt. The results of the 2012
census came under scrutiny after it became known that missing data had been filled
in by the INE department, and that part of the personnel in charge of conducting the
surveys had also reported false results. Two separate commissions of specialists
reviewed the process and presented their recommendation to retake the census. The
new census is planned for 2016, 6 years ahead of schedule.
Chile has one of the oldest populations in LatAm. Unlike other countries in the
region where inhabitants are very young, 36% of the population in Chile is less than
25 years old (compared to 46% in Colombia, for example), while 41% is over 40
years old. This implies that in terms of the demographic dividend Chile compares
negatively to the rest of LatAm.
Figure 2: Population
Millions of Inhabitants (LHS), % growth oya
2,0%
25.000.000
1,8%
1,6%
20.000.000
1,4%
1,2%
15.000.000
1,0%
0,8%
10.000.000
0,6%
0,4%
5.000.000
0,2%
%YoY
Source: INE and J.P. Morgan
Population
2047
2044
2041
2038
2035
2032
2029
2026
2023
2020
2017
2014
2011
2008
2005
2002
1999
1996
1993
1990
0,0%

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
According to the World Health Organization, Chile has an average life

expectancy of 79 years, which ranks 29th amongst the 193 countries in the study.
This figure is the highest in LatAm and on par with developed countries such as the
US, Denmark and Portugal.
Table 3: Main cities by population
City
Population
Santiago
% of Total
Figure 3: Life Expectancy

Average age in years
5,898,612
35.5%
Concepcin
949,023
5.7%
Valparaso
934,859
5.6%
82.0
La Serena
413,716
2.5%
80.0
Antofagasta
348,669
2.1%
Temuco
345,247
2.1%
78.0
Iquique
279,408
1.7%
76.0
Rancagua
277,090
1.7%
74.0
Puerto Montt
238,455
1.4%
Other
6,949,524
41.8%
72.0
Total
16,634,603
100.0%
84.0
70.0
Source: DANE and J.P. Morgan
Figure 4: Urbanization Levels

Urban Population, Percentage of Total,
2011
2005
Argentina
74.8
Chile
78.1
Spain
80.2
Japan
81.9
2012
75.8
79.3
82.3
82.6
Source: WHO and J.P. Morgan
Chiles population is largely concentrated in the Santiago metropolitan area

with 41% of the nations inhabitants located there. The next-largest population
center is in Region VIII, which contains roughly 12% of the population. This
includes Chiles second-largest city, Concepcion. Region V is also an important
population center as it includes the important cities of Valparaiso and Via del Mar,
which are located just west of Santiago on the coast and together have a population
of over 1mn inhabitants and congress is located there. Given the high density in cities,
Chile's urban population represents 87% of total inhabitants.
Rural
10.6%
Urban
89.4%
Source: UN, J.P Morgan.
Figure 5: 2015 Population Breakdown

Women
Men
80+
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
800.000
700.000
600.000
500.000
400.000
300.000
200.000
100.000
100.000
200.000
300.000
400.000
500.000
600.000
700.000
800.000
Source: INE, J.P. Morgan

7
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Politics
Table 4: Chile's Political Parties

and Coalitions
Two main coalitions
Nueva Mayora ("New Majority", center-left)
Christian Democrat Party
Party for Democracy
Socialist Party
Radical Party
Comunist Party
"Ample Social Movement"
Alianza ("Alliance", center-right)
"National Renovation"
UDI
Other coalitions
Regional Party of Independants
Regional Party of Independants
Humanist Party
"New Constitution for Chile"
Green Ecologist Party
Equality Party
"If you want, Chile changes"
Liberal Party
Progresist Party
Source: J.P. Morgan
Chile operates as a presidential representative democratic republic, whereby the

president is both the head of state and head of government. Executive power is
exercised by the government, legislative power lies in both the government and the
two chambers of Congress, which act as co-legislators, while the judicial branch
operates independently. Presidential elections are held every 4 years and cannot be
immediately re-elected (but can run again after waiting 1 term).
Chiles Congress has a lower house (Chamber of Deputies) with 120 members
and an upper house (Senate) with 38 members. Senators serve 8-year staggered
terms, with half being replaced every 4 years. They must be eligible to vote, have
completed secondary school and be at least 35 years of age. Deputies serve 4-year
terms. They must be eligible to vote, have completed secondary school, be at least 21
years of age and have lived in the corresponding electoral district for at least 2 years.
Chile had a unique binomial congress election system, the purpose of it was to
established balance between the two major parties. This system has historically
benefitted the center right coalition, as it has been able to gain seats in both chambers
even without having majority of votes, to the detriment of the center left coalition
and independents. This election system made constitutional changes difficult to
implement, as voting power was evenly distributed. Now that the election system has
been eliminated (voted in 2014, beginning this year), we expect an increase in the
representation of parties not affiliated with any coalition, beginning in the next
municipal elections.
Voting is now voluntary. During 2014, a long discussed law was passed that made
voting voluntary for all Chileans residing in Chile (voting from abroad is not
allowed). However, voting has been de facto voluntary in the past, as fines for not
voting have historically been seldom paid. The 2014 presidential was the first
election with voluntary voting, and turnout was 6.7 mn, 8.2% lower than last
presidential election. Female vote in Chile was legalized in 1935 for municipal
elections and in 1949 for presidential.
Expect further financial regulation innovation in the coming quarters. Last year
congress approved a law that allows individuals to file for bankruptcy. We expect,
following some political and corporate scandals, that the regulators will expedite the
approval and implementation of some laws that have been in discussion. The most
relevant of these changes are a new General Bank Law, changes to the management
of the Securities Supervisor, and changes to the way personal financial information is
reported and handled.
In 2014 congress passed a law that will allow individuals to file for bankruptcy.
Beginning this year Chileans, as individuals, will be able to file for bankruptcy, a
matter in which Chile had historically lagged. Until now, personal debts never
expired, and non payers information was sent to DICOM, the centralized debt
information agency. Once in DICOM, all financial institutions and potential
employers could access this data. This made it difficult for debtors to access the
financial system or even find employers willing to hire them. Now, individuals who
are behind in their obligations are assigned an intermediary who negotiates with all
the creditors on his behalf. The intermediary has to estimate the amount of money the
debtor can pay out and agrees, under these circumstances, on a new repayment
regime. Once an agreement is reached between all parties, then debt is repaid
following the new structure. We expect this law should have an impact in terms of
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
access to credit for vulnerable social groups, as banks and retail lenders will be more
selective and cautious with potential clients. In terms of interest rates we believe a
slight increase will follow this year, mainly to lower income segments, although
there might not be so much room for hikes as Chile regulates the maximum rate that
can be charged.
Figure 6: La Polar Fraud
Political scandals
La Polar is a Chilean retailer that

serves primarily the middle to low
income segment. In 2011, after
huge growth, it was discovered that
its credit card business had
systematically refinanced
nonperforming loans, so that they
did not have to increase provisions.
This made it appear like credit was
expanding at a very high rate and
non performing loans where
normal. We note that the
refinancing of loans was done
without consent from the debtors,
which is illegal under Chilean law.
After this fraud was discovered
some of the companys board
members and CEO have been
under prosecution; the maximum
penalty for the charges presented
would involve jail time.
During 2014 irregular political campaign funding was uncovered. The past year
marked a profound shakeup in the local political scene, as politicians from all sectors
were discovered to have received irregular funding from private and listed
companies. Although the scope of the irregularities is relatively small compared to
other countries of LatAm, it has had intense repercussions in Chile, leading to legal
prosecutions. The most relevant of these cases are related to private bank Penta and
its affiliates, and to SQM, a listed company.
Both owners of Penta bank are currently in jail awaiting trial. The two owners
have been prosecuted for tax evasion and irregular political funding. The tax evasion
part involves various mechanisms by which top executives were paid benefits
without reporting them as such, and thus reducing the taxable base. The case about
politicians being irregularly funded involves payments for services that were not
delivered. This allowed the bank owners to finance politicians (primarily associated
with right wing coalition UDI), while reducing their taxable base and bypassing the
anonymity of political funding in order to protect their interests.
SQM and its controller has been involved in two scandals during the past and
ongoing year. In the first of these, SQMs controller, Julio Ponce was accused and
fined (more than US$70mn) of expropiating minority shareholders in market
transactions. The second scandal, that has involved directly politicians and SQM, is
still at the early stages and has already caused the CEO and several board members
to resign. The resignations come after the refusal of the company to hand over
financial information to prosecutors and the internal revenue service.
The son of President Bachelet, and former Sociocultural Advisor to the
President, has been in the spotlight for allegedly trafficking influences. This
incident relates to the purchase (on the day following Bachelets election as
President) and subsequent sale of a property prior to the relevant construction permits
change. The property was bought at roughly US$7mn and sold at about US$10mn.
This transaction was done through his wife's firm, which had capital of less than
US$10.000, which received a credit from Banco de Chile in a negotiation where the
Vice Chairman and Bachelets son met. This event has garnered significant interest
by the press and the public, and is thought to have contributed to Bachelet's decline
in approval polls.
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Figure 7: Congressional Elections

Results
Bachelets Second Term
August 2013
Other
42%
New Majority
30%
Alliance
28%
Source: Servel, J.P. Morgan
Michelle Bachelet is the current President of Chile. Bachelet is currently

commencing her second year of her second period as President, after serving as
Executive Director of UN Women in between mandates. She took office for her
second mandate (she was previously president of Chile between 2006-2010) on
March 11th 2015. She won on the second round against the right wing coalition
candidate Evelyn Matthei, with a strong victory of 62.2%, (this was the first election
where voting was de jure voluntary). Her campaign was characterized by a more
radical approach than her previous administration, proposing several structural
reforms, which in her program are defined as three main pillars: 1. Education reform,
2. Tax reform, and 3. Changes to the constitution. From a macro/equity market
perspective the most relevant is probably the tax reform, which has already been
voted on and approved by all chambers. We expect other ongoing laws and
regulations to be passed during her mandate, particularly referring to the regulation
of the financial sector to be updated to international standards.
The economic program is centered in growth and productivity gains. The
economic program is based on the idea that economic growth is key to defeat
poverty, improve inequality, enhance quality of living and become a developed
country. This basic statement, in our view, summarizes a program that appears to
have a pro-market approach. Despite not having a concrete action plan behind some
of the ideas, it does address the concepts of: increasing potential GDP growth, focus
on innovation, fiscal responsibility (with the goal of returning to structural balance in
2018), promoting new electricity generation projects, among others.
Figure 8: Presidential Elections

Results
December 2013
Matthei
37.8%
The Presidents approval rate has declined since she took office (notably, she
ended her first term as president with approval above 80%), and is currently below
her disapproval rate. According to the latest polls, her approval rate is at 30%, while
her disapproval is above 60%. This is attributed to several reasons, partly the poor
economic performance, and partly a series of political scandals involving her
relatives in what may be traffic of influences for personal gain.
Table 5: LatAm Presidents Approval Ratings
Approval rate
Bachelet
62.2%
Source: Servel, J.P. Morgan.
Coutry
Argentina
Brazil
Chile
Colombia
Peru
Venezuela
Presidential Approval
President
Cristina Fernandez
Dilma Rousseff
Michelle Bachelet
Juan Manuel Santos
Ollanta Humala
Nicols Maduro
Approval
23%
29%
42%
26%
22%
Source: Local surveys, J.P. Morgan
A government of reforms
The current government is well underway with implementing profound
structural reforms. The tax reform has already been voted on and approved, during
the second half of 2014, and we have already felt some of its effects, particularly
regarding specific taxes to beverages, alcohol and cigarettes, where companies
already hiked their prices. Another focus of discussion is the proposed labor reform
and several other regulatory updates to financial institutions.
10
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Bachelets administration has proposed profound changes to labor regulations.

The proposed reform by the government rests on two pillars, first to enhance and
extend the scope of collective negotiation, and secondly to promote unionization of
workers in order to enhance and achieve a more representative union movement, that
contributes to the development of the country, the firms and the workers.
The reform, as it stands, will add rigidity to the labor market. There has been
strong opposition from all sectors to different aspects of the labor reform. We are
cautious on the impact a labor reform of this magnitude will have in terms of
unemployment and matching dynamics, while worker movements are concerned that
it does not address the underlying problem of wage and socioeconomic equality.
Chiles labor market is not a particularly flexible one, and we believe this reform will
hinder it further. The proposed changes to enhance collective negotiation seek to
eliminate forced removal or replacement of workers on strike, broaden the type of
workers that can collectively negotiate, enlarge scope of items open for negotiations
and extend the agreements to non unionized workers. (In our view, all these reforms
will hurt the dynamics of employment). On the front of gender discrimination, the
governments proposed reform makes it mandatory for women to be a part of the
negotiating commission and for the employer to disclose information regarding
gender salary differences. We estimate the NAIRU for Chile to be 6.5%, below other
LatAm countries excluding Mexico.
A progress in female labor participation and minimum wage. Given the
relatively low female participation in the labor force compared to OECD standards,
we are optimistic this reform will address this issue, as it will encourage female
participation. However, the regulator must be cautious as to not discourage potential
employers from hiring women, as incentivizing female participation and seeking
equality in salaries are different objectives in the short term. Minimum wage has
already been agreed upon and will be set at CLP 250.000 per month by 2016;
currently, minimum wage sits at CLP 225.000 (USD 360 at Dec 2014 FX). Taking
into account current economic conditions, this increase in minimum wage should
exert negative pressure on unemployment and on the employment rate.
Next steps before approving the bill. The reform to labor and working conditions
was one of Bachelets main themes in her presidential campaign, and had proposed
to sign and send a draft during her first year in charge. On Monday, December 22nd
2014, President Bachelet signed and sent the proposed Labor Reform to be discussed
at Congress. The filed bill was drafted by a commission composed of representatives
of the Labor and Interior Ministry, by representatives of the Workers and Employers
and a handful of politicians. The bill has been received with mixed reactions by all
sectors, as they adjust their agenda and interests. Once discussion and amends of the
bill finalize in congress it will be dispatched to the Senate where it will be voted into
law. The congressional discussions will be tough as there are many subjects open for
compromise, and voting will be divided. Nonetheless, we expect a consensus during
this year, after CUT, employers; employees and politicians have had their say.
OCDE pronounced itself recently regarding Chilean labor relations, saying that The
Work Directress has limited resources, that negotiations are usually confrontational
and they are hampered by lack of trust. We expect the bill will be modified following
Congress debate and be approved during 2H15, before the interim municipal
elections. The discussion will be mainly regarding the proposed changes, as different
parties have divided opinions on the economic and social effects of the reforms.
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[email protected]

08 April 2015
Figure 9: Labor reform
Quick list of the main labor reform topics

Changes regarding collective negotiation:
Prohibition of removing of workers on strike.
Includes replacement with employees of the firm
Broader class of workers can negotiate
Base of negotiation is the current collective agreement, or if it doesnt exist, the response from the
employer.
Larger scope of items that are open to negotiation.
Extension of agreement to non unionized workers subject to negotiation and paying of union fee.
Changes regarding gender equity:
Obligation to include females in unions negotiator commissions.
Employer must disclose information regarding salary or other differences.
Source: Labor Ministry and J.P. Morgan
Consolidation of financial information, including retail cards and insurances. In
2012 a bill was sent to congress that will allow the Bank regulator, SBIF, to access
all credit information, regardless of the issuer type, consequently anybody can ask
and obtain this information once consent is obtained. This bill was widely accepted
by the SBIF, especially following the La Polar scandal (see Figure 6). In Chile, the
low income segment credit demand is highly served by Retailers non bank credit
cards. Banks interest in serving this segment has historically been low, as is
reflected by credit penetration, due to the fact that it has higher risk and the strong
presence of Banco Estado. The new law will make it mandatory for retailers to share
client credit information with SBIF, basically allowing banks to access this
information on a per client basis, once privacy rights have been waived (we expect it
will be standard in bank contracts). This move was highly resisted by retailers, as
banks have the potential to screen and segment clients without incurring in the cost
of obtaining the information. We expect the impact of this law to affect the marginal
decisions of banks to expand the offer of credit to low income groups, and for
retailers to be the big losers, as banks have greater economies of scale in credit
origination. Taken in consideration with the recent bankruptcy law, we expect credit
to low income segments to shift marginally from retailers to banks, but we don't
expect a disturbance to credit growth rate.
Reorganization of the Securities Supervisor (SVS) commission to achieve a
higher level of independence. Currently, the chairman of SVS is appointed by the
President (and can be removed at will). This arbitrariness adds political risk to the
entity and dependency to the economic and political cycle. The proposal being
discussed, as it stands, would create a commission of five members who lead the
institution and would make it illegal for the President to remove commissioners for
political reasons. The commissions chair would still be appointed by the president.
The Bank regulator, SBIF, is not included in this discussion. This law is expected to
be passed in 2H15.
Changes to the General Bank Law (LGB). At present, the proposed draft includes
increasing capital requirements in line with Basel III recommendations, and
implementing liquidity requirements and reporting. The Central Bank has begun the
consultation period for this law. In a nutshell, Basel III requires banks to hold enough
liquid assets to cover an outflow of funds for a period of time, which depends on the
systemic risk the institution posses to the economy (varies between 0 to 30 days), as
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Diego Celedon
(56-22) 425-5245
[email protected]
well as differentiated capital requirements. In Chile, it is not clear that the new
regulation will require differentiated ratios per bank systemicness, but we do expect
more stringent rules, especially with regard to liquidity management. Last year,
SBUF commenced stress testing banks balance sheets, and all Chilean banks have
solid levels.
A project for creating a state owned and operated Pension Fund Administrator
has been dispatched to Congress for discussion. This generates some concerns
regarding the scope of action of the pension fund and the future of the pension
system in Chile. So far, the speech is moderate, as the objective of the pension fund
would be to increase price competition and focus on the segment of lower interest
of private AFPs, such as independent workers and low income employees", but there
is uncertainty about what would be the definitive role of this entity.
Health System
Based on the latest information from the World Health Organization (WHO), as of
2012, Chile spends roughly 7.5% of GDP on total health expenditure (both public
and private). This places Chile 27th among the 34 OECD countries and significantly
below the OECD average of 9.4%.
Figure 10: Health Expenditures as % of GDP
% of GDP
20
18
16
14
12
10
8
6
4
2
0
17.6 17.9
11.7 11.6
8.3 8.1
Argentina
9.0 8.9
Brazil
7.4 7.5
Chile
9.6 9.3
6.5 6.1
5.3 5.2
4.9 4.8
Colombia
Peru
2011
USA
Venezuela
France
United
Kingdom
2012
Source: WHO, J.P. Morgan
Table 6: Total Expenditure in Health

2013
Argentina
Brazil
Chile
Colombia
Peru
Venezuela
Public
55%
47%
48%
73%
54%
35%
Private
45%
53%
52%
27%
46%
65%
Source: WHO
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08 April 2015
At the per capita level, Chileans spend just US$1,185 (PPP adjusted) per annum on
average, which ranks 32nd among OECD nations, ahead of Turkey and Mexico only.
Figure 11: Per capital Total Health Care Expenditure 2009
US$, PPP adjusted
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Source: WHO
That said, Chile ranks #1 among OECD nations when measuring private
healthcare expenditure as a percentage of total healthcare expenditure, which comes
to 52.6%, down from 60% in 2005 and is likely lower since recent reforms aimed at
social protection. This level is above Mexico (51.7%) and the US (51.4%). This is
likely due to the optionality of the Chilean system, as described below, but also
highlights the potential for additional reform in the area of public financing.
Neoliberal reforms during the 1980s changed the structure and functioning of
the healthcare system in Chile. Key reforms included, 1) the establishment of a
National Health Fund (FONASA) to collect, administer and distribute State
resources, as well as provide public health insurance; 2) the creation of private
Health Insurance Institutions (ISAPRES); and 3) the decentralization of the National
System of Health Services (SNSS) into 27 area systems, as well as decentralization
of primary care. This resulted in the dual healthcare system that still exists, under
which the public and private subsectors carry out functions related to both financing
(insurance) and provision of health services.
The main sources of financing for the sector are 1) mandatory contributions of all
dependent workers and pensioners, equivalent to 7% of taxable income; 2) national
budget resources channeled primarily through FONASA; and 3) direct
supplementary payments for private health services.
One of the unique features of the Chilean system is that health insurance
contributions can be paid into either the public or the private system, which operate
in parallel, but on different principles. For example, although FONASA receives
direct mandatory contributions from contributors that choose this system, additional
tax-based subsidies (from the government budget) are required to cover all patients,
especially the most vulnerable (including indigents), who by law are entitled to
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08 April 2015
public health services. Meanwhile, ISAPRES offer private insurance plans under
contract, with benefits tied to the premiums paid. The plans offered by the ISAPRES
must incorporate all the care offered by FONASA. Therefore, what differentiates one
ISAPRE contract from another is the degree of financial coverage and the inclusion
of levels of care over and above that offered by FONASA.
Suppliers of health services are not integrated with the insurance companies. On the
public side, users of FONASA can visit any of the municipal clinics and hospitals
from the national area systems or private clinics registered with FONASA (under the
free choice modality). Meanwhile, suppliers of the ISAPRES are private and can
be either independent or contractually linked.
Additional reforms in the past decade (most notably Plan AUGE) have done little to
change the general structure of the healthcare system but have sought to provide
greater coverage, especially for the more vulnerable segments of the population.
There is an ongoing congressional discussion on regulation for private health
insurance. This is a project that began being discussed more than two years ago and
that currently lies in congress. There is no clear visibility on the timing for its
approval or the final characteristics that it will have.
The project implies the base plan growing bigger and limits the capacity for
discriminating prices. The Guaranteed Health Plan (PGS) project was created
with the intention of eradicating price discrimination and avoiding higher fees
charged to women and the oldest segments of the population. The project proposes a
fixed plan of Ch$24.000 (around US$40) for people older than 24, and Ch$12.000
(around US$20) for relatives under 24 years. For the complementary services a
special commission of experts would price the different plans, which would also be
fixed regardless of age or gender. Finally, prices would be indexed to a health CPI,
controlling the unilateral price readjustments.
Figure 12: Proposed Changes Guaranteed Health Plan
Current
Project Proposal
Additional Benefits
Additional Benefits
CAEC
CGC
Complementary Plan
Non AUGE
Minimum Coverage
AUGE
Minimum coverage
Guaranteed
Health Plan
AUGE
Source: Ministry of Health, J.P. Morgan.
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08 April 2015
Education
Table 7: Illiteracy Population Rate

2013
Argentina
Bolivia
Brazil
Chile
Colombia
Mexico
Peru
Venezuela
Source WHO
2,1%
8,8%
9,6%
1,4%
6,4%
6,5%
7,0%
4,5%
The Chilean education system is structured into pre-school (up to age 5),
primary/elementary school (which includes 8 grades for ages 6-13), secondary/high
school (which includes 4 grades and two diploma options: science-liberal arts or
vocational-technical) and higher/tertiary (received at universities, professional
institutes and/or technical centers). Coverage is essentially universal. Primary and
secondary school are mandatory by law, thus enrollment rates are high nearly
100% for primary and 90% for secondary.
Along with the pension and health reforms of the 1980s, Chile introduced a
unique voucher system for education financing. Public schools, which have been
run by municipalities since the reform, and private subsidized schools receive the
voucher subsidy. Private subsidized schools, but not municipal schools, are allowed
to top up the voucher subsidy with fees from parents. If these fees exceed a certain
limit, private schools lose their right to the voucher subsidy and are financed by
parents fees alone. This school type is called a private fee-based school. As a result
of these reforms, Chile has seen a sharp increase in the number of private schools.
Based upon data from the OECD, it is clear that Chile has made impressive
progress in terms of educational coverage and attainment, which is in part related
to the large increase in the number of private schools, extent to which it is obligatory,
and some social benefits for attending (school meals). As Figure 10 highlights,
secondary education attainment for 25- to 34-year-olds is above the OECD average
at 86%, which compares to just 43% for 55- to 64-year-olds, representing the largest
generational gap in the data set.
A similar trend has been seen at the tertiary level (35% attainment for 25- to 34yearolds, compared to 17% for 55- to 64-year-olds), but the figure is below the
OECD average (37% for 25- to 34-year-olds), likely due to high costs (85% of
funding for higher education is private, and 79% comes from families).
Despite notable improvements in coverage and attainment, Chile continues to
lag when it comes to quality. Since the voucher reform, Chile has relied on free
school entry and school competition as the main quality assurance mechanism, with,
until recently, little or no state intervention to ensure minimum quality standards.
While Program for International Student Assessment (PISA) results improved
considerably between 2000 and 2012, the scores of 15-year-olds in science, reading
and mathematics are still well below the OECD averages, even after adjusting for the
lower socioeconomic background of Chilean students. More specifically, 64% of
students (age 15) had reading scores below PISA proficiency Level 3, compared to
just 43% on average for the OECD.
Chile also lags when it comes to equality in education. OECD data indicate that
Chile scores just 48.6 in the index of horizontal social inclusion (equal to the
proportion of variance in the PISA index of social, economic and cultural status of
students within schools). This compares to the OECD average of 74.8 and the high
mark of Norway at 91.2. Furthermore, Chile lags its largest Latin America peers
Brazil (64.7), Argentina (59.8) and Mexico (56.2) in this category.
Meanwhile, when it comes to education spending, Chile allocates around 4.2% of
GDP, which is above the OECD average of 3.8%. However, per-student spending
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Diego Celedon
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[email protected]
stands at just US$2,707 for primary school and US$2,564 for high school, which is
well below the OECD averages of US$7,153 and US$8,972, respectively.
Although teachers salaries are also below OECD averages, when compared to
Chilean per capita income, they are actually above average. The shortfalls in quality,
equality, accountability and cost (at least at the higher education levels) have not
gone unnoticed, especially by students, who have taken to the streets in the past
couple of years in protest. Additional reform appears imminent, with the government
willing to negotiate and already promising to allocate another US$4bn of state
resources to the cause.
Table 8: Human Development Index
Table 9: PISA Math Performance
2011
2009
Country
HDI rank
Mean years
Public Expenditure
of
on Education
Schooling
% of GDP
PISA Math Performance

Shanghai-China
Rank
1
Mean Score
600
Norway
12.6
6.8
Singapore
562
United States
12.4
5.5
United States
26
487
Japan
12
11.6
3.5
Chile
44
9.7
3.4
Uruguay
45
427
Argentina
45
9.3
4.9
Chile
47
421
Mexico
57
8.5
4.8
Mexico
49
419
Venezuela
73
7.6
3.7
Argentina
55
388
Peru
80
8.7
2.5
Brazil
55
386
Brazil
84
7.2
5.1
Colombia
56
381
Colombia
87
7.3
4.1
Peru
61
365
Source: U.N.
Source: OECD
The Chilean Education Conflict and Bachelets Education Reform

Since 2011 theres been a series of student-led protests in Chile, demanding a
new framework for education in the country, including more direct state
participation in secondary education and an end to the existence of private profit in
higher education. Currently in Chile, only 45% of high school students study in
traditional public schools and most universities are also private.
Beyond the specific demands regarding education, there is a feeling that the protests
reflect a "deep discontent" among some parts of society with Chile's high level of
inequality. Protests have included massive non-violent marches, but also a
considerable amount of violence on the part of some protestors as well as riot police.
This has generated a lot of political pressures for the authorities and ultimately led to
Bachelets main campaign promises: a deep reform on education, which includes free
education to school students, prohibiting owners of taking profits, and ending
schools' ability to select students.
The specific details of Bachelets education reform are not public yet, but the
principles are based on the idea that education is understood as a social right. All
citizens have the right to be educated and freely choose their paths in life. Below are
the main guidelines of the reform:
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08 April 2015
1. Education is a fundamental social right. Education has an undeniable public value

and is the basis of a more just, democratic and participatory society.
2. The reform wants to explicitly grant guarantees for citizens education: access,
quality and financing.
3. Strengthening the role of the state as an active player both in the direct delivery of
educational services, and strict control of the system.
4. Strengthening Public Education. Public Education should set quality standards and
have significant presence throughout the territory. This is the basic and most
powerful tool on the educational project, cohesion and social integration will be built.
5. The education system should promote integration and social inclusion at all levels.
6. Put the center of political education and the learning process. It is necessary to
align the educational process with the citizens we want to form the country we dream
and challenges of teaching at all levels and especially of the most vulnerable.
7. The generation of equal educational opportunities from birth. Public policies
should contribute to reducing and eliminating social gaps.
8. A global reform to the educational system, including Nursery, General levels and
Superior, in order to integrate and cover the entire cycle of education.
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08 April 2015
Figure 13: Workforce by Sector
Labor
% of Total
Commerce
20.6%
Industry
11.4%
Agriculture
9.3%
Construction
8.5%
Education
7.3%
Transport
7.1%
Real State
6.5%
Domestic
6.1%
Public
5.5%
Social and
4.8%
Hotels
3.6%
Mining
3.0%
Other
Banking
2.9%
2.0%
Fishing
0.7%
Electricity
0.6%
0.0% 10.0% 20.0%

Source: INE
Table 10: Unemployment Rate LatAm

Average 2013
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Venezuela
Source UN ECLAC
Unemployment
6.9
5.3
6.0
8.4
5.1
5.8
7.0
Chile has a workforce of around 8.3mn people, or roughly 47% of the

population and 82% of working age population. Of the total, roughly 40% are
women, a figure that has increased from 32% in the past 10 years. Though mining
represents a large portion of Chiles economy, from an employment standpoint, it
represents just 3% of jobs. The vast majority of jobs are concentrated in commerce
(21%), manufacturing (11%), agriculture (9%) and construction (8%) see Figure 13
for more details.
Though Chile has made great strides over the past two decades in terms of job
creation and diversification, labor force participation is still relatively low, with few
job opportunities for certain groups. In particular, while female participation in the
labor market has risen steadily, the female employment rate (43%) is still 25
percentage points below the male employment rate (68%) and well below the OECD
average of 57% (2009 figure). At the same time, less than 30% of the young (age 15
to 24) are employed, compared with 40% on average in OECD countries. Although
this in part reflects efforts to promote higher levels of education, for many youths
with low skills, access to jobs remains a challenge in Chile. Recent government
initiatives under the Piera Administration have sought to improve education and
technical training of workers, while promoting entrepreneurship and innovation.
It is difficult to determine the exact level of informality in Chile, but estimates based
on the Chilean household survey CASEN (Encuesta de Caracterizacin
Socioeconomica Nacional) suggest that about one-third of Chilean workers are not
affiliated with or contributing to social security. This remains high by OECD
standards, albeit receding and lower than in most of Latin America. Informality is
most common in the low-productivity segments of the labor market, where low
skilled employees are often hired without a contract by small firms that are
themselves informal. These workers generally lack old-age, unemployment or health
insurance and are not covered by labor law (minimum wage, employment protection
or occupation health and safety standards). They are often poorly paid, with limited
access to training and career advancement.
Employment protection regulation is not overly strict by OECD measures,
except when it comes to severance payments for regular workers, which can be as
much as 11 months of wages, compared to 3-4 months in many OECD countries.
This high cost often dissuades employers from formalizing employment
relationships, though recent tighter regulation regarding subcontracting has helped to
increase formalization.
Unemployment compensation consists mainly of individual accounts from which
accumulated contributions are paid. The accounts are financed by contributions
from both employers and employees. Meanwhile, if an account balance is too low, a
state funded Solidarity Fund pays out additional benefits. One advantage of the
savings account system is that it tends to promote active job search among recipients
who have had to draw from their accounts while unemployed. This is important
given limited labor office resources, as it reduces the demand for job counseling.
Labor relations in Chile have historically been confrontational. This has at least
been partly due to low union membership, which accounted for just 12.5% of the
workforce in 2009. In addition, this membership is highly concentrated in certain
sectors, particularly mining. Furthermore, as in most countries, the labor law
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08 April 2015
enforcement body (Direccion de Trabajo) has limited resources (underfunded) and

can only deal with reported disputes and specific complaints.
Chile has had a relatively high minimum wage, which as of 2009, represented
44% of the average wage, exceeding the OECD average of 40%. Minimum wage is
set to increase by almost 10% in 2015. Despite the fact that informal work
arrangements are very common among low-skilled workers, the minimum wage has
historically operated as a strong signal for the informal sector. As a result, minimum
wage hikes have broader implications for employment, often causing unemployment
to rise slightly. Although the government is aware of these risks, contentious wage
debates have often caused the government to increase the minimum wage above
inflation.
Income Distribution
Sustained growth in Chile over the past two decades has resulted in a
substantial decline in the absolute poverty ratio at the national level. According
to data provided by the OECD (collected via Chiles Mideplan), the poverty rate
dropped from 38.6% in 1990 to 15.1% in 2009. This represents roughly 2.4mn
people moving out of poverty. The drop was particularly noticeable during the 20032006 period, likely helped by the commodities boom, which lowered unemployment.
That said, the poverty rate actually rose from 13.7% to 15.1% during the 2006-2009
period.
Table 11: Gini Coefficient
Ranking Country
GINI Index
1
Sweden
23.0
12
Germany
27.0
30
South Korea
31.0
101
United States
45.0
105
Argentina
45.8
114
Peru
48.0
123
Mexico
51.7
124
Chile
52.1
128
Brazil
53.9
132
Colombia
58.5
Source: CIA World Factbook, J.P. Morgan
However, this was largely due to a 20% increase in the poverty line in real terms due
to higher food prices. The cost of the food basket accounts for approximately half of
the poverty line and thus has a disproportionate impact on the figures. This trend was
likely further impacted by the financial and economic crisis of 2008/9.
Despite Chiles economic success, the country still faces a significant problem in
terms of inequality. Chile has a Gini coefficient of around 0.5, which indicates that
the degree of inequality in household disposable income is the highest among OECD
countries. Chile also has a high relative poverty rate, with around 18% of the
population having an equivalent disposable income of under 50% of the median for
the entire population (more than all other OECD countries with the exception of
Israel and Mexico).
Meanwhile, the distribution of household market income has remained virtually
unchanged in the last two decades. Household market income covers the income
generated with the households own means and includes labor income, capital
income (rents and interest), benefit payments from contributory pensions and other
private income (such as transfers from relatives not living in the household and
donations). Although deciles 3 through 9 have increased their share, deciles 1 and 2
are flat to down, while decile 10 remains above 40%.
The Chile Solidario program was introduced in 2002 in order to promote equity
and enhance opportunities. Instead of focusing on cash subsidies, it primarily
grants entitlements for a range of services, focusing on four target groups: families,
the sole elderly, the homeless and children with a parent in prison. Services include
healthcare, childcare, education, as well as income and other family-support services.
Family workers and clients sign a contract of participation, committing
themselves to specific actions, such as medical checkups, vaccinations and
school attendance. Roughly two-thirds of the participants belong to the lowest-
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Diego Celedon
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income segments of the population, while another 15% belong to lower-income

segments, suggesting that penetration is substantial. However, the package has had
only a small effect on earnings and income poverty reduction, especially considering
that public spending on employment support in general is just 0.1% of GDP. Client
characteristics are also not particularly favorable, given lack of skills and distressed
family conditions.
Figure 14: Chile Poverty Level Evolution
35.0%
Extreme Poverty
Poverty
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1992
1994
1996
1998
2000
2003
2006
2009
2011
Source: Casen Poll, J.P. Morgan
Competitiveness
Chile ranks 31st in the 2011-12 World Economic Forum (WEF) Global
Competitiveness Index, out of 142 nations, down one spot from the previous year.
Chile has the highest rank among LatAm countries, with Brazil next closest at 53 (up
5 spots from previous period).
According to WEF, early measures to open and liberalize its markets by introducing
high levels of domestic (24th) and foreign (17th) competition, a relatively flexible
labor market (49th), and one of the most sophisticated and efficient financial markets
(21st) have helped the country to maintain its long-term growth prospects in the past
decades.
Index Score
Figure 15: Competitiveness Index
100
90
80
70
60
50
40
30
20
10
0
Switzerlan
d
2011-2012
1
2012-2013
1
US
UK
Hong Kong
Chile
Brazil
Mexico
Peru
Colombia
Argentina
5
7
10
8
11
9
31
33
53
48
58
53
67
61
68
69
85
94
Source: WEF, J.P. Morgan
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08 April 2015
As Chile moves quickly toward higher levels of rent and the next stage of
development, the solid basic requirements and efficiency enhancers that have paved
the way for the economic success of the country will likely give way to innovation,
in which Chile is currently lagging behind. Companies with low investment in R&D
(60th) and a weak capacity for innovation (66th) act in an innovative environment
characterized by relatively low quality scientific research institutions (51st) and weak
university-industry collaboration in R&D (44th). Moreover, the perceived poor
quality of the overall educational system (87th), especially of primary education
(123rd), along with poor results in math and science (124th), hinder the capacity of
the economy to generate, diffuse, and use knowledge that can be brought into the
market in the shape of new products or services.
Sidenote: IDs in Chile
In Chile, all citizens and companies
have a unique tax identification number,
known as RUT or RUN, which is widely
used by all government agencies and
private companies.
22
Business can be created in one day. Creating and starting up a business in Chile is
relatively simple, especially after the changes introduced during the Piera
administration. This new law, deemed your business in a day aimed at simplifying
the process of formally constituting a company, which usually took between two
weeks to one month and discouraged the entrepreneurial spirit. The final law made it
possible to legalize a company in one day, and eliminated the requirement to attend
in person the office of a public notary. The business in a day reform was approved in
2013, and was seen as a signal of the government, together with other initiatives such
as the Star-up Chile program and changes to the bankruptcy law, that aimed to
promote the business environment and dynamics. Creating a business in Chile now
only requires that the founders have the ability to digitally sign (costs around US$10)
in order to guarantee their identity (see sidenote), and that they upload the necessary
documents to the governments webpage. The impact of the reform was an increase
of 40%Y/Y of new companies in the month following implementation, a 17%M/M
increase, and an increase of 15% of total new companies in 2014 vs. 2013, according
to the Ministry of Economics. We note that small and medium enterprises account
for 48% of total employment in Chile and 91% of all companies, and this reform
impacted greatly these types of companies.
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Figure 16: Chiles business creation dynamics
Source: Ministry of Economics and JPM
23

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Copper
Chile is the number one producer of copper in the world. Chile is the country
with the highest level of copper reserves in the world, predominantly located in the
northern regions, totaling around 30% of the planets reserves. With production of
approximately 5,800 km of refined copper per year and exports around USD 40bn
during 2014, Chile ranks as the number one producer and exporter of copper in the
world. The main destination of copper exports is China, accounting for 38%. Copper
in the Balance of Trade represents roughly 51% of total exports, in dollar terms,
which translates to about 15% of GDP.
Figure 17: Copper exports
2014 Exports Breakdown
49%
51%
Figure 18: Chiles copper production relative to rest of world

Other
exports
Copper
25.000
20%
Chile's share in refinedcopper production
2010 Exports Breakdown

20.000
19%
18%
17%
42%
15.000
16%
58%
15%
10.000
14%
13%
5.000
12%
11%
Source: BCCh and JPM

0
10%
World Production
Chile Production
Chile (%)
Source: BCCh, Cochilco and JPM
Chinas copper demand represents more than 40% of global consumption. The recent
slowdown in Chinas growth affected global copper demand, translating to lower
prices and depressed investment. However, growth has been picking up in USA, and
this could compensate in part for the lack of demand from China. Quantity elasticity
to growth in USA has been lower in recent years than in China, due to lower weight
of communication growth and investment. Chilean exports to China represent 24%
of total exports, with copper representing 78% of exports to China.
Refined copper mine production totaled 5.746 km in 2014. Investment in new
exploration and extraction is highly dependent on the long-term price of the metal,
which currently sits slightly below US$3 per pound, and trades at the London Metals
Exchange. During 2014, investment in mining sector suffered a sharp decline, partly
influenced by investments reaching maturity and partly by the deterioration of the
economic and political climate in Chile. World installed capacity is forecast to
decrease in around 100 km in 2015 and increase in around 1200 km in 2016, mainly
driven by depressed price expectations and new capacity coming into production
next year. Given current copper prices, some mines have closed their higher cost
operations. According to our Global Commodities Research team, global production
of refined copper should grow at a higher pace than demand, widening the supply
24
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
surplus that has been the trend for the past five years. Overall, global demand is
forecast to grow 3.8% in 2015, supported by a 5% increase from China, while total
production is forecast to increase 4% on the back of new mines coming into
production and new smelting capacity (Link: Metals Outlook Presentation).
Figure 19: Production weighted average copper mining C1 cash costs by country US$ per MT
Copper production in Chile is a mix of private companies and the CODELCO,

the state owned mining company formed after nationalization of copper in the 70s.
CODELCO, which contributes on average around 10% of total fiscal revenues per
year, operates some of the largest copper mines in the world: Chuquicamata, the
worlds deepest open-pit mine, El Salvador and El Teniente, which is the worlds
largest underground mine and the most important (in terms of revenue) for
CODELCO. Other relevant producers are BHP Billiton, which operates the largest
mine, Escondida, in terms of copper reserves and annual production and Xstrata and
Anglo American, which jointly operate Collahuasi, the third largest copper mine in
the world.
Mining companies operating in Chile are subject to a different taxing scheme
from other firms, as they must pay a Royalty to the government. This Royalty is a
fraction of operating income; its justification is that Chile is the sole owner of all non
renewable resources within its territory. The tax bracket distinguishes mines by size,
between small (less than 12.000 MT/year) medium (less than 50.000 MT/year) and
large (more than 50.000).
25
Diego Celedon
(56-22) 425-5245
[email protected]
Table 12: Mining companies

subject to different tax scheme
Mining Cos subject to special taxes
Minera Escondida Limitada
Minera Spence S.A.
Collahuasi
SCM Lumina Copper Chile
Minera Los Pelambres
Sierra Gorda S.C.M.
Anglo American Sur
Minera Antucoya
El Abra
Minera Meridian Limitada
Anglo American Norte
Compaa Minera Mantos de Oro
Compaa Minera Zaldvar
Minera Florida Limitada
Minera Candelaria
Compaa Minera Maricunga
Cerro Colorado
Compaa Minera Nevada SpA
Quebrada Blanca
Minera El Morro
Minera El Tesoro
Algorta Norte S.A.
Lomas Bayas
SQM Salar S.A.
Minera Michilla S.A.
SQM Nitratos S.A.
Carmen de Andacollo
Atacama Minerals Chile SCM
Pucobre
Compaa Minera Casale
Minera Esperanza
Minera Lobo Marte S.A.
Source: Cochilco

08 April 2015
Fiscal spending is linked to copper revenues. Despite the high importance of

copper for Chiles economy (15% of GDP), the country has been successful to
neutralize its fiscal accounts from foreign shocks, by setting the budget in relation to
the expected two year copper price and by the creation of a copper stabilization fund
(FEES). The FEES was designed to isolate fiscal finances from volatility in the price
of copper. This 14 billion fund, which was created with copper profits but is now
funded with a diverse mix of fiscal surpluses, is managed by the Central Bank and
primarily invested in international assets. Also, Gross Fixed Capital Formation
follows copper price very closely, although with a one quarter lag (see Figure 21).
We attribute this lag as investors would like to know if copper price movements are
transitory or permanent before investing, that is investment will follow after higher
prices have persisted.
Figure 20: Importance of mining taxes and CODELCO for fiscal revenues
100,0%
5,5%
17,1%
21,9%
2003
2004
2005
32,0%
25,7%
14,0%
20,9%
19,1%
14,2%
10,0%
2008
2009
2010
Mining tax + state owned
2011
2012
2013
80,0%
70,0%
60,0%
50,0%
40,0%
30,0%
20,0%
10,0%
0,0%
Source Cochilco and J.P. Morgan
26
34,1%
90,0%
2006
2007
Total fiscal revenues
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Figure 21: Relationship between copper price and GFCF is slightly lagged
500
10.000.000
450
9.000.000
400
8.000.000
350
7.000.000
300
6.000.000
250
5.000.000
200
4.000.000
150
3.000.000
100
2.000.000
50
1.000.000
0
ene 93 oct 95
jul 98
abr 01 ene 04 oct 06

Copper price
0
abr 12 dic 14 sep 17
jul 09
GFCF
Source Cochilco, BCCh and J.P. Morgan
Figure 22: FEES evolution and impact of macro events

25.000
23.000
Higher than average copper price

led to sharp FEES accumulation
Counter-cyclical fiscal spending
following 2008 crisis
21.000
19.000
17.000
15.000
13.000
11.000
Slower growth rate associated

with lower copper prices
9.000
7.000
5.000
oct 06
feb 08
jul 09
nov 10
abr 12
ago 13
dic 14
Source BCCh and J.P. Morgan
27
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
We note that Chile has moved from being the 6th cheapest copper producing
country in 2008 to the 23rd in 2013, and productivity per worker (measured in tons
produced per worker) declined by almost 40% over the past ten years. Tons mined
per person, even after adjusted for lower grades, are four times higher in the US and
Canada compared to Chile. Chilean mining labor cost averages $44.30 per man hour
compared to $44.20 per man hour in the US. Shortages in skilled labor are the driver.
That said, in Chile cash cost is rapidly approaching copper prices, as costs have
increased and coper price has decreased. Cash cost has increased significantly in
recent years, especially for the newer explorations, as more resources are required to
extract and refine copper.
Industry related to copper mining in Chile is well developed, as are seaports,
transportation, machine bartering, and energy. In terms of energy generation,
mines operate long-term contracts with electric companies or have implemented their
own generation plants. Water: desalination. Safety: although accidents do occur,
they are not the norm and very few casualties occur. Perhaps the most notable in
2011, in the San Jose mine, 33 miners were trapped for 69 days after a collapse in the
lower levels (700m below ground) and were eventually rescued. Salaries in the sector
are on average higher than in the rest of Chiles regions, the industry is male
dominated and unionization is strong. The real growth rate in base wages for miners
is only 0.6%-to-0.7% per annum. In contrast, the size of signing bonuses has
reportedly increased by almost five times since 2004. Negotiations usually end in
bonuses being paid to workers in lieu of permanent salary increases.
Figure 23: Copper price and CLP exchange rate
800
High correlation of copper

price and exchange rate
700
0
50
100
600
200
400
250
300
300
350
200
400
100
0
may-79
450
500
nov-84
may-90
Spot CLP
Source Cochilco, BCCh and J.P. Morgan
28
oct-95
abr-01
20Y CLP MA
oct-06
Copper price
abr-12
Copper price
Exchange rate
150
500

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
China
100.000
80.000
60.000
40.000
20.000
0
2010
2011
Total Exports
Copper to China
Source: BCCh and JPM
2012
2013
2014
Total Copper Exports
Together with copper prices, we believe China is the most important risk factor
for the Chilean economy, as it is a relevant trade partner and has significant impact
on copper price. According to estimates by IMF staff (using a VAR model), a 1
percentage point increase in Chinas growth leads to an increase in the copper price
and appreciation of the Chilean peso by about 3.5 percentage points in 8 quarters and
to a 4 percentage point increase in GFCF growth over the same horizon. Chilean
peso and copper prices are also highly correlated, as can be seen in Figure 28. One
reason for this high correlation is that an increase in copper price leads to an inflow
of dollars, which in turns appreciates the Peso.
Figure 25: Chinas copper consumption compared to DM and RoW
China, the main commercial partner and risk. Chile has a medium to high risk
exposure to China, as its the destination of around 24% of total Chilean exports, in
US$. Not only is exposure relevant as a commercial partner, but as China demands
close to 40% of world copper production it has a high impact on the metals price.
According to IMF estimates, a 1 percent increase in Chinas growth leads to an
increase of copper price of 3.5 percentage points. As copper weighs in at 51% of
total exports (around 16% of GDP), a price increase of the metal transfers directly
and significantly into GDP and sovereign funds.
Figure 26: Export to China breakdown
20.000
15.000
USD mn
Figure 24: Exports breakdown
10.000
5.000
0
2010
2011
Exports to China
2012
Copper
Copper price adjusted
2013
2014
Goods
Copper represents 78% of exports to China. Although copper is still Chile's main
export to China, it has lost some relevance, down from 85% in 2010 to 78% in 2014.
We see this change in the mix of exports as positive, as it lessens the dependency on
copper and allows Chile to diversify its export mix. However, if we adjust exports
value for changes of the price of copper we estimate that exposure to copper is still
high.
29
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
China uses around 45% of total world copper. China has increased its usage of
copper in terms of weight relative to the rest of the world as well as in volume terms.
In contrast, Europe and North America have reduced their weight in copper usage
from around 42% in 2005 to 27% in 2014. This positions China as the most relevant
country in copper demand growth and price expectations.
Figure 27: 2015 Copper usage in different markets
kmt
25000
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
20000
15000
10000
5000
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E
China copper use
Europe & North America use
27%
42%
44%
35%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E
Rest of World use
China copper use
Europe & North America use
Rest of World use
Source: Company reports, Government and Industry data, USGS, Antaike, Wood Mackenzie, J.P. Morgan
How does investment react to increases in Chinas growth and increases in the
price? We see that price increases caused by acceleration in Chinas growth is
followed by an increase in foreign direct investment that is lagged by some months.
Foreign direct investment in mining is fundamentally influenced by the long-term
price of copper, and the pass-through of Chinas growth to copper price might be
seen as transitory, until it persists. Chinas demand (in volume terms) for copper is
highly elastic to real GDP growth, predominantly to growth in the energy and
construction sectors.
Figure 28: Copper price and Chilean growth is influenced by Chinas growth rate
20%
500
450
15%
400
300
250
5%
200
Copper Price
350
10%
150
0%
dic 99
abr 01
sep 02
ene 04
may 05
oct 06
feb 08
jul 09
nov 10
-5%
abr 12
ago 13
100
dic 1450
0
Chile real growth
China real growth
Copper price
Chilean exports to China account for 24% of total exports. Around 40% of
mining exports are headed to China and 25% of goods exports. A deceleration in
growth should lead to a decrease in mining exports by a higher sensitivity to price
and a sharp decline in goods export by a higher sensitivity to quantity. In this sense, a
sharp slowdown in Chinas growth would have a large impact on Chiles net exports,
its borrowing capacity (gross external financing is around 16% of GDP) and real
growth.
30
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Still, we see the main risk for Chile is a strong decline in Chinas growth rate
and the ensuing depressed metals market and prices. We believe the best
mitigation mechanism for these risks is to maintain the free floating exchange rate.
We do not see more space in the short term for monetary policy to support domestic
demand; however, we do believe there is space for an increase in fiscal spending
should output drop severely.
Economy
GDP
Mainly due to its relatively small population, Chiles nominal GDP is in the
middle part of the table compared to the rest of LatAm at US$240 billion. While
this positions Chile only as the sixth largest economy in LatAm, this is mainly due to
the relatively small size of the population compared to the top 5 countries. However,
Chile has the second-highest nominal GDP per capita in the region, following
Uruguay, at around US$14,000. This is mainly the result of a decade of strong
growth during the 90s, after structural reforms in the late 80s and early90s
(openness of the economy, pension reform, independence of Central Bank, etc.). The
goal of the government is to lift per capita GDP to levels above US$22,000 by 2018,
which would make Chile a developed country.
Table 13: Latin America Nominal GDP
Data as of 2013
US$, bn
Population, mn
GDP per capita
Latin America
5,262
100.0
508
10,357
Brazil
2,243
42.6
201
11,144
Mexico
1,243
23.6
119
10,487
Argentina
446
8.5
42
10,623
Colombia
333
6.3
49
6,810
Venezuela
397
7.5
31
12,859
Chile
249
4.7
18
13,970
Peru
207
3.9
30
6,813
Ecuador
88
1.7
15
5,755
Uruguay
56
1.1
18,667
Source: J.P. Morgan
After experiencing above potential growth (5.7%) over the 2010-2012, Chile
entered an economic slowdown beginning in 2013, on the back of the maturing of
the investment cycle mainly associated to the mining sector. In this context, the
economy moderated below potential (5% at the time, revised to 4% in 2015) in 2013
expanding 4.1%, and 1.9% in 2014. It is worth noting that with most of the countries
in the region experiencing growth moderation amid tighter global financial
conditions and lower commodity prices, the Chilian economy appears to have turned
the corner, as growth expectations for 2015 have been revised upwards.
31
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Table 14: Latin America real GDP growth forecasts

% change
2015 (%q/q, saar)

2013
2014
1Q
2Q
3Q
4Q
2015
Argentina
2,9
1,5
4,5
-2
1,4
Potential
3
Brazil
2,5
-0,5
-1,4
-0,1
1,2
-0,6
2,2
Chile
4,1
1,8
1,3
3,5
2,7
Colombia
4,7
4,8
3,9
3,3
2,5
2,5
3,3
4,4
Ecuador
4,6
3,5
0,5
3,5
1,5
Mex ico
1,4
2,1
2,6
2,5
2,8
3,3
Peru
5,8
2,3
2,5
4,5
5,5
3,7
4,8
Uruguay
4,7
4,5
3,5
2,5
3,5
Venezuela
1,3
-4
-10
-4
-10
-4
Latin America
2,6
0,8
0,5
0,7
0,6
1,4
0,8
2,9
Source: J.P.Morgan
Although Chile has already conducted significant reforms over the last decades
(OECD inclusion confirms this), the country still has a long way to go before
becoming a developed country. In this context, the wave of reforms we have seen in
2014 and expect to continue to in 2015 address the necessity of improving the quality
of public services and meeting social demands. In this context, while growth in the
coming years is likely to moderate relative to the boom observed in the last decade, it
will likely continue to perform above the EM average.
Figure 29: Chile real GDP growth vs. EM
%oya
14
12
10
8
6
4
2
0
-2
-4
EM
Chile
91
96
Source: Central Bank of Chile, J.P. Morgan
32
01
06
11
16

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Figure 30: Real GDP growth expectations for 2015

%oya
5.5
5.0
4.5
Consensus
4.0
3.5
3.0
J.P.Morgan
2.5
2.0
May 13 Aug 13 Nov 13 Feb 14 May 14 Aug 14 Nov 14 Feb 15
GDP demand side composition: Looking at GDP composition (weight), household

consumption is the main component on the demand side (64.0%). This is not news,
as in the last two decades household consumption has been responsible for more than
60% of the countrys GDP. On the other hand, the size of the public sector in Chile is
relatively small at 12.4% of GDP, although it has seen a persistent increase in size in
the last years and we expect it to grow 1-2% due to the tax and education reforms.
Imports are the second most representative component, accounting for 32.9% of
GDP, mainly explained by oil (the country imports practically 100% of its oil
consumption), machinery and electrical equipment. However, due to the depreciation
of the peso, imports weight in GDP has decreased markedly in the last year and we
expect exports to outrank imports this year. On the other hand, exports account for
32.6% of GDP, mainly explained by copper exports, which account for 44.6% of
total exports. On the other hand gross fixed investment (GFI) in Chile has
historically been a pillar for growth. Capital formation has been accounting for
around 24% of GDP, and as it is highly related to the mining sector; however, its
growth has slowed in the last two years.
Figure 31: Nominal GDP Composition Demand Side
Table 15: Contribution to Real GDP Growth Demand Side
% of GDP 2014
%-pts to annual growth

Real GDP - Demand side
2010
5.8
2011
5.8
2012
5.4
2013
4.1
2014
1.9
Domestic demand
Household consumption
Public consumption
Gross fixed capital formation
Equipment and machinery
Construction
Change in inventories
12.5
6.4
0.6
2.6
2.5
0.2
2.9
8.9
5.3
0.3
3.1
1.7
1.3
0.2
6.7
3.6
0.4
2.7
1.5
1.2
-0.1
3.4
3.5
0.5
0.2
-0.3
0.5
-0.7
-0.6
1.4
0.5
-1.5
-1.6
0.1
-1.1
Net exports
Exports
Imports
-6.8
0.9
7.7
-2.9
2.1
5.1
-1.3
0.4
1.7
0.7
1.5
0.8
2.5
0.2
-2.3
64,2
60
33,8
40
22,0
20
12,9
0
-20
-40
Priavte
Public
consumption consumption
GFCF
Exports
-32,3
Imports
33

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Consumption was a compelling story in Chile in the aftermath of the 2008-09

crises. The intensive migration of lower-income Chileans to the middle-income
segments brought to the market more than 3 million potential consumers who are
able to buy things that were out of their reach before. However, while consumption
continues to be the main contributor to economic growth in Chile, it has been
experiencing a gradual moderation over the last two years. In this context, we expect
private consumption to stabilize around 2.5%oya this year, contributing close to 2%pts to growth.
Figure 32: Real Private Consumption
%oya
20
Figure 33: Investment and consumption

%oya, both axes
Total
Durable goods
10
0
Non-durable
-10
2009
2010
2011
2012
Services
2013
25
60
50
40
30
20
10
0
-10
-20
-30
11
Investment
15
10
5
0
5
3
-5
Consumption
1
2010
2014
20
-10
-15
2011
2012
2013
2014
Source: INE
On the other hand, investment was the main driver of the economic slowdown
experienced in the last two years. This has been mainly associated with the maturing
of the investment cycle in the mining sector, with both investment components
construction spending and machinery and equipment purchases (M&Eq) moderating
and the deterioration of the political climate.
Figure 34: Gross capital formation
% oya
40
30
Construction
20
10
0
-10
M&Eq
-20
-30
2009
2010
2011
2012
2013
Total
2014
Source: INE
As a result, domestic demand contracted 0.6% last year, well below real GDP growth
of 1.9%. Last year domestic demand negative contribution to real GDP was
explained by private and public consumption, with 1.4%-pts and 0.5%-pts,
respectively, which was offset by a negative incidence of -1.5%-pts and -1.1%-pts
from investment and inventories, respectively. On the other hand, the positive
contribution of net exports (2.5%-pts) was explained by an increase of 0.7%oya in
exports coupled by a 7.0% plunge in imports.
34

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Figure 35: Real GDP and Domestic Demand

%oya
16
14
12
10
8
6
4
2
0
-2
2010
Source: INE
Figure 36: Real Exports and Imports

%oya
35
28
21
Demand
Imports
14
Exports
7
GDP
0
-7
2011
2012
2013
2014
-14
2010
2011
2012
2013
2014
Source: INE
GDP supply side composition. The services sector in Chile accounts for 56.0% of
GDP, followed by mining, which represents roughly 11.1%. Mining sector
represented 15% of GDP in 2011. The Industrial sector comes third at 11.3% of
GDP. On the other hand, agriculture represents only 2.7%, one of the lower figures in
the region, while taxes represent 8.2% one of the highest of the region.
35
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Table 16: Real GDP breakdown supply side% of GDP

Real GDP
Agriculture
Agriculture and forestry
Fishing
Mining
Copper
Other
IP
Manufacturing
Construction
Utilities
Services
Business
Personal
Commerce
Financial
Public
Housing
Tourism
Transportation
Media
GDP at factor prices
Value added tax
Import duties, net
100.0
3.1
2.7
0.3
12.2
11.0
1.2
20.7
10.4
6.9
3.3
55.3
12.8
10.4
9.4
5.9
4.0
4.7
1.4
4.5
2.2
90.9
8.6
0.6
Source: INE
Last years moderation across all sectors was evident. That said, the exportsdriven mining sector and services explained most of the slowdown last year,
expanding 1.3% and 2.5% in 2014, from 5.9% and 4.5% in 2013. Manufacturing and
construction posted -0.2% and 1.5% last year, moderating from 1.1% and 3.9% in
2013.
Figure 37: Real GDP supply components
% oya
15
IP
10
Mining
5
0
-5
Services
-10
-15
2010
Source: INE
36
2011
2012
2013
2014
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Inflation and Monetary Policy

The Monetary Authority. The Central Bank of Chile (BCCh) is independent and
has established a formal and credible inflation-targeting regime, as is evidenced by
the relatively high ratio of M2 to International Reserves and the inflationary
trajectory of the last 20 years. The highest authority of the Central Bank is the board,
composed of five members suggested by the President and ratified by the Senate. The
President also has the faculty to remove members of the board in the event of failing
to conduct monetary policy in accordance to the objectives. The current Chairman of
the board is Rodrigo Vergara, appointed in 2011, while the rest of the board is
composed by Enrique Marshal (Vice-President), Sebastian Claro, Joaquin Vial and
Pablo Garcia.
In late 2006, BCCh replaced the 2-4% target range with a formal central target of
3%, with an interval of tolerance of +/-1%. This target reflects the banks long-term
commitment to price stability; it is perceived as a perennial level. BCCh exercises a
symmetrical defense of its inflation target by setting the target in the middle of the
range. BCCh also redefined the relevant horizon for monetary policy to two years
from a one- to two-year window.
BCChs model emphasizes the impact of the output gap and unit labor costs on
future inflation. BCCh is also sensitive to, and monitors, inflation expectations
through the evolution of B/E and analyst polls. BCCh tracks different core CPI
metrics: IPCX (CPI ex-fresh fruits and vegetables and fuels), and IPCX-1 (IPCX exmeat regulated tariffs and financial services) and the BCCh preferred core CPI
(headline CPI ex-food and energy). In this context, the central bank believes core
inflation is the best price measure estimate of future inflation, and therefore tends to
disregard the impact of supply-side shocks affecting headline inflation unless the
severity and persistence of the shock threatens inflation expectations, and hence
potential second round effects, as occurred in 2008, for example.
The central banks nominal policy rate is known as Tasa de Poltica Monetaria
(TPM) and has been used since August 2001, when it replaced the real overnight
interest rate. That change responded to BCChs assessment that price stability had
been successfully achieved. Since then, BCCh has embarked on a policy of extending
the nominal peso curve while preserving indexation (to the CPI-based UF index) for
longer tenors.
Monetary policy meetings are held monthly, generally during the second week of the
month. The president and four directors account for the five votes that set the TPM.
Policy actions are accompanied by a press release, while detailed minutes of the last
meetings are published two weeks after the monetary policy meeting. Moreover, the
central bank publishes a Quarterly Monetary Policy Report in which it lays out its
outlook for monetary policy and depicts its macroeconomic projections for the next
two years.
The 2009 global crisis forced BCCh to innovate in terms of its monetary policy tools.
In July 2009, with the policy rate at 0.5%, it launched a facility (called FLAP) that
provides 91-day and 182-day financing at the prevailing policy rate, thus reinforcing
the low for long message on rates. When engaging in this type of extraordinary
monetary policy measure, BCCh has shown a bias to remain focused on influencing
base rates (rather than credit spreads), the term structure of rates in the shorter end
37
Diego Celedon
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08 April 2015
(up to 2 years), and rebalancing supply of sterilization paper to accommodate

Treasury issuance.
Inflation is a key issue in Chile given that many costs, including large and long-term
items such as mortgage payments, are indexed. The key inflation-linked metric in
Chile is the Unidad Fomento, or UF, the value of which is adjusted daily by the
Central Bank. It embeds the CPI inflation with a one-month lag. The mechanism is
straightforward: prior to the ninth day of each month, the previous months CPI is
released and then accrued on a pro rata basis in the UF index from the tenth day of
the reference month to the ninth day of the next month. It is published on a daily
basis by INE (the National Institute of Statistics) and can be found in Bloomberg
under the tickers CLUFUF for the daily and CHUF for the values up to the ninth day
of the following month. As of April 14, 2014, the UF stood at Ch$23,673.
Inflation has remained under control since the mid-90s. Although Chile experienced
hyperinflation amidst economic trouble related to a banking crisis in the early 1980s,
inflation over the last 15 years has been largely under control in the range of 2-5%.
This has been driven by an arguably hawkish Central Bank that has established an
inflation target of 3%.
Figure 38: Headline and core CPI inflation
% oya
40
30
20
10
0
-10
80
85
90
95
00
05
10
15
Source: INE
New CPI methodology. Starting in 2014 the National Statistic Institute (INE)
incorporated a new CPI methodology based on CPI weights embedded in the 20112012 Households Income survey. The new base year is now 2013 (previous 2009 =
100), and there was a reduction in the numbers of items, from 368 to 321. The
divisions with major reductions included transportation, clothing, and recreation,
while those increasing the most were education and healthcare. There was an
increase in the weight of non-tradable goods (to 46.1%, from 41.9%) and services
(from 43.7% to 46.1%) reflecting change in consumers purchases.
38
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08 April 2015
Table 17: Chile CPI Inflation Composition

Headline
Old
New
Chg.
100.0%
100.0%
Food and beverages
18.9%
19.1%
0.2%
Alcoholic beverages & tobacco
2.0%
3.3%
1.3%
Clothing
5.2%
4.5%
-0.7%
Housing, utilities & fuels
13.3%
13.8%
0.5%
Furniture & appliances
7.5%
7.0%
-0.5%
Healthcare
5.4%
6.4%
1.0%
Transportation
19.3%
14.4%
-4.9%
Telecom services
4.7%
5.0%
0.3%
Entertainment
7.5%
6.8%
-0.7%
Education
6.0%
8.1%
2.1%
Restaurants and hotels
4.4%
4.4%
0.0%
Other goods and services
5.8%
7.2%
1.4%
Source: BCCh and INE
FX pass-through is relatively high. Given that Chile imports nearly all of its fuel
and a large amount of agricultural products, the country is susceptible to large swings
in external prices and shocks in the exchange rate. In fact, given Chile is a small and
widely open economy we estimate that with FX pass-through into consumer prices at
13% is one of the highest in the region.
Table 18: Latin America inflation pass-through
Country
Brazil
Chile
Colombia
Mexico
Peru
Source: J.P.Morgan
FX change (avg
Dec'12/Dec'13)
-11.5%
-9.8%
-7.3%
-1.1%
-7.9%
Figure 39: Tradable CPI inflation and exchange rate

% oya both axis
Estimated impact of 1% FX
depreciation on headline
inflation (in bp)
6
13
4
5
10
8
Tradable CPI
30
Exchange rate
20
10
-10
-2
-20
2011
2012
2013
2014
2015
Source: INE
Inflation outlook. After running below the BCCh target during 2013, both headline
and core inflation ended 2014 at 4.5%, above target. The BCCh has lowered the
interest rate to 3.00% during 2014 in order to reanimate demand but has been
reluctant to continue to use this mechanism any further due to stubbornly high
inflation, definitely closing the door for interest rate reductions this year. Our
estimates for 2015 in terms of inflation is for it to converge close to the BCChs
target of 3% on the back of lesser FX pass-through. Plunging oil prices in 2H14
helped ease inflation and FX pass-through, as it peaked at above 5% in November.
39

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Figure 40: Headline and core CPI inflation

% oya
Figure 41: Headline inflation projections

%oya
6.0
Headline
5.0
6.0
Forecast
5.0
4.0
BCCh target
4.0
3.0
BCCh target
3.0
2.0
1.0
2.0
Core (ex-food & energy)
0.0
2011
2012
2013
2014
2015
Source: INE
1.0
Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15
Source: INE
Moderate impact on CPI from the fiscal reform. The tax reform approved in
Congress in 2014 imposed higher taxes to some CPI items, such as alcohol, sugared
beverages and cigarettes. The impact on inflation was likely a one-off shock, as
producers adjusted their prices, and given the stage of the business cycle, we
anticipate no second-round effects. With the implementation of the stamp tax
increase expected in 2016, we estimate an impact of around 21bp, mainly from
higher taxes on alcoholic and sugary beverages this year.
Table 19: Impact to CPI from new taxes
Beer
Wine
Pisco
Whisky
Rum
Vodka
Sugary
drinks
Tobacco
Total
Old tax
New tax
15.0%
15.0%
27.0%
27.0%
27.0%
27.0%
20.5%
24.0%
31.5%
31.5%
31.5%
31.5%
CPI weight
(%)
0.64%
0.69%
0.23%
0.06%
0.13%
0.13%
13.0%
18.0%
1.61%
45.4%
60.5%
1.51%
5.0%
16
33
Incidence (bp)
3
5
1
0
0
0
Source: J.P.Morgan
The monetary policy cycle. After holding rates at 5% throughout 2012 and most
part of 2013, the BCCh started an easing cycle in October 2013 on the back of a
sharper than expected moderation in growth and benign inflation. In this context, the
central bank has delivered a cumulative easing of 200bp over the last year leaving
rates at 3% since October 2014. Inflation dynamics remain the center of attention of
the board, while concerns on the soft dynamism of the economy appear to have
alleviated, following better macro data in late 2014.
40

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Figure 42: Chile Monetary Policy Rate

%
10
8
6
4
2
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: J.P. Morgan
The BCCh outlook. This months Central Bank (BCCh) Monetary Policy Report
conveyed a hawkish tone after holding rates with a neutral bias over the last six
months. The board left unaltered its real GDP growth forecast for this year (2.5 3.5%) but acknowledged upside surprises in inflation in the first two months of the
year warrant upward revisions to CPI forecasts. In this context, headline inflation
projections were adjusted to 3.6% for year-end 2015, with core prices up to 3.4%,
both from 2.8% previously. In contrast, growth concerns were left on the backburner,
as the board highlighted that while risks remain to the downside, these have
moderated recently.
Consequently, for the first time the board introduced the possibility of hiking rates
before year-end by stating that under their base case scenario (working assumption)
the policy rate will follow a path somewhat higher than that assumed in the
surveys. That said, we now expect BCCh to hike 25bp in 4Q15 (instead of 1Q16)
and to softly normalize monetary policy with three more 25bp rate hikes in 1H16
leaving rates at 4.0% through year-end 2016.
Table 20: Chile Macroeconomic framework
BCCh
J.P.Morgan
2015
2015
2016
New
2.5 3.5
2.5
Old
2.5 3.5
3.0
2.2
3.5
1.2
1.9
1.1
3.0
Consumption
Headline inflation
(%Dec/Dec)
Core inflation (%Dec/Dec)1
2.5
2.8
2.5
2.5
3.6
2.8
3.3
3.0
3.4
2.8
3.2
3.0
Current account (% GDP)
-0.3
-1.1
-0.6
-1.1
Copper price ($US/lb)
275
295
273
286
GDP (%oya)
Domestic demand
Investment
Source: BCCh and J.P.Morgan. 1. Headline ex-food and energy.
2.7
Figure 43: Monetary Policy Rate and exchange rate

%p.a.
USD/CLP spot
%p.a., inverted scale
660
3.5
610
2.5
Reference rate
3.0
USD/CLP
3.5
560
4.0
4.5
510
460
Jan 13
5.0
May 13
Sep 13
Jan 14
May 14
Sep 14
Jan 15
5.5
Source: INE
41

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Inflation concerns are under the spotlight. The board clearly stated that the main
risk regarding domestic conditions relies on inflation given the sustained depreciation
of the peso and its cumulative effect on local costs. This becomes more relevant
given nominal wages remain stubbornly high amid relatively tight labor markets
(chart below), while in some sectors the impact of lower fuel prices has been limited.
In other words, the board is showing concern on potential second round effects from
FX pass-through to inflation, given firms margins have been squeezed and the
economy looks poised to gradually recovery ahead.
Downplaying downside risks to growth. On the activity front, growth expectations
were left unchanged (2.5 - 3.5%) but the BCCh remained cautious given
consumption and investment performance remains relatively weak. However, the
board highlighted the positive impetus on activity from the fiscal stimulus put in
place, the current accommodative monetary stance and a weaker peso. Interestingly,
despite stubbornly high core inflation amid resilient labor market conditions, the
board avoided assessing on potential growth, which was trimmed by 75bp last year
(4.0 - 4.5%). Ultimately, we continue to believe the bias for potential growth remains
to the downside, which in turn suggests the need to tightened monetary policy ahead.
The Fed tightening will matter. Among the main external risks monitored by the
board (commodity prices, geopolitical conflicts in Europe and Middle East as well as
Chinas economic slowdown) the expected normalization in monetary policy by the
US Fed is the most relevant. In this context, the timing and pace of monetary
tightening in the US will likely weigh on the boards future decisions, particularly if
this transpires into excessive FX weakness.
Thus, FX dynamics will be closely monitored. So far, the central bank has
welcomed a weaker currency as a healthy consequence of monetary accommodation
amid the experienced economic slowdown. In this context, the exchange rate has
been the main buffer to allow an efficient adjustment on the economic cycle by
fostering a quicker recovery in the tradable sector, which in part is underpinning the
ongoing economic recovery. That said, the board has characterized the real exchange
rate (RER) as inline with fundamentals, emphasizing the frontloaded adjustment
observed last year (chart below). However, given that the economy has turned the
corner, the current account deficit has shrunk and inflation remains sticky, further
peso weakness could be perceived as undesirably misaligned with fundamentals,
particularly if growth accelerates amid tight labor conditions, and thus may prompt
the central bank to gradually tighten monetary policy.
Figure 44: Wage-related employment, wages and real labor income
%oya, 3mma, both axes
%oya, 3mma, both axis
Real income
10
7.5
Wages
7.1
Employment
130
120
6.3
100
5.9
90
5.5
80
2012
2013
2014
USDCLP
2000-14 average
110
0
2011
Source: INE
42
6.7
Figure 45: Chile: Real exchange rate

Index Jan 2000=100
Multilateral
2000
Source: INE
2002
2004
2006
2008
2010
2012
2014
Diego Celedon
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08 April 2015
Currency
Chiles currency, the peso (CLP), has been in circulation since 1975. Since its first
circulation, the CLP was in seemingly constant devaluation, moving from
1CLP/USD to as weak as CLP700/USD in the early part of the last decade. In the
aftermath of the 2008-09 crisis the commodity/economic strength allowed the CLP to
oscillate in a range between 450- 550. At times when the currency strengthened
beyond that range the Central Bank implemented intervention measures, buying
dollars on a daily basis (including a purchasing plan in 2008 and again in 2010-11).
However, the last time BCCh intervened in the FX market was back in 2011 and
given that the BCCh has welcomed a weaker currency to face the current economic
slowdown, we anticipate a hands off approach going forward.
In a gradual process of deregulation, constraints to capital mobility have been lifted,
and the Chilean peso is freely convertible (since 1999) although it remains
internationally nondeliverable. From June 1991 through September 1998
unremunerated reserve requirements (encaje) were applied on selective inflows. The
encaje still exists, but it is currently set at zero. This bias has been reinforced by the
Treasurys introduction of a fiscal stabilization fund in 2006, effectively keeping
windfall copper revenues offshore during the boom years.
FX market
The Chilean peso market is among the most liquid in Latin America, with a full
market average daily turnover of US$3.1-3.3 billion (US$2.3 billion in the spot
market plus nearly US$1 billion that is traded in the derivative market, mostly in the
interbank market). However, there is no spot market for the Chilean peso outside its
borders, and Chile is not part of the Continued Linked Settlement, so there is further
risk (settlement risk, other than volatility) to exchange operations.
Historical intervention policy: The BCCh retains the option of intervention in the
FX market, in exceptional situations. When it has intervened, the approach is
normally to follow a preannounced program over discretionary action. However,
since January 2011 the BCCh has not intervened in the FX market:
January 2011: Purchases of USD spot

Stated goal: Increase international reserves
Size: US$12 billion (US$50 million per day)
April/September 2008: Purchases of USD spot

Stated goal: Increase international reserves
Size: US$5.75 billion (initial target US$8 billion)
October 2002: Sales of USD spot and BCDs (dollar-indexed bonds; 2-year
and 5- year maturities)
Stated goal: Tame the speed of CLP depreciation and volatility
43
Diego Celedon
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08 April 2015
Size: US$2 billion each
August 2001: Sales of USD spot and PRDs (dollar-indexed bonds; 2-year
and 4-year maturities)
Stated goal: Tame the speed of CLP depreciation and volatility
Size: US$2 billion each
Given Chiles status as the #1 producer of copper (50% of total exports), the CLP
shows a high degree of correlation with copper prices, particularly after the 2008-09
crisis.
Figure 46: Nominal exchange rate and copper prices
USD/CLP spot
US$/lb
400
500
450
Peso spot
500
400
550
300
600
650
Copper price
700
200
100
750
800
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: J.P.Morgan
The spot exchange rate has deteriorated, and remains the first line of defense.
The Chilean peso has seen a strong depreciation beginning in late 2012, and despite
overshooting following BCCh rate cuts, it has gone on to depreciate further than its
20 year average (reference used by the BCCh). We believe there will be no more
significant depreciation of the peso going forward in 2015 as it has reached our target
level. However, volatility of the peso will remain high as copper prices have a large
impact on FX and the expected (2H15) rate hikes in USA still are a concern.
Real exchange rate has depreciated but current account deficit has shrunk. We
have seen a sharp depreciation of the real exchange rate beginning in 2012, reflecting
the weakening domestic demand. However, consequently the current account deficit
has narrowed massively, which is a sign that internal demand has weakened in order
to accommodate the change in the terms of trade and that the country still has solid
access to international funding as supported by FDI levels.
44
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Figure 47: Chinn-Ito index for

different economies
Figure 48: Real brad effective exchange rate

Index, 2000=100
2012
0.8
160
Appreciation
140
0.6
120
0.4
0.2
20y average
100
80
60
1
80
2008
0.8
85
90
95
00
05
10
15
Source: J.P.Morgan
0.6
0.4
External Accounts
0.2
Chile has trade agreements with nearly all major trading blocs and countries,
including the US, the EU, China, Japan and India. With total merchandise exports
and imports representing 63% and 61% of nominal GDP, Chile and Mexico are the
most open economy in the region. As a result, Chile has typically had significant
trade diversity. Regarding financial openness, Chile has made significant progress in
opening its financial account, as reflected by the Chinn-Ito index of financial
openness evolution in the past years.
Source: Journal of Development Economics.
Figure 49: Chinn-Ito index evolution for Chile (0 is closed capital account)
1
0,8
0,6
0,4
0,2
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Journal of Development Economics and J.P. Morgan
45
Diego Celedon
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08 April 2015
Table 21: Chiles Trade Agreements

Country
Type
Date
Country
Type
Date
Venezuela
Bolivia
Mercosur
ECAi
ECA
ECA
1993
1993
1996
India
Japan
Panama
PTAiii
AA
FTA
2007
2007
2008
Canada
Mexico
Costa Rica
El Salvador
FTAii
FTA
FTA
FTA
1997
1999
2002
2002
Cuba
Honduras
Peru
Australia
AA
FTA
FTA
FTA
2008
2008
2009
2009
EU
USA
South Korea
Aaii
FTA
FTA
2003
2004
2004
Colombia
Ecuador
Guatemala
FTA
ECA
FTA
2009
2010
2010
EFTA
China
P-4
FTA
FTA
AA
2004
2006
2006
Turkey
Malaysia
Nicaragua
FTA
FTA
FTA
2011
2012
2013
Source: Ministry of Foreign Affairs.

i. Economic Complementary Agreement
ii. Free Trade Agreements
iii. Preferential Trade Agreement
Exports breakdown. As a result of the booming demand for commodities over the
last decade China has become the most relevant trading partner accounting for nearly
25% of total exports (mainly copper). Moreover, exports to the rest of Asian
countries represent another 25% of total exports. On the other hand, over the last year,
the share of exports to North America and Europe has been about 16% and 17%,
respectively. Lastly, exports to the rest of the region have remained relatively stable
around 15% although they spiked this year due to the relative strength of the peso
versus the rest of LatAm currencies.
Figure 50: Merchandise exports by country
% of total
North America
Europe
30
Asia ex-China
South America
China
Other
20
10
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: BCCh
However, from a supply perspective exports are highly concentrated in the mining
sector, particularly copper (48%). Manufacturing exports account for 35% while
agricultural products represent roughly 7%.
46
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08 April 2015
Figure 51: Merchandise exports by sector

% of total
Copper
36
51
Other mining
Agricultural
Manufacturing
8
5
Source: BCCh
Imports breakdown. North America accounts for almost 20% of total imports, as
Chile imports most of its energy needs from the US. On the other hand, consistent
with the above-mentioned dynamics, the increasing share of China in total imports
reached 21% in 2014, from 9% back in 2003. In contrast, the share of imports from
Latin America has fallen to 21%, from 36%.
Figure 52: Merchandise imports by country
% of total
North America
Europe
40
Asia ex-China
South America
China
Other
30
20
10
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: BCCh
Chile's imports are evenly distributed, with 36% related to intermediate goods, 28%
to consumer goods, 17% associated with capital goods and 19% energy related.
47

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Figure 53: Merchandise imports by sector

% of total
15
Consumer goods
Intermediate goods
27
14
Capital goods
Energy
22
Source: BCCh
The trade balance. The 12-month trade balance reaching $10.5 billion, up from $8.6
billion in December. The widening of the trade surplus was underpinned by plunging
capital goods imports amid virtually flat exports. In sum, we anticipate the trade
surplus to stabilize around current levels throughout the year with exports
outperforming imports as the economy looks poised to gradually recover
underpinned by the externally driven sectors. This is consistent with our view for a
modest impact from lower commodity prices into external accounts as lower oil and
copper prices roughly offset each other, while non-commodity exports are to
benefiting from a weaker currency.
Figure 54: Merchandise trade balance
US$ bn, 12-month sum
Table 22: Chiles Trade Balance

US$ million
28
2013
2012
7,767
2,117
2,508
-2,494
-2,108
75,675
76,684
77,965
41,041
43,937
46,302
Copper
37,872
40,158
41,987
Other
3,169
3,780
4,315
Agricultural
5,737
5,749
5,056
Manufacturing
Trade balance (FOB-FOB)
23
Trade balance (FOB-CIF)

Exports (FOB)
18
Mining
13
8
3
-2
2014
04
Source: BCCh
05
06
07
08
09
10
11
12
13
14
15
28,897
26,997
26,607
Imports (FOB)
67,908
74,568
75,458
Imports (CIF)
72,160
79,178
80,073
19,999
21,567
19,812
Durable
7,561
9,034
8,087
Semi-durable
6,022
5,813
5,465
Non-durable
6,415
6,720
6,260
Intermediate goods
39,931
42,366
43,706
12,230
15,246
16,555
Consumer goods
Capital goods
Source: BCCh
Given the maturing of the investment cycle mainly associated with the mining sector
in mid 2014, amid a gradual moderation in domestic consumption, we anticipate
imports to remain relatively subdued this year. On the other hand, a weaker CLP and
48
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[email protected]

08 April 2015
a resilient mining sector (as maturing investment translates into higher output) should
support exports throughout the year.
Figure 55: Merchandise exports and imports
%oya, 3mma
40
30
20
Exports
10
0
-10
Imports
-20
2011
2012
2013
2014
2015
Source: BCCh
The Balance of Payments. After experiencing current account surpluses on the back
of V-shape recovery in terms of trade after the 2008-09 crises, stabilization in terms
of trade over the last years led to a gradual widening of the current account deficit.
Chiles current account deficit reached $9.5 billion (3.4% of GDP) in 2013, from
$9.1 billion (3.4% of GDP) in 2012. However, the severe economic slowdown and
exchange rate adjustment prompted a quick correction in external accounts during
2014, narrowing the CAD to 1.2% of GDP. The current account balance was
explained by a trade surplus of $4.0 billion, from a $1.6 billion deficit in 2013, while
the income deficit narrowed to $8.7 billion from $10.7 billion, respectively. Net
transfers were $1.9 billion last year, from $2.2 billion in 2013.
Figure 56: Terms of Trade and Current Account Balance
Average 2003-12=100
140
130
120
110
100
90
80
70
60
50
% of GDP
Current account
Terms of trade
8
6
4
2
0
-2
-4
03
04
06
07
09
10
12
13
-6
Source: BCCh
The recent widening of the current account deficit has been mainly explained by the
reduction in the merchandise trade balance that more than offsets the moderation in
the income deficit, as the services balance and net transfers have remained relatively
stable over the last decades.
49
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Figure 57: Current Account composition

% of GDP
20
Net transfers
Income Balance
15
Services Balance
Trade balance
10
5
0
-5
-10
-15
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: BCCh
How do lower commodity prices transpire on external account?

While soft domestic demand alongside a weaker CLP should continue to support a
healthy trade surplus going forward, the recent drop in commodity prices is also
likely to shape the trade balance performance going forward. Note that roughly 55%
of total exports are mining exports, from which the bulk is copper (51%). While this
suggests external accounts are vulnerable to lower commodity prices, in our view,
the impact in the current account is likely to be modest due to the following reasons:
Higher output to partially offset lower prices. Copper production is
expected to increase this year, which may partially offset lower prices ahead.
Note we have seen exports in volume terms recovering over the last six months
already.
FX stabilization mechanism. Given the high correlation (~82%) between
copper prices and CLP, lower copper prices are partially offset by currency
depreciation, which in turn, is likely to fuel non-mining related exports.
Is not only about copper. Chile is a net energy importer with energy
imports accounting for 22% of total imports (4.5% of GDP). That said, Chile is
the county within the region to benefit the most from lower crude oil prices.
Given the sharper correction observed in oil prices relative to copper prices, we
expect lower energy costs will also help to keep narrowing current account
deficit ahead.
Income balance is also to correct. Lower copper prices will likely translate
into lower profit remittances (outflows)mainly associated with the mining
sectorcorrecting the income balance deficit in the current account.
50
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Figure 58: Copper and crude oil prices

Index, Jan 2009=100
290
250
210
170
Copper
130
Oil (Brent)
90
2009
2010
2011
2012
2013
2014
2015
Source: BCCh and J.P.Morgan
Figure 59: Copper prices and profit remittances

US$, bn
25
US$/lb., 4Q ma
500
Profit remittances
20
400
15
300
Copper price
10
200
100
0
03
04
05
06
07
08
09
10
11
12
13
14
Consistent with the effective adjustment in relative prices from CLP depreciation, the
narrowing in CAD was coupled with a reduction in the capital account surplus. In
fact, the capital account surplus shrank to US$ 2.7 billion, from US$11.3 billion in
2013. While FDI and portfolio flows over the last years have remained robust, last
years correction was mainly driven by other investment, which in turn was mainly
explained by both the banking and non-banking private sectors increasing assets and
reducing liabilities in foreign currency. That said, the current account deficit remains
healthy financed amid stabilization in international reserves around US$40 billion
last year.
51
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(56-22) 425-5245
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08 April 2015
Figure 60: Capital Account balance

% of GDP
6
4
2
0
-2
-4
-6
-8
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Figure 61: FDI and portfolio flows

% of GDP
8
6
Direct investment
4
2
0
-2
-4
Other investments
-6
-8
Portfolio flows
-10
-12
03
05
52
07
09
11
13
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08 April 2015
Figure 62: International reserves

US$ bn
45
40
35
30
25
20
15
10
5
0
80
85
90
95
00
05
10
15
Source: IMF
Last years reduction in the capital surplus was explained by hefty net FDI inflows at
$10 billion (from $9.0 billion in 2013) and modest net portfolio inflows of $2.1
billion (from $4.3 billion in 2013), which were offset by net outflows of US$ 8.3
billion from other investments (from -$1.6 billion in 2013). International reserves fell
by $1.0 billion last year (table below).
Table 23: Chiles Balance of Payments
US$ billion
1Q14
2Q14
3Q14
4Q14
2013
2014
Current account
-0.5
-0.3
-1.6
-0.7
-10.1
-3.0
Trade balance
1.4
1.9
0.0
0.7
-1.6
4.0
Merchandise
2.1
2.9
1.1
1.7
1.8
7.8
Exports
19.0
19.6
18.1
18.9
76.5
75.7
Imports
16.9
16.8
17.0
17.2
74.7
67.9
-0.7
-1.0
-1.0
-1.1
-3.4
-3.8
Income balance
-2.3
-2.7
-2.1
-1.7
-10.7
-8.9
Net transfers
0.5
0.6
0.5
0.3
2.2
1.9
Financial account
-0.7
0.0
2.4
1.1
11.3
2.7
0.9
0.6
2.5
6.0
9.0
10.0
Portfolio investment
0.3
-0.9
1.8
0.8
4.2
2.1
Other investments
-2.0
0.1
-1.8
-4.6
-1.6
-8.3
Chg. in reserves
0.1
0.1
-0.2
-1.1
-0.3
-1.1
Errors and omissions
-1.1
-0.3
0.8
0.4
1.1
-0.3
Services
FDI
Source: BCCh
FDI breakdown. During the last decades commodity boom cycle roughly 50% of
gross fixed investment was associated with the mining sector. However, this has
recently moderated to 31% over the last couple of years, as the maturing of the
investment cycle materized. Other relevant sectors are financial services with 14%,
other services with 8.2% and manufacturing with 5.7%. From an origin perspective,
after a couple of Caribbean countrieswith benign fiscal schemesaccounting for
26% of total FDI, Spain (15%), US (11%), Canada (8%) and Japan (7%) are the
main investors in the country.
53

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Figure 63: FDI breakdown by sector

% of total
Figure 64: FDI breakdown by country

% of total
10.9
31.3
40.8
3.1
US
Canada
16.7
Luxembourg
Mining
5.1
Manufactuirng
Spain
2.2
Financial services
Netherlands
10.4
33.1
Japan
Other services
14.0
8.2
Latin America
Other
Rest of Europe
3.8
Other
14.8
5.7
Source: BCCh
Source: BCCh
Fiscal Policy
Since 2001, fiscal policy in Chile has been defined within a structural balance
framework. The idea of this balance is to reflect the medium-term fiscal outlook,
instead of focusing on the current fiscal position (effective balance). This implies
estimation of the fiscal income isolating the economic cycle and thus spending only
the amount that would be compatible with this level of income. In simple terms, it
means saving during economic highs and spending those savings in situations when
fiscal income drops.
The estimation of the structural balance isolates the impact of three variables: 1.
the level of economic activity, 2. the price of copper; and 3. the price of molybdenum.
Consequently, the structural balance reflects the financial results that the country
would have shown in a particular year if GDP had been at its trend level and copper
and molybdenum prices had been at their long-term levels. Since the adoption of this
methodology, the government has set itself the target of maintaining an annual
structural surplus equivalent to 1% of GDP.
Figure 65: Structural and effective fiscal balance
% of GDP
2.0
10.0
Efective
1.0
8.0
6.0
0.0
4.0
-1.0
2.0
-2.0
Structural balance
-3.0
-4.0
0.0
-2.0
-4.0
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
-6.0
Source: BCCh
In our view, the implementation of this methodology has had important benefits for
the country. Among them we highlight that it has allowed the implementation of a
54
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08 April 2015
counter-cyclical fiscal policy, attenuating the economys swings and reducing

uncertainty as to its medium-term performance. It has also increased public savings
(Chiles sovereign funds have reached US$14.7 billion, or 6% of GDP in 2014),
reduced interest rate volatility and enhanced the Chilean governments credibility as
an international debt issuer, reducing the sovereign risk and improving access to
foreign financing.
With nearly 21% of GDP in fiscal revenues, the size of the state in Chile is relatively
small. The government continues to run primary fiscal surpluses and moderate
headline fiscal deficits in accordance with the aforementioned fiscal rule.
Table 24: Central Government Fiscal Balance

% of GDP
Revenues
Tax collection
Copper
Property income
Operation proceeds
Other
2008
24.2
18.9
3.4
0.8
0.6
0.5
2009
19.0
15.3
1.7
0.7
0.6
0.8
2010
21.5
17.2
2.7
0.4
0.5
0.7
2011
22.7
18.7
2.3
0.4
0.5
0.7
2012
22.0
18.8
1.5
0.5
0.5
0.7
2013
20.7
17.9
1.0
0.5
0.5
0.8
2014
20.7
16.6
0.9
0.5
0.5
0.7
Expenditures
Current spending
Interests
Subsidies
Other
16.7
5.8
0.5
6.1
0.0
19.0
6.7
0.5
7.0
0.0
18.1
6.3
0.5
6.7
0.0
17.3
6.2
0.6
6.3
0.0
17.5
6.2
0.6
6.6
0.0
17.7
6.2
0.6
6.9
0.0
18.5
6.6
0.6
7.3
0.0
Primary Balance
Headline Balance
7.5
3.9
0.0
-4.4
3.5
-0.5
5.3
1.3
4.5
0.6
3.0
-0.6
2.2
-1.6
Source: BCCh
The 2015 fiscal budget. The annual budget approved for this year implies a deficit
of 1.9% of GDP, from 0.6% in 2013. The annual budget revenues of CLP33.3 trillion
imply a 5.0% increase compared to 2014s budget law, while total expenditures are
expected to reach CLP36.4 trillion, increasing 9.8%. The budget includes an increase
of 27.5%y/y in public investments (reaching CLP6.979 bn), which will be the highest
in history of Chile. In our view, this budget should continue to be a support for
domestic demand and supply as it has a strong focus on social policies and
expenditure. The government aims to create 30.000 jobs directly related to public
investment.
However, some assumptions under which the budget was planned are likely to fall
short expectations, which makes us believe the fiscal deficit could be larger relatively
to the original programmed (-1.9%). For instance 2015 budget considers real GDP
growth of 3.6%, a price for copper of US$3.07 per pound and a price for
molybdenum of US$16.1 per pound. Given we expect real GDP growth at 2.7% and
copper prices have average US$2.7 per pound year-to-date, the likelihood of
adjustments to the budget down the road has increased. Against this backdrop, we
anticipate an effective deficit of 2.3% of GDP this year.
55
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(56-22) 425-5245
[email protected]

08 April 2015
A quick guideline to last years tax reform. The approved tax reform last year has
the objective to increase permanent income in order to match the permanent
increases Bachelet's government has proposed. It is estimated that the increase in
revenues will be equivalent to 3% of GDP by 2018 (an increase of 0.9% is forecast
for 2015), decomposed as 2.5% coming from structural changes and 0.5% from
reduction in tax evasion and elusion. In a nutshell, Bachelets fiscal reform seeks to
increase the size of the public sector in 3% of GDP (2.5%-pts from higher taxes
revenues and 0.5%-pts from improving efficiencies in tax collection), Spending will
be allocated as follows; 2% would fund education and 1% would be used to balance
the structural budget. Overall, the reform has a redistributive bias and looks to
encourage investment and savings. The fiscal proposal consists of the following
measures:
A gradual increase in the corporate tax to 25% in 2017, from 20%

currently.
A 5% drop in the maximum personal income tax (from 40% to 35%),
where government authorities will not be included.
The elimination of the previous profit basis tax scheme (Fondo de
Utilidades Tributaria) in substitution of an accrued basis tax collection
scheme, starting in 2018. Hence, companies will pay taxes on all profits,
regardless of whether they are retained or distributed.
The Elimination of DL 600 (fiscal incentives to attract foreign
investment) starting in 2016.
An increase in stamp tax from 0.4% to 0.8%.
Higher taxes on alcoholic beverages and sugary drinks.
Environmental taxes will be implemented to discourage dirty
technologies (imports of fossil fuels and gas-guzzling cars).
Small and medium size companies can apply instant depreciation.
Medium and large companies can use this mechanism in the first year
after the implementation.
Large companies will assume the payment of VAT to its suppliers in
the case of delay.
New mechanisms will be established to prevent avoidance and tax
evasion.
Public Debt
In terms of public-sector debt, after holding a net credit position for several years,
strictly speaking Chile now holds a net debtor position while continuing to stand out
in Latin America with one of the lowest net indebtedness level. As of December
2014, the countrys public debt reached US$37.7 billion, equivalent to 14.9% of
GDP, the lowest figure among Latin American countries. In addition, Chile showed
public liquid assets for US$28.4 billion (table below), or 11.3% of GDP.
Consequently, Chile currently has a moderate net debtor position equivalent to 3.7%
of GDP.
56
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Table 25: Chiles sovereign net financial position

% of GDP
2013
2014
US$ bn
Total assets
Sovegeign welath funds
US$ bn
% of GDP
30.1
11.5
28.4
11.3
22.8
8.7
24.0
9.5
Pension funds' savings
7.3
2.8
8.3
3.3
Stabilization funds
15.4
5.9
15.6
6.2
Education fund
4.0
1.5
3.8
1.5
Treasury
3.4
1.3
0.7
0.3
Total debt
33.5
12.8
37.7
14.9
Net financial position
-3.4
-1.3
-9.2
-3.7
Source: DIPRES.* Considers only the most liquid public assets. Hence the assets definition differs from that use to compute net debt.
In the past 20 years Chile has shown a consistent trend of declining public debt.
While in 1992 public debt represented 31.4% of GDP, the strong growth seen in the
decade of the 90s implied that by 2000 public debt was only 13.6% of GDP. If we
add the conservative fiscal policies established since 2001, and consider a broader
definition of public assets (IMFs definition) Chiles assets have surged from 8.8% of
GDP in 2001 to 19.6% by 2014. Hence, we can see that broadly speaking Chile has
been a net creditor since 2006.
Figure 66: Gross and Net Public Debt
% of GDP
60%
50%
40%
30%
20%
Gross debt
Net debt
10%
0%
-10%
-20%
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Source: Ministry of Finance. Note: Net debt is computed with IMFs assets definition, which considers not only liquid assets, but other
assets as current Deposits in public accounts.
The bottom of pubic debt level was reached back in 2008 at 4.1% of GDP and it has
gradually increased since then to around 14% currently. However, debt composition
has healthily relied on domestic funding, while reducing external financing exposure.
Note that while external and domestic debt represented 6.5% and 5.2% of GDP,
respectively, a decade ago, as of 2014 external liabilities represent 2.5% and
domestic debt 11.7%. In other words, the share of external debt in total debt fell from
42% to 17%, respectively.
57
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08 April 2015
Figure 67: Domestic and external debt

% of GDP
16%
External debt
14%
Domestic debt
12%
10%
8%
6%
4%
2%
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: BCCh
Overall, the solid financial position of Chile has contributed to low levels of country
risk, strong access to capital markets and the development of the domestic financial
system.
Sovereign Credit Ratings

Chile was the first country in Latin America to get an investment grade rating, in
1992, followed by Mexico in 2000 and Brazil in May 2008. Since then it has
consistently showed the best rating in the region, with a solid position even during
the financial crisis in 2009.
In February 2011, Fitch Ratings upgraded Chiles investment grade from A to A+, in
line with Moodys ratings, while S&P nudged the sovereign down to AA- in 2012,
from A+. Chile has maintained this rating as of April 2015. The reasons that have
allowed Chile to continue to be ranked in the A space among the three main rating
agencies have been prudent macroeconomic management, a credible monetary
authority with free floating exchange rate, healthy public finance and economic
model based on free prices and competitive markets. According to the main risk
agencies, one of the major reasons that prevents Chile from improving its current
ratings is its dependency on copper prices. With all three main rating agencies
holding a stable outlook, we dont expect changes to Chiles sovereign rating any
time soon. It is currently the only county in LatAm to be ranked in the A space by
Fitch, Followed by Peru and Mexico, with BBB+ both.
Capital Markets
Stock Market
The Santiago Stock Exchange (SSE) is the third-largest market in Latin
America, after Brazil and Mexico. According to the World Federation of
Exchanges, the SSE market capitalization by April 2014 reached one fourth of the
size of BM&F Bovespa and 50% of the Mexican Exchange. This is also equivalent to
12.1% of the Latin American stock exchanges market cap.
58

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Figure 68: Latin American Stock Exchanges Weight by Market Cap (Apr 2014)
Colombia SE
10%
Lima SE
4%
Santiago SE
12%
BM&F Bovespa
50%
Mexican
Exchange
24%
Source: J.P. Morgan and Bolsa de Santiago.
Table 26: MSCI Chile exposure by

Sector
Weight %
Index Weights (% )
Financials
Materials
Consumer Staples
Energy
Telecommunication Services
INDUSTRIALS
Utilities
Consumer Discretionary
Information Technology
Health Care
Source: MSCI, J.P. Morgan
Chile
17.3%
11.8%
12.2%
10.0%
2.5%
8.2%
27.3%
10.8%
0.0%
0.0%
The SSE market cap reached US$231.4 billion by March 2015. After the
elimination of the capital gain tax in 2001, the market cap of the SSE increased
significantly. While in 2002 it reached US$49.8 billion, by the end of 2010 it had
multiplied almost 7 times, reaching US$341.8 billion. It is also worth mentioning
that while the SSE was strongly affected during the subprime crisis, it was followed
by two extraordinary years in terms of market performance (market cap increased
75% and 48% in 2009 and 2010, respectively), leading to a record in terms of market
cap by the end 2010. Nonetheless, since then the profitability of Chilean companies
has been affected significantly, with ROE's declining from a peak of 14% to only 8%
last year, leading to a decline of the IPSA of more than 35% in the last two years.
The Chilean stock markets main index is the IPSA (Spanish acronym for Indice
de Precio Selectivo de Acciones). It was created by the Santiago Stock Exchange in
1977 and is composed of the 40 most liquid stocks of the SSE. The index is
recomposed annually in December of each year, and the weight of each stock is
rebalanced every day, based on the free-float-adjusted market cap of each company.
In the last 12 months, the IPSA has traded an average of US$90 million per day,
with 27 stocks trading more than US$1 million per day. During the last 10 years the
DATV of the IPSA has increased significantly, coming up from less than US$70
million in 2001 to US$150 million in 2013-14 and currently in US$90 million.
Likewise, there are now 9 firms trading more than US$5 million per day and 27
trading more than US$1 million. In terms of market cap, only 14 companies in the
IPSA show a size above US$4 billion, while there are only 7 stocks in the index with
a market cap of less than US$1 billion.
In terms of sector composition, we highlight that despite its relevance to Chiles
economy, there is no representation of copper mining in the stock market. This
is mainly due to two facts: on one side, the existence of CODELCO, the state owned
copper mining company (which in our view is very unlikely to be listed in the
short/medium term), and on the other side the presence of relevant international
players (e.g., BHP Billiton, Anglo American, etc.), which are not listed locally.
However, despite the absence of copper companies in MSCI Chile, the index
59
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(56-22) 425-5245
[email protected]

08 April 2015
performance has a strong correlation with copper price, mainly due to the relevance
of copper to the overall economy in Chile.
Figure 69: MSCI Chile and Copper Price correlation
US$ bn and US$ per mt
3500
11000
10000
3000
9000
2500
8000
7000
2000
6000
1500
5000
4000
1000
500
Mar-04
3000
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
MSCI Chile (LHS)
Mar-10
Mar-11
Mar-12
Mar-13
2000
Mar-14
Copper (US$/MT)
Source Bloomberg, DataStream, and J.P. Morgan.
The sectors with the highest weight in MSCI Chile are Utilities, with a 27.3%
weight, followed by Financials, which accounts for 17.3% of the index. Among the
sectors with less exposure is Telecom, with only a 2.5% weight, and Healthcare and
IT, which are not represented in the index.
The Chile MSCI index is composed of 21 companies, free float market
capitalization weighted. Despite a modest 8.3% weighting in the MSCI LatAm
index, Chile is the third-largest country in terms of representation, behind Brazil and
Mexico, which account for more than 84% of the index.
Figure 70: IPSA sector composition
percent of market cap
16%
22%
Banks
Commodities
Construction
13%
11%
Consumer
Industrials
Retail
9%
15%
Utilities
14%
Source: J.P. Morgan and Santiago stock exchange
Market composition Ownership structure

Chile is characterized by a high presence of conglomerates. These conglomerates
are sometimes very complex structures that control and manage firms across diverse
industries, alongside being highly vertically integrated. Most owners of these
conglomerates are Chilean families that surged in the past century. Many
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08 April 2015
conglomerates operate important financial institutions inside their operations, such as

Banco de Chile, Corpbanca, BCI, and Penta, and as such there is high contagion and
reputational risk.
Due to the existence of group banks, the regulator has set limits to intragroup
exposure, by, for example, limiting direct credits. However, there is still room for
regulatory arbitrage, as intragroup loans are not at all uncommon via specialized
investment vehicles (FIPs). In this context, contagion is possible and recently some
cases have occurred, such as Corpbancas involvement in direct loans to sister
distressed company SMU. This cost Corpbanca a steep rise in its bonds yields and
funding cost. The regulator currently does not have access to all information
regarding conglomerates, and a bill has been dispatched to alleviate this issue.
Ownership structure is sometimes complex. Pyramid organizations in Chile are
fairly common, and are an effective way of exercising control over firms as they
require less capital and result in high leverage. Some of the most famous pyramid
schemes in Chile are SQM and Vapores (now defunct). In these ownership structures
all firms above the controlled firm are publicly listed and their main assets are shares
of the controlled, these firms are usually highly leveraged. There are some limitations
to these schemes, as pyramid organizations cannot be co-owners of firms pertaining
to the same group (no cross holdings). A typical holding would be composed of the
parent company owning several firms, and each of these firms would in turn own
different companies, but it is illegal for companies to be shareholders of their owners.
Recently, the trend has been for holding companies to diversify, given that many
conglomerates are already sufficiently vertically integrated so to capture economies
of scope and exposure to different markets. Exceptions to this have been retailers,
which have not diversified across industries but have rather looked for exposure to
different countries.
Figure 71: Luksic group ownership structure
Source Quienco financial reports and J.P. Morgan.
Luksic group operates companies in the following industries: Finance & Banking
(Banco de Chile), Food & Beverages (CCU), Telecommunications (VTR), Mining
(Antofagasta Minerals), Transportation & Port Operations (CSAV and SAAM),
Manufacturing and Energy.
61
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08 April 2015
Figure 72: Matte group ownership structure
Source Company reports and J.P. Morgan.
The Matte group operates companies in the following industries: Finance & Banking
(Banco BICE, private), Telecommunications (ENTEL), Transportation & Port
Operations (Minera Valpo), Manufacturing and forestry (CMPC) and Energy. The
Matte group was founded by the current controllers father in the 20th century.
Figure 73: Angelini group ownership structure
Source Antarchile reports and J.P. Morgan.
Angelini group operates companies in the following industries: Energy (COPEC,

Metrogas, Terpel), Forestry (ARAUCO), Fishing (CORPESCA) and others. The
group is led by the deceased founders brother, Roberto Angelini.
Figure 74: Saieh group ownership structure

62
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08 April 2015
Source Company reports and J.P. Morgan.
Saieh group is led by Alvaro Saieh, a Chilean economist and entrepreneur; it operates
companies in the following industries: Finance & Banking (Corpbanca, soon to be
merged with Itau Chile), Retail (SMU, third largest supermarket by GLA, private).
The recent acquisition of control by Saieh in SMU, as he bought an additional 13%
stake, will force the group to offer an OPA for the remaining 21% of the shares.
Minority shareholders are protected via the Public Acquisition Offer (OPA)
law. Due to the fact that in many companies there is a controlling shareholder
(sometimes with a small percentage of equity) Chilean law was modified in the early
00s to protect minority shareholders by implementing obligatory takeover Public
Acquisition Offerings (OPAs). This law came in effect after a takeover transaction
was denounced by minority shareholders that ended with majority shareholders
paying large fines for abuse.
Figure 75: Chispas case
The so called Chispas case was a
transaction in which Enersis, controlled by
a group of the firms executives who owned
less than 5% of the company, was
acquired by Endesa Espaa that paid a
premium of more than 200x for voting
shares over regular shares. The executives
owned the voting shares.
One of the main features of the OPAs law is that it is required by the acquiring party
to offer the same price and terms of acquisition to all shareholders (or in prorate of
the amount offered) of a publicly listed company. This means that controlling
shareholders cannot sell their stock at premium prices and prevents the exploitation
of asymmetric information.
Not all transactions require a tender offer. However, not all acquisitions require
the application of an OPA (detone an OPA, as it is referred to in Chile); this does
not mean that OPAs are voluntary, rather that they are necessary only when certain
conditions are met. OPAs are mandatory when control is transferred or obtained, or
when as a result of the transaction the acquirer ends with more than two thirds of
voting shares, or when the transaction represents 75% or more of the consolidated
assets of the controlling company of the acquired. An OPA gives the minority
shareholders an option to sell their shares at the offered price (not the obligation to
sell). In this sense, there is little space for hostile takeovers in the Chilean market, as
usually acquiring control means that both the acquirer and the controller have to
prearrange a bid price (it requires the controller to be willing to sell, otherwise the
OPA fails). Once control is obtained it cannot be taken from the controller unless he
is willing to sell it. An OPA is successful when the transaction is completed, which
means that the acquirer was able to buy at least the minimum amount of shares that
he previously disclosed. When an OPA fails, the acquirer has the option to reverse all
transactions he engaged in with shareholders.
Minority shareholders in Chile are typically represented by Pension Funds
(AFPs). It is not uncommon for AFPs to take positions in equities that allow them to
63
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
elect a director, and as such they act as the main voice for minority shareholders. In
the threat of tunneling or abuse AFPs have typically lead the cases and even gone to
court. As they own a significant share of the companies, many times AFPs can block,
by escritura, changes or proposals. In recent years, AFPs have even led legal
actions against controlling shareholders. For example, recently Endesa Espaa
proposed a capital increase in Endesa Chile, but asset valuation was controversial
and deemed abusive by AFPs. In turn, AFPs sought legal and corporate ways to
block the capital increase, in which they where successful as Endesa Espaa required
AFPs approval of the capital increase. AFPs have the legal capacity to participate in
OPAs in representation of their affiliates.
Market composition Corporate governance

Corporate governance in Chile. There is little widespread evidence of tunneling in
family or holding controlled firms; although some cases have been discovered in the
past few years (see Table 27), many studies rank Chile as a safe place to do business.
There is a fair amount of intragroup loans (related parties transactions), and again,
there is little evidence that these are not conducted at market prices. This can be
accounted for several factors: first, the existence of the law of OPAs, secondly, the
active role of Pension Funds as minority shareholders, and third the standards and
norms for participating in intragroup transactions.
Table 27: Relevant corporate news in Chile
Year
Name
2014
Penta
Not listed
2014
SQM
Listed
2014
Larrain Vial Not listed
2011
La Polar
Listed
2013
Corpbanca Listed
Source: Local press and JPM
Corparate news
Company type
Alleged
Financial Institution
Irregular political campaign financing and fiscal fraud
Mining
Irregular political campaign financing
Tunneling and minority shareholder abuse
Retail
Fraud - financial statements
Transactions with related companies
Quality of supervising institutions is subpar. However, there is still room for

improvement, as the quality of Superintendence of Securities (SVS), Bank
Supervisor (SBIF) and Internal Revenue Service (SII) is considered to be below
international standards. According to the International Organization of Securities
Commission (IOSCO), this is due to three factors, i) insufficient funding, ii)
dependence on the political cycle, and iii) limited access to resources. There are
some bills being discussed in congress aimed to improve the quality of these
institutions by addressing these issues. We highlight that Chile does not belong to the
Basel Committee of Bank Supervision, but does in general observe its guidance and
recommendations.
The IPSA index has a fair amount of stocks controlled by a conglomerate. It is
worth noting that of the 40 companies included in the IPSA index, about half of them
are part of a conglomerate. This translates into roughly 50% of market cap of the
index directly associated to conglomerates. Companies that have a controlling
shareholder amount to more than 75%, accounting for more than 80% of the index
capitalization. The free float of firms belonging to a conglomerate varies widely
through out firms and sectors.
64
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Table 28: Composition of IPSA index
IPSA composition
Total Conglomerate
Number
Mkt. Cap
40
100%
18
51%
Controlling
shareholder
29
80%
Source: JPM and Santiago Stock Exchange
There is more than one explanation for the high concentration in the local stock
market and other industries. We believe economic groups could have been a way
to counter the low quality of local and Latin American institutions during most part
of the 20th century. As local government institutions were very differently managed
from North American and other developed countries, companies in Chile were
subject to unfriendly market tax schemes (taxes on exports, for example),
expropriation, and unfair competition from public companies. As a way to defend
their firms, many entrepreneurs vertically integrated their operations and ultimately
diversified the scope of their operations. To further protect their industries, an
important part of political funding came from firms, in order to protect their interests
in congress.
Our view on the market we remain UW

Distinctive country drivers. The Chilean market has outperformed LatAm YTD,
driven by a better macro scenario and low oil prices. Investors have turned more
positive on Chile equities given its the country that benefits most from lower oil
prices, it has a solid fiscal position, and growth is expected to accelerate compared to
2014 (coming from a low base). However, as stated in our note with feedback from
US investors, there are still concerns on private investment picking up, and investors
highlighted that they are struggling when reflecting the improved top-down view into
stock picking. That is consistent with the still low levels of activity we have seen in
the market, with foreigners being net buyers but with low volume. On the macro
side, the Central Bank published its monetary policy report. Inflation expectations for
2015 were revised up to 3.6%, from 2.8%, while growth forecast was unchanged at a
2.5-3.0% range. With a modest economic recovery in place, inflation concerns are
now the centre of attention of the board. We now expect BCCh to hike 25bp in 4Q15
and to softly normalize monetary policy, leaving rates at 4.0% in 1H16.
Factors driving future performance. Despite some improvements on the macro
side, we remain UW Chile, on downside risk to EPS estimates and weak business
confidence. We are confident that economic growth bottomed in 3Q14 and that 2015
will benefit at the macro level from the arguments highlighted above. However, we
believe these are not enough to make a strong case for Chile at this point as we see
two risks that could continue hurting stock performance. The first relates to EPS
growth estimates, as they remain at the top of LatAm and reflect overly optimistic
expectations, in our view. This is particularly evident in the materials sectors
(Copec), industrials (LatAm Airlines), consumer staples, and discretionary. All of
these sectors have estimates of double-digit consensus EPS growth for 2015 and
2016, which seem like they will be hard to reach in a year of a still slow economic
environment and increasing corporate tax. The second risk we perceive relates to
business confidence and private investment. The sentiment from the private sector in
Chile is close to the one seen in 2009, and the current political environment makes it
hard to improve, in our view.The discussion of the labor reform in congress added to
the impact of the scandals related to tax evasion and irregular politicians financing
65
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
(Penta and SQM) will keep the level of confidence under pressure, in our view.
While a 2015 macro recovery has more to do with an aggressive expansionary fiscal
policy, private investment not picking up poses a risk for 2016 growth.
Investment strategy. We keep Endesa (OW, Marcos Severine) in the portfolio,
given the current deficit of generation capacity in Chile and its attractive optionality
to an improvement in Argentina as it has close to 25% of installed capacity in that
country. We are also keeping Santander (OW, Saul Martinez) as we believe it will
continue showing attractive growth, valuations remain discounted, and inflation
should be higher in upcoming months given currency weakness.
Equity Issuance
Due to the concentration of control in the Chilean market and the existence of
the OPAs (tender offers law), IPOs and takeovers are relatively rare. During
2014 there were no IPOs, and the main transactions were the merger (announced,
pending approval) of Itau Chile and Corpbanca, CFRs acquisition by Abbot and
Scotiabank's acquisition of Cencosud credit card business (still pending approval).
All in all, ECM transactions averaged US$4.465 mn in the last eight years, with an
extraordinary 2013 that totaled US$11.804 mn. Despite annual transactions being
above other LatAm economies, we highlight that there have been no IPOs in the past
two years.
2013 extraordinary ECM transactions reached a record of close to US12 billion in
Chile. This is roughly 3-4 times more than the average amount seen in the last 5
years. This was highly concentrated in the three largest transactions: Enersis' followon integrating the LatAm assets of Endesa Spain (US$6 bn), Cencosud's follow-on to
finance the acquisition of Carrefour Colombia (US1.6 bn) and Lan's follow-on (US1
bn) in the context of the merger with Tam in Brazil. For this year the pipeline seems
much more moderate, with few transactions announced so far. This implies less debt
overhang risk for this year.
Table 29: 2013 Equity issuances in Chile Stock Exchange
Company
ECM Transaction
Banco de Chile
Primary/Secondary
Sonda
Primary/Secondary
Corpbanca
Primary/Secondary
Cencosud
Primary/Secondary
Enersis
Primary/Secondary
CMPC
Primary/Secondary
MASISA
Primary/Secondary
CSAV
Primary/Secondary
CCU
Primary/Secondary
LAN
Primary/Secondary
Molymet
Primary/Secondary
Total
Timing
Jan
Jan
Feb
Mar
Mar
Apr
May
Aug
Sep
Nov
Nov
US$mn
529
100
600
1636
6022
500
100
500
700
1000
117
11,804
Source: BVC, J.P. Morgan
Flows
Flows in the Chilean equity market are dominated by local investors, which
according to our estimates represent roughly 80% of DATV. Among the different
participants we highlight retail investors, which have a relevant presence mainly due
66
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
to the absence of capital gain tax in the market; pension funds; mutual funds; and
other semi-institutional investors, such as Family Offices, which have been growing
significantly in recent years.
Historically, pension fund flows have dominated the market, given the relevant
size of their AUM and the limits they had to invest locally. However, the mix
between higher DATV in the market and the increase of foreign investment limits
has moderated the funds relevance significantly. As an example, in 1998 the pension
funds system held US$4.6 billion in local shares, while total volume in the market
that year reached US$4.4 billion (1.05 times the total volume of the year). As of
December 2013, the system had US$18.7 billion in local stocks, while total volume
was US$41.3 billion that year (0.43 times the total volume of the year). Regarding
foreign investment limit, since the pension funds were allowed to invest abroad in
1990, limits have been revised upward several times, reaching the current maximum
of 80% of the systems AUM (as of March 2014 the system had 41.3% of its
investments outside Chile). Consequently, we now see a more balanced mix between
AFPs, other local institutional investors (mainly mutual funds) and retail investors.
Foreign investors, commonly known as Chapter XIV (due to the norm
established by the Central Bank for its operations in the domestic market),
represent around 20% of the markets volume. While the historical valuation
premium of the Chilean market compared to the rest of Latin America has in most
cases prevented foreign investors from having an overweight position in Chile, the
increase in flows coming to LatAm as a region have boosted foreign investor
volumes in the country, consistently increasing its relevance over the years. While in
2008 we estimate that foreign flows represented only 4.2% of total volume in the
market, that figure increases to close to 20% for 2013.
Chile has historically showed a valuation premium to the region, which has been
narrowing in recent years. Chiles valuation premium has been sustained by the
region's lowest cost of capital, lowest corporate taxes, and one of highest potential
GDP growth rates in the region. These all still exist, though this stands out less today
than it did historically, for the following reasons:
The cost of capital advantage has narrowed, from ~1,000bp vs Brazil and Mexico
ten years ago, to 140bps five years ago, and only 80bps today.
Corporate tax rates have risen. They were increased from 10% to 15% in 1992,
then to 17% in 2004, and to 20% in 2012. Furthermore, the current tax reform bill
aims to increase it to 25%.
GDP growth rates eased, and while potential GDP growth is still good by
regional standards, growth rates have fallen, from a 90s average of 6.4% to a00s
average of 3.1%.
Chilean corporates have continued expanding abroad, incorporating higher
regional risk into Chilean earnings and valuations though at least partially offset
by potentially higher growth rates.
67
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Figure 76: Historical Premium of Chilean Valuations to LatAm

2.4
2.2
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
95
97
98
99
00
01
02
04
05
06
07
08
09
11
12
13
Source Bloomberg, Datastream, J.P. Morgan
Pension Funds
The AFPs are required to offer 5 funds with varying risk levels and associated equity
limits (A: 80%, B: 60%, C: 40%, D: 20% and E: 5%). Based upon current affiliate
risk allocation, the average overall equity limit is in the range of 47-50% (this
includes both foreign and domestic equities). The AFPs have been hovering near this
limit since 2006. Although a rise in foreign equity limits created concern about the
possibility of domestic selling, the AFPs have maintained an overall exposure to
domestic equities in the range of 15-19% of AUM over the last 5-6 years, suggesting
to us that Chile exposure is generally fixed, for either strategic or political reasons.
Given the relatively tight range, we dont expect any major net domestic
inflows/outflows, but rather continual rotation/repositioning/opportunistic moves.
The one exception is substantial market movements abroad, which affect overall
performance and exposure of the AFPs, ultimately impacting local flows.
Per-company equity limits
Aside from the overall equity limits, the AFPs have company-specific limits aimed at
limiting the concentration in any one name. We have applied these limits in order to
arrive at the Investment Cushion.
5. 5% * FV * CF * LF
Where FV = Fund Value, CF = Concentration Factor and LF = Liquidity Factor. This
is applied to the various fund types (A, B, C, D and E) with the goal of limiting
liquidity risk and creating diversification.
6. 7% * Market Capitalization
This is applied to each of the six fund administrators (Provida, Habitat, Capital,
Cuprum, Planvital and Modelo) with the goal of limiting the concentration of
ownership of any one fund manager.
Size/liquidity of holding
68
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
We have seen pension funds focused mainly on four stocks. Among the top net
investments is Cencosud (US$23.16Mn), Colbun (US$17.07Mn) and Lan
(US$14.91Mn). On the other hand, the biggest divestment was, once again, Enersis
(US$25.26Mn), which surprised after three consecutive purchasing months. As for
Falabella, we saw an increase in stock price, which could in part explain Pension
Funds position reduction. Within the banking sector, we saw PFs diminish their
exposure to Banco Santander probably to compensate for previous months
investments in Banco de Chile.
Table 30: Top Net Investments

Feb 2014 (US$mn)
Company
FALABELLA
SONDA
CCU
ENTEL
CENCOSUD
CAP
SK
PARAUCO
FORUS
Investments
Net Flow
15,97
7,69
5,54
5,11
4,14
2,67
2,11
0,87
0,76
% Issuer
3,7%
18,8%
2,7%
9,2%
16,2%
8,1%
7,8%
7,0%
4,9%
What happened last month? During February Chilean pension funds closed the
month with a moderate US$11.8 million net investment. Exposure to local equities
increased slightly to 10.1% compared to the previous month (9.9%), recuperating
from the 12 month low. This increase we believe is a positive response to movements
in asset prices and currency appreciation. In addition, we see an intention of PFs to
return to former local variable income exposure. Although we believe most political
and social changes have already been incorporated in the market, the Labor Reforms
impact still generates concerns.
Table 31: Chilean Pension Funds Equity Holdings (US$mn)
Source: SAFP, J.P. Morgan.
Table 32: Top Net Divestments

Feb 2014 (US$mn)
Divestments
Company
Net Flow
ANTARCHILE
-21,30
CHILE
-18,76
SQM-B
-17,85
CRUZBLANCA
-17,62
LAN
-12,46
BANMEDICA
-9,45
COLBUN
-8,29
BCI
-5,63
ENDESA
-4,34
% Issuer
2,6%
0,6%
9,2%
6,0%
15,5%
5,7%
18,3%
7,3%
14,8%
Figure 77: Chilean Pension Funds Net Monthly Investment and Exposure in Domestic Equities
US$mn
69
Diego Celedon
(56-22) 425-5245
[email protected]
Table 33: Main sector OW/UW in

local equities portfolio
Utilities
IPSA
Weight
19,0%
AFPs
Weight OW/UW
35,4% 16,4%
Services
46,7%
43,0%
Materials
24,1%
14,0% -10,1%
Industrial
7,5%
5,3%
-2,2%
Telco
2,7%
2,3%
-0,4%
-3,7%

08 April 2015
What are the pension funds main positions? During February there were no
major changes on the industry sector weight on the local equity portfolio. Utilities
sector exposure remains stable, remaining as the main overweight sector of pension
funds against IPSA index, at 35.4% of total equity investments. All the other sectors
are underweight, led by materials, the strongest underweight (-10.1%), followed by
services (-3.7%). On the bright side, local pension funds increased their exposure to
local equities 0.6% MoM.
Figure 78: Chilean Pension Funds Current and Historical Sector Allocation in Local Equities
What to expect looking forward? Pension funds increased their exposure to

Chilean equities, representing 11.2% of their total AUM, reverting the historical
minimum seen last month. The cushion to invest in equities is US$ 2.0bn the last
month, according to our estimates, decreasing 1.3%. This still gives the AFPs
flexibility in case they want to increase their exposure in equities.
Table 34: Equity Exposure by Fund
US$ bn, January 2014
70
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Table 35: Chilean Pension Funds Current and Historical Sector Allocation in Local Equities
71

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Table 36: Top Net Investments

Jan 2014 (US$mn)
Company
Chile
Conchatoro
Enersis
Colbun
Corpbanca
IAM
Aguas-A
Gener
Parauco
Entel
Investments
Net Flow
Hold
11,2
60,1
6,1
27,2
4,6
89,5
4,3
27,9
3,8
19,5
3,4
20,4
3,0
35,5
2,8
50,2
2,5
33,5
2,3
27,8
% Issuer
0,6%
1,9%
1,0%
0,7%
0,7%
1,3%
1,0%
1,2%
3,2%
1,0%
Mutual Funds
What happened last month? Chilean Mutual funds reversed their behavior
considerably in February, being, for the first time in 22 months, net investors. Equity
mutual funds participants again declined 0.32% m/m, while total AUM increased
amid a context of a slightly more optimistic local market performance. Previous
months overall sluggish macroeconomic performance as well as currency
devaluation exerted pressures to divest from local equities, which reached an all-time
low exposure of 2.2%. This month we saw more positive sentiment toward the local
market in line with our relatively more positive view on Chile. This months
investment reached US$42Mn. Mutual funds top buys were Banco Santander,
Parque Arauco and Endesa while they sold Sonda, Gener and Falabella.
Table 37: Chilean Mutual Funds Equity Holdings (US$mn)
Source: Mutual Fund Association, J.P. Morgan.
T Table 38: Top Net Divestments

Jan 2014 (US$mn)
Company
CCU
Embonor
CFR
Endesa
Sonda
Cruz Blanca
ILC
Ripley
CMPC
Cencosud
Divestments
Net Flow
Hold
-13,1
26,3
-5,6
21,7
-5,3
13,7
-4,9
87,2
-4,9
25,7
-4,6
6,6
-4,1
11,2
-3,7
13,9
-3,6
16,4
-2,9
25,9
% Issuer
0,7%
2,3%
1,0%
0,8%
1,7%
1,7%
0,9%
1,2%
0,3%
0,4%
Date
2007
2008
2009
2010
2011
2012
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Total
Foreign
AUM
Investment
23.932
3.832
17.544
1.258
33.737
4.379
37.626
5.381
32.928
3.188
37.456
3.521
41.535
3.771
40.869
3.770
42.089
3.775
41.160
3.803
39.647
3.481
39.375
38.653
39.615
41.739
40.804
39.018
39.475
38.653
3.552
3.398
3.540
3.840
3.784
3.871
3.797
3.897
%
Local Fixed
Total
Icome
16,0%
17.829
7,2%
15.421
13,0%
27.394
14,3%
27.580
9,7%
27.219
9,4%
31.431
9,1%
34.921
9,2%
34.274
9,0%
35.669
9,2%
34.977
8,8%
34.057
9,0%
8,8%
8,9%
9,2%
9,3%
9,9%
9,6%
10,1%
33.705
33.573
34.305
36.144
35.451
33.646
34.382
33.471
%
Local
Total
Equities
74,5%
2.228
87,9%
846
81,2%
1.950
73,3%
4.628
82,7%
2.501
83,9%
2.480
84,1%
2.821
83,9%
2.802
84,7%
2.625
85,0%
2.361
85,9%
2.101
85,6%
86,9%
86,6%
86,6%
86,9%
86,2%
87,1%
86,6%
1.760
1.663
1.753
1.753
1.553
1.485
1.275
1.270
%
Total
9,3%
4,8%
5,8%
12,3%
7,6%
6,6%
6,8%
6,9%
6,2%
5,7%
5,3%
Net
Invest
237,3
-720,3
339,1
1.277,0
-859,7
-334,6
68,4
57,1
-74,6
-70,6
-102,0
4,5%
4,3%
4,4%
4,2%
3,8%
3,8%
3,2%
3,3%
-177,0
-57,1
-8,9
-18,6
-69,3
-46,9
-48,2
-18,0
What to expect looking forward? Mutual funds have finally seemed to put an end
to the negative 22-month streak. It seems like redemptions might have stopped and
sentiment could lift over upcoming months. Although there is still a slight fall in
mutual fund participants, the decrease was reduced almost four times compared to
previous months (-1.2-1.4%). Initially, we do not see mutual funds participants
taking a leading market role, but instead waiting for any market signals that might
indicate a rebound. Exposure to local equities increased slightly (2.3%), while local
fixed income exposure diminished 0.2% and investment interest in foreign equities
remained constant. As things are, despite equity markets having begun to give the
first investment incentives, they still lack convincing proof of positive returns. We
still see investors looking toward foreign equities that might render better returns.
72

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Table 39: Main sector OW/UW in

local equities portfolio
(US$mn)
Net Monthly Investment
300
OW/UW
3.9%
5.6%
-4.2%
-5.1%
-3.8%
3.6%
Local Equity Mutual Fund Particpants Change %
12,0%
10,0%
240
8,0%
180
6,0%
120
Source: Mutual Fund Association, J.P. Morgan..
4,0%
60
2,0%
0,0%
-2,0%
-60
-4,0%
-120
-6,0%
-180
-8,0%
-240
-10,0%
Aug-09 Dec-09
Apr-10
Aug-10 Dec-10
Apr-11
Aug-11 Dec-11
Apr-12
Aug-12 Dec-12
Apr-13
Aug-13 Dec-13
What to expect looking forward? Negative flows are slowing down, losing the
negative momentum, and showing a small increase of the exposure in local equities
(+0.1%). Looking forward, if the market starts to post positive returns, retail
investors might start to jump in to equity funds again, which would lead positive
flows into domestic stocks.
Figure 80: Historical local Equity AUMs and Participants of Mutual Fund Industry
5.500
200
Local Equity AUM $US
Local Equity Fund Participants in th
5.000
180
4.500
US$ Mn
3.500
140
3.000
120
2.500
2.000
Th Participants
160
4.000
100
1.500
80
1.000
dic-14
jun-14
sep-14
dic-13
mar-14
jun-13
sep-13
dic-12
mar-13
sep-12
jun-12
dic-11
mar-12
jun-11
sep-11
dic-10
mar-11
jun-10
sep-10
dic-09
60
jun-09
500
mar-10
MFs
Weight
20.3%
19.1%
25.9%
5.2%
9.4%
20.0%
sep-09
Utilities
Retail
Materials
Transport
Financial
Other
IPSA
Weight
16.4%
13.5%
30.1%
10.4%
13.2%
16.4%
Figure 79: Chilean Mutual Funds Net Monthly Investment and Equity Funds Participants Change
PropTrading
A considerable decrease in Prop Trading eased what was a 2014 year end trend.
Although February was a slower month and traded volumes were lower, prop trade
decreased 10.2% compared to January's post. We are seeing prop trading levels
coming back to normal, suggesting market sentiment might start to lift, even though
February is not a conclusive month in terms of market outlook. This month, brokers
73
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08 April 2015
Table 41: Prop Trading as % of total

volume
Summary
Jan-13
28,2%
Feb-13
41,0%
Mar-13
31,2%
Apr-13
30,9%
May-13
31,9%
Jun-13
33,6%
Jul-13
32,4%
Aug-13
38,5%
Sep-13
28,0%
Oct-13
37,8%
Nov-13
31,4%
Dec-13
18,7%
Jan-14
22,2%
Feb-14
29,0%
acquired less in relative terms to total traded volume, and the magnitude of
acquisitions and sales of stocks decreased overall, except for LAN stocks sales.
Banco de Chile and Puntilla were brokers favorites, while they were sellers of Lan
and Banco Santander.
Table 40: Main Prop trading investments and divestments
US$ mn
Source: SEBRA, J.P. Morgan.
Source: SEBRA, J.P. Morgan
Sectors
Mining (Rodolfo AngeleAC)
[email protected]
(55-11) 4950-3888
Copper makes Chile one of Latin Americas most important mining countries, owing
principally to its vast high-quality copper reserves. The country produces 35% of the
worlds copper and is home to about 30% of global copper reserves. Chile is also a
large producer of zinc. In terms of the sector exports in US$, copper represents
89.5%, followed by molybdenum (2.7%), iron (2.5%), and gold (2.3%). While the
mining sector is very relevant for the Chilean economy (19% of GDP), it accounts
for only 3% of the countrys labor force. In terms of the equity market, there are no
copper companies listed in the local exchange, so the sectors weight in the IPSA and
MSCI Chile are not significant.
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08 April 2015
Figure 81: Copper as a % of GDP

300
GDP
16.0%
Copper as % of GDP
14.0%
250
12.0%
200
10.0%
150
8.0%
6.0%
100
4.0%
50
2.0%
0.0%
2008
2009
2010
2011
2012
2013
Source: BCCh, J.P. Morgan
The main company in the sector is state-owned copper producer Codelco, which
accounts for 32% and 11% of the Chilean and worldwide copper production,
respectively. Codelco is the main copper producer in the world and controls around
20% of the world reserves of this metal. In addition to regular corporate taxes,
Codelco pays an additional 40% of its earnings as an extraordinary tax, thereby
contributing around 11% of the countrys tax collection.
Copper mining industry in Chile is highly concentrated, with the five largest
companies producing around 75% of the total. After Codelco, the most relevant
operations are controlled by well-known foreign mining companies. The largest
operations include: Escondida (20.1% of total production in Chile, owned by BHP
Billiton and Rio Tinto), Collahuasi (9.1%, owned by Anglo American, Xstrata plc
and JCR), Anglo American (7.3%) and Los Pelambres (7.3%, owned by Luksic
group and Nippon LP investment).
Since mid-February copper prices have posted a decline of close to 9%. This has
affected investors sentiment regarding the copper exporting countries in LatAm.
Chile has the highest exposure to copper in the region, but it has mechanisms to
deal with short-term price fluctuations. Chile produces close to 35% of the
worlds copper and it has about 30% of global copper reserves. Around 90% of its
mining exports and above 50% of total exports are copper. It has contributed around
20% of fiscal revenues in recent years and it accounts for roughly 12% of GDP.
Considering this, a long-term impact on copper prices presents a significant
challenge for the Chilean economy. Nonetheless, there are several considerations to
take into account: 1) Fiscal budget in Chile is estimated using a long-term copper
price of US$3.04 per pound, basically in line with current prices. This implies that,
unless prices keep falling, the impact for Chile of the fiscal side wouldnt be
significant; 2) the structural balance framework with the fiscal policy conducted
since 2001 implies that Chile saves money when copper prices are above long-term
estimates. Currently, Chile has close to US$25 billion in sovereign funds that could
be used for counter-cyclical fiscal policies to avoid a significant impact from lower
copper prices; 3) average cash cost for copper producers in Chile is currently around
US$1.81 per pound, still close to 40% below current copper prices. The correlation
between copper prices and MSCI Chile in the last 10 years is .45.
75
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08 April 2015
Pulp/Paper (Lucas FerreiraAC)

[email protected]
(55-11) 4950-3629
After Brazil, Chile is one of the most efficient countries for pulp production in the
world, due to the combination of favorable climate, land and water availability and
political stability. As a result, Chile has become a relevant player in the global pulp
market, representing ~10% of global pulp production. Pulp and paper exports in turn
represent ~5% of Chiles exports, 3.1% of GDP and account for ~130,000 jobs.
Planted area (2.3 million hectares) has expanded at a rate of 10% annually during the
last decade, mostly concentrated in the southern part of Chile. The country has
production capacity of more than 5 millions tons per year.
Among Chiles competitive advantages are the cycles and yields obtained from pine
and eucalyptus trees in the world market. Chile has the third-highest growth rate for
eucalyptus yields, after Brazil and Argentina, with cycles of 10 to 12 years and yields
of 25-40 m3/ha/year, depending on the species. In effect, the Chilean Radiata Pine
competes with the best yield rates in the region and is only surpassed by some
subtropical species of Argentina and Brazil, with average yields of 23 m3/ha/year
and cycles of 18 to 25 years. Chile stands at the low end of the global cash cost
curve. According to Suzano and Hawkins Write, Chilean cash cost for hardwood
stands at ~$356/t, compared to Brazil $331/t (lowest) and China $564/t (highest). As
for softwood, the Chilean average cost is $422/t, compared to Russian $307/t
(lowest) and Canada $620/t (highest).
Figure 82: Hardwood Pulp Cash Cost
Source: J.P. Morgan
Chilean companies are among those leading global capacity expansion, with 23% of
total new supply being added in the next 5 years. Chilean companies Arauco and
CMPC will together launch over 3mt of pulp in the next 5 years, with projects being
developed in Chile, Brazil, Uruguay and Argentina. This amount represents over
23% of total market pulp expansion in the period.
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Chiles forestry resources consist of 16 million hectares of forest, 86% of which

corresponds to natural forests and 14% to plantations. The main planted species are
the Radiata Pine (64% of the plantations), the Eucalyptus Globulus and the
Eucalyptus Nitens. These three species cover 92% of the total planted surface. Over
the last 33 years, the annual plantation rate has exceeded 100 thousand ha/year, far
above the felling rate. The plantation of eucalyptus trees in Chile increased
significantly during the 1990s; indeed, more eucalyptus trees are planted today than
Radiata Pines. Chile and Uruguay are the only countries in Latin America to
experience net growth in their forest covers, thanks to high plantation rates.
Chile places itself among the five world-leading countries in terms of forest recovery
per capita. In comparison to global trends, the latest developments in Chile have
contributed to a more acute decrease in deforestation (FAO 2005) and a positive
impact on forests due to public monetary incentives for forestation. Preliminary
reports estimate that there are still 2-3 million hectares of deteriorated lands that can
be recovered and forested commercially. If these 2-3 million hectares are planted, it
would double the current figures for the national forest economy.
The pulp industry is concentrated in two large players, Arauco (subsidiary of Copec)
and CMPC, both among the 5 largest pulp producers in the world, with 5% and 4%
of total production, respectively. Arauco is the second-largest pulp producer in the
world and is 99.9% owned by Copec (the largest oil distributor in Chile) and has
over US$12 billion in assets. The company has pulp production capacity of 3.2
millions tons that comes from five pulp mills in Chile and one in Argentina, and 36%
of its sales go to China. CMPC (listed in the Santiago Stock Exchange) had US$4.2
billion of sales with US$1.2 billion of EBITDA, of which 33% belongs to pulp with
1.8 millions tons of sales. We highlight the 60%+ increase in sales of tissue in two
years, which could lead the tissue business to outperform the pulp business if there
were a global recession. CMPC and Arauco have both added 1.3mt of hardwood
capacity to their mix in Brazil and Uruguay, respectively, increasing their marketshare in the global market. The companies are among the few players that have
delivered growth in pulp recently.
77
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08 April 2015
Figure 83: Chile Pulp Map
Source: FIC, J.P. Morgan
78

08 April 2015
Retail (Andrea TeixeiraAC)

[email protected]
(1-212) 622-6735
The retail industry is highly concentrated in most retail formats, including
supermarkets, department stores, home improvement, consumer credit and shopping
malls. Main Chilean retailers, including Cencosud, Falabella and Ripley, are present
in most of these formats, in order to attract new customers to offer financial products
and increase their share of wallet. There is a high concentration in each line of
business, with Falabella, Cencosud or Wal-Mart leading each of them.
Supermarkets: After an extensive period of consolidation in the Chilean supermarket
industry since 2003, the sector is today almost entirely represented by four relevant
players, with Wal-Mart (D&S) and Cencosud accounting for more than 60% of total
sales. In addition, Chile shows the highest level of supermarket penetration in the
region, with almost 60 square meters of selling space per 1,000 inhabitants.
Figure 84: Supermarket Penetration (m2 per 1,000 inhabitants)
Supermarkets
120
Chile
Mexico
M2 per 1,00
Diego Celedon
(56-22) 425-5245
[email protected]
90
60
Colombia
30
0
5,000
Peru
Brazil
Argentina
10,000
15,000
Per Capita GDP
20,000
Source: IMF, J.P. Morgan
Department stores: Department stores show a diversified mix of products that

includes apparel (60%), and the rest composed of electronics, white goods, furniture
and sporting goods. In addition, most department stores combine retail sales with
store credit offerings, including private label credit cards, personal loans, insurance
and mortgages. The industry has five dominant players, including Falabella,
Cencosud and Ripley, which are focused on high- and middle-income segments, as
well as La Polar (under restructuring) and Hites, which in turn target low- and
middle-income segments. The two largest players, Falabella and Cencosud, account
for more than 60% of market share.
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08 April 2015
Figure 85: Department Stores Penetration (m2 per 1,000 inhabitants)
Department Stores
M2 per 1,00
80
Chile
60
40
20
Peru
0
5,000
Mexico
Colombia Brazil
Argentina
10,000
15,000
Per Capita GDP
20,000
Consumer finance: Chilean retailers started offering installment sales in the 1980s,
with a particular focus on the Chilean middle-income segments, whose limited access
to credit reduced their purchasing power for durable goods. Today, around 60% of
purchases in department stores are made with company credit cards, while home
improvement stores show card penetration rates of around 25%, and supermarkets
less than 10%. Nonbank credit cards represent almost 21% of total consumer loans in
Chile.
Figure 86: Home Improvement Penetration (m2 per 1,000 inhabitants)
Home Improvement
80
Chile
M2 per 1,00
60
40
Brazil
20
0
5,000
Peru
Colombia
Mexico
10,000
-20
Per Capita GDP
80
Argentina
15,000
20,000
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08 April 2015
Regulation changes may likely arise in the near future, particularly after accounting
issues in La Polars credit business last June. In our view, potential changes may
include a more comprehensive disclosure of credit business and client leverage, as
well as stricter parameters for establishing loan provisions. While we do not foresee a
structural change in the way consumer finance operations work, these changes may
imply lower profitability for retailers credit businesses and more competition from
banks.
Home improvement: Home center stores offer perhaps the most significant growth
potential of any of the retail formats included in the multiformat retail model. This is
based mainly on the low levels of penetration exhibited both in Chile and the region,
where emerging mega-stores compete directly with local hardware stores. Chilean
style home centers are a mix between do-it-yourself (DIY), hardware, and
department stores. This format focuses on a large range of goods for the home, from
gardening to bedding, appliances and electronics. In addition, many of these stores
have tradesman-focused sections that offer a large range of construction materials,
from tools to timber. This retail format has become very successful in Chile, with
Falabellas Homecenter Sodimac the industrys largest player at 25.8% market share
and representing over 40% of Falabellas sales in Chile. The industry is also unique
in Chile compared to other retail formats in that over half the industry remains
fragmented and composed of traditional family-run hardware stores.
Shopping malls: Like the credit business, shopping mall development has become a
strategic part of the multiformat strategy for Chilean retailers in Chile and the region.
Falabellas Mall Plaza is the largest mall operator, with 31% market share, while
Cencosuds eight malls in Chile represent 26% of the market in terms of gross
leasable area (GLA). These retailers hold a significant competitive advantage in this
business given their ability to install their own anchor stores that are essential to new
shopping mall developments.
The last decade of the Chilean retail sector is characterized by strong growth and
diversification into new markets and formats. The supportive consumption
environment in most Latin American countries where Chilean retailers operate,
together with the aggressive expansion plans of the companies, should continue to
drive strong growth for the sector in upcoming years. We expect the main Chilean
retailers to invest over US$5 billion in Capex in the next three years. The two largest
players, Falabella and Cencosud, should continue to lead that expansion, accounting
for more than 90% of the sectors Capex.
The main focus is outside Chile, though there is still room to grow in less developed
regions in the country. From the total Capex expected for the next three years, less
than half would be invested locally, mainly in the less-penetrated regions of the
country. The largest portion of Capex invested outside Chile is directed toward Peru,
where the selling area of Chilean retailers should increase by 140% by 2013. Main
investments are centered on supermarkets. Heavy investments are also expected in
Colombia and Brazil.
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08 April 2015
Financials (Saul MartinezAC)

[email protected]
(1-212) 622-3602
Chile has a very developed financial industry, showing the highest banking
penetration in Latin America, with a loan-to-GDP ratio of around 82.6% as of
December 2014. The system has a strong concentration in commercial loans, which
represent more than 60% of the mix, while mortgage penetration is also high at
21.7% of GDP, explaining 26% of total loan mix. On the other hand, consumer loan
penetration is still low at 11.0% of GDP and 13% of loan mix, and consequently is
one of the main strategic focuses of the largest banks in the country, which believe
that the consumer segment will lead loan growth in coming years.
Figure 87: Loans to GDP
Source: SBIF, J.P. Morgan.
In 2002, Banco de Chile and Santander Chile emerged as the two leading players in
the Chilean banking system. More specifically, Santander Chile's loan market share
jumped to 24.4% in 2002 from 11.7% in 2001, while Banco de Chile's loan market
share rose to 18.6% in 2002 from 11.9% in 2001. Both increases resulted from large
mergers during the year. More specifically, Santander Chile acquired Banco Santiago
in August 2002, while Banco de Chile agreed to merge with Banco Edwards in
January 2002. Today, these two banks collectively have 38.7% loan and 31.8%
deposit market share.
Santander Chile has lost ample share since the 2002 merger. Santander Chile has
seen its lending market share decline to 19.5% in December 2014 from 24.4% in
December 2002. The share decline was most substantial from 2002 to 2009, when
Santander Chiles market share fell to 19.9% from 24.4% in the aftermath of the
merger between Santander Chile and Santiago. After increasing in 2010 versus 2009,
the share decline resumed in 2011 and 2012. In particular, Santander Chiles market
share fell an additional 160 bps from 2010 to 2012 to 19.3%. These more recent
share losses at Santander Chile were largely driven by slow growth in Santander
Chiles consumer book. Specifically, the bank saw its share of the consumer loan
market decline 340 bps from 27.7% in 2010 to 24.3% in 2012. We note that
Santander Chile has been selective about its loan growth to lower/middle-income
segments (which it has greater exposure to than Banco de Chile), as the removal of
2.9mn people from the negative credit bureau in the aftermath of the implosion of La
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08 April 2015
Polar in June 2011 has made pricing risk to these segments of the population more
difficult.
The eventual merger between Itau Unibanco and Corpbanca will create five banks
with double digit market shares. On January 29, 2014, Itau Unibanco and Corpbanca
announced the merger of Itaus Chilean operations with Corpbanca. According to
CorpBanca, the merger is expected to close by the end of 2015 or the beginning of
2016. Using pro-forma figures, Itau Corpbanca will have 13.1% loan share (ranked
5th among Chilean banks) and 16.0% deposit share (ranked 3rd among Chilean
banks). It will have 14.8% commercial loan share, 7.9% consumer lending share, and
14.4% demand deposit share, according to December 2014 figures, on a pro-forma
basis. Government bank Banco del Estado has 14.6% loan share and 18.3% deposit
share, while BCI has 13.7% loan share and 12.2% deposit share.
Figure 88: Banking Sector ROE
Source: SBIF, J.P. Morgan.
System earnings growth has been lackluster since 2009 due to top line pressures,
averaging 2.2% from 2009 to 2013. Over this time period, system ROEs have fallen
from the high teens to the mid teen range. The biggest headwinds have been net
interest margin (NIM) pressure (the system NIM fell to 4.0% in 2014 from 4.2% in
2010 due to falling inflationChilean banks have net long positions in inflation
indexed assets) and substantial pressure on fees. We note that fees as a percentage of
total revenue declined to 16.1% in 2014 from 21.0% in 2010. This decline was
concentrated in 2013, when it fell 210 basis points to 17.5% from 19.6% in 2012.
83
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08 April 2015
Utilities (Marcos SeverineAC)

[email protected]
(55-11) 4950-4297
The Chilean power industry is divided into generation, high-voltage transmission and
low-voltage distribution. Most of the industry is deregulated, allowing companies to
define expansion programs with no input from a central planning agency (as in, for
example, Brazil) and to freely negotiate prices and conditions of service with offtakers. The only segment that is regulated is low voltage distribution to clients with
less than 500kW of installed capacity, with users between 500kW and 2MW of
installed capacity able to choose between regulated and deregulated supply.
The country has two interconnected systems in Chile the Central (SIC) and the
Northern (SING) that represent over 99% of the installed capacity. The SIC is the
largest of the two networks, with 12.5GW of installed capacity and 6.9GW peak
demand. It covers the countrys largest cities (93% of Chiles population) and has a
diverse generation mix (50% hydro + wind, 30% low-cost thermos, and 20% peaking
capacity) and demand structure (60% residential, 40% industrial). By contrast, the
SING (4.6GW installed, 1.9GW peak demand) is nearly 100% thermoelectric, and
large industry, mostly mining, represents over 90% of the systems demand. The SIC
and SING are not connected even though physically they are ~50mi apart on their
extremes; however, given the distance between the location of the heavier load
centers (around Santiago) and the Northern Grid, an interconnection would not affect
the operation of the systems without a major upgrading of the entire SIC north of
Santiago (a project to interconnect both systems is currently being promoted by the
main regulatory agency, CNE). The country also has a few small and geographically
isolated grids, mostly in islands and the far South of the country the most important
of which are Aysen and Magallanes.
There is a project promoted by current authorities to connect both systems but
wont become a reality before 2019. The transmission line capacity would be
between 1,000-1,500 MW and the project is currently pending approval in congress.
In any case, while this would be, in our view, a positive step toward increasing the
reliability of the system and could be positive for future development of new
capacity (a small fraction of population lives in the north of Chile so it could be
easier to develop thermal capacity in those regions); in the best case scenario, it is
expected to be ready by 2019. That means that in order to anticipate what are the
main challenges in the electricity sector in Chile and the potential impact for
productive sectors in upcoming years we have to consider both systems
independently. The National Commission of Energy (CNE) published a study (full
report here) showing that the economic value that this interconnection would
generate adds up to US$3.2 billion in a conservative scenario, and that it would
imply a reduction of regulated prices of 1.9% in the SIC and 5.8% in the SING and a
decline in free clients prices of 2% in the SIC and 7% in the SING.
Since the privatization of the Chilean electricity sector in 1980s and 1990s, the state
has no significant stake in the power sector (the sell-down of state-owned miner
Codelcos stake in E.Cl completed the privatization of the sector). There are 26
companies that participate in generation, with the four main generation companies
being Enersis/Endesa, AES Gener, Colbn and E.Cl. Similarly, the distribution
sector is fragmented in approximately 25 companies, yet in terms of sales volume the
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08 April 2015
market is concentrated in a few names: CGE Distribucin, Chilectra, Chilquinta, and

SAESA. In transmission, there are 5 players. In the SIC, the transmission system is
mostly owned by Transelec (48% of the SIC by kms of lines) and CGE Transmision
(18%). In the SING, the system is owned by the systems generators (49%) and
largest off-takers (34%, mostly copper miners).
Distribution companies are remunerated by regulated tariffs calculated with a 10%
real rate of return for unlevered capital. The Chilean regulatory framework is one of
the worlds most time tested, dating back to 1981, and defines the added value for
distribution services (VAD), which the companies receive to compensate for opex,
capex needs and capital costs. All energy purchase costs are passed though to the end
consumer on a dollar-per-dollar basis every month. Given the maturity of the
distribution sector, and the relatively high efficiency level of the industry, tariff
reviews in Chile tend to be noncontroversial.
Generators receive two sets of revenue: for actual consumption (energy payment,
80-85% of revenue) and for availability (capacity payment, 15- 20%). Both
payments can be regulated (i.e., for small consumers) or deregulated. Typically, offtake contracts run for 10-15 years at fixed prices with indexation mechanisms,
including both regulated and deregulated contracts. The indexation is typically based
on the capacity mix of the generator CPI for hydro, or fuel cost for thermo.
As a result of regulatory changes in the late 2000s, regulated and unregulated prices
have converged. Before the legislative change, the regulator defined tariffs for
smaller consumers biannually based on a 4yr forecast of marginal costs. Now, the
regulated price is defined by competitive auctions carried out by distributors, for
demand requirements typically 3-5yrs ahead so that generators can have visibility of
the future. Effectively, this is the same model used by large consumers for
deregulated contracts, the regulated and deregulated markets having converged
rapidly. Depending on each contracts vintage and indexation, the bulk of these
wholesale contracts in the SIC are priced at US$95-110/MWh.
Generators trade surplus/deficit energy with each other at the marginal cost of the
system in the spot market; exposure to the spot market is the single most relevant
source of earnings volatility for Chilean generators. The system operator typically
ranks all power plants by actual economic merits (i.e., cheaper plants are operated
first), which are accumulated until production meets demand on an hourly basis the
last plant to deliver power defines the marginal cost of the system at any point in
time. Given that generators will presell energy independently, some generators will
have surplus production (e.g., if the system operator dispatches more energy from
that generators plants than the demand included in the generators contracts) or
deficit. On an hourly basis, all surpluses and deficits are priced at the marginal cost
of the system, and generators in deficit buy spot energy from surplus generators.
Currently, as a result of the drought, hydroelectric generation is low, thus spot prices
are at a relatively high $250-300/MWh; thus, companies in deficit (typically hydro)
are required to buy energy at $250-300/MWh from surplus generators to sell at
contract prices ($100/MWh). In the long run, spot prices should trend to the marginal
cost of LNG-fired power plants, $80-100/MWh; however, hydrological and demand
conditions will continue to make the spot price oscillate between zero (wet
hydrology, low demand) and up to $500/MWh (dry hydrology, peak demand).
Chile has the highest generation cost in LatAm. In the case of the SIC, the
marginal cost of generation reached US$312 per MWh by the end of June (last
month available). That was the highest figure YTD and is more than three times
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08 April 2015
higher than the average marginal cost in LatAm. There are several reasons behind
this extremely high cost (low hydro generation output on the back of low rains, lack
of efficient thermal capacity, high fuel prices, etc.), but the facts are that most of
the free clients (clients with more than 2,000 KW of capacity, around 40% of
clients in the SIC) have some kind of indexation to marginal costs in their contracts,
implying that productive sectors face an important disadvantage compared to other
countries in the region. In the case of the SING, things are better, with marginal costs
hovering around the US$80 per MWh level, as a result of a generation mix with a
higher relevance of coal and gas. Nonetheless, this is still much higher than, for
example, Peru, which shows a marginal cost close to US$35 per MWh.
This scenario is hurting productivity and affecting future investments. The
problem of high electricity costs has been highlighted by many industry
representatives. Mining industry, in particular, is very concerned, as close to 20% of
cash costs in copper production are related to energy (close to 12% directly related to
electricity). Chile has been losing competitiveness in the sector with cash costs
increasing double digit in recent years, electricity prices being one of the main
factors behind this increase. In a recent poll conducted by Fraser Institute, Chile left
the top ten as the most attractive countries to invest in mining. In 2004, Chile was
second in the same poll. This is not only hurting margins currently, but could
definitively affect investment looking forward.
Unfortunately Chile has faced several issues in terms of approving and executing
new projects. The portfolio of generation projects under execution indicate that the
current tightness between supply and demand will continue for at least the next four
years. According to the National commission of energy (CNE), electricity demand
growth will require the incorporation of 1,847 MW between 2013 and 2017 in the
SIC. Currently, there are only two projects of conventional energy to be incorporated
in that period: Angostura from Colbun (316 MW) and the fifth unit of Geners
Guacolda (138MW). There are other renewable energy projects to be incorporated
that could add around 400 MW, but even so the reserve margin will decline
significantly in upcoming years. This means that hydro output will continue to be
key for outlook of the system and that high prices are here to stay. There are
projects, but most of them are facing difficulties. There is a pipeline of more than
9,000 MW of projects that have been presented to the environmental authority, but
that for different reasons have not been able to be executed (please see table 1). In
our view, this has been the main problem in the Chilean electricity sector in recent
years. The mix of rejected environmental studies, local communities opposition,
legal processes from local authorities and the lack of a clear support to the projects
has implied that most of them have not seen the light yet. There are a few
emblematic examples (Hidroaysen from Endesa and Colbun, Castilla from MPX),
but also several additional lower scale projects that have not been able to develop.
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08 April 2015
Table 43: Main Generation Projects under Construction in Chile

Project Name
Energa Pacfico
Pulelfu
Los Hierros
El Paso
San Andrs
Laja I
Cuel
Picoiqun
Til Til
Angostura
El Arrayn
San Pedro de Dalcahue
Santa Marta
La Cebada
El Pacfico
San Andrs
Llano Llampos
Lautaro II
Total SIC
Company
Coipsa
E.E. Capullo
Besalco
HydroChile
HydroChile
GDF Suez
Mainstream
HidroAngol
E management
Colbn
AMSA/Pattern/Ashmore
TransAntartic Energa
Consorcio Santa Marta
Eolicpartners
Eolicpartners
SunEdison
SunEdison
Comasa
Source
Biomass
Hydroelectric
Hydroelectric
Hydroelectric
Hydroelectric
Hydroelectric
Eolic
Hydroelectric
Solar
Hydroelectric
Eolic
Eolic
Gas
Eolic
Eolic
Solar
Solar
Biomass
Portada
El guila
Pozo Almonte Solar 2
Pozo Almonte Solar 3
Arica Solar 1 (Etapa I)
Ampliaciacin La Huayca
Valle de los Vientos
Arica Solar 1 (Etapa II)
Cochrane I
Cochrane II
Total SING
Tecnet
E-CL
Solarpack
Solarpack
Sky Solar
Selray
Enel Green Power
Sky Solar
AES Gener
AES Gener
Diesel
Solar
Solar
Solar
Solar
Solar
Eolic
Solar
Coal
Coal
Capacity (MW)
15.6
9.4
23
40
40
34.4
34
19.2
2.5
316
115
36
14
43
72
48.2
95
22
979
Starting Date
Jul-13
Sep-13
Oct-13
Nov-13
Aug-13
Aug-13
Aug-13
Oct-13
Nov-13
Dec-13
Mar-14
Oct-14
Aug-14
Feb-14
Feb-14
Feb-14
Dec-13
Feb-14
3
2
7.5
16
18
9
90
22
266
266
700
Jul-13
Jul-13
Sep-13
Sep-13
Oct-13
Oct-13
Nov-03
Jan-14
Jan-16
Jul-16
Source: CNE, J.P. Morgan
Is there a solution? We believe there is, but it will take some time. Unlike other
economic discussions, it seems to be that most presidential candidates in Chile have
a similar view regarding the energy problem in the country, which is good, as it
makes the implementation of a solution more likely. We recently met with members
of the economic teams of the three main candidates, and there was consensus about
three things: 1. Chile needs an ample agreement between different political parties
to move forward on the required changes (including the interconnection of SIC and
SING, support to projects, etc.); 2. It seems that natural gas, via the LNG
regasification facilities, generate consensus as being an environmental friendly and
efficient way to develop the system. Members of the two main candidate's teams
mentioned this; and 3. With this goal in mind give the involved authorities the means
to reduce the judicialization of the projects, which has been a relevant constraint for
new projects. We see this consensus as positive and we see current (and future)
authorities aware of the relevance of moving things forward in the sector. This is
positive in the long term, although it seems that the country will have to live with
high electricity costs for some years.
87
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Table 44: Main Generation Projects facing problems to begin construction in Chile
Project Name
Company
Source
Proyecto Hidroelctrico Aysn
HidroAysn
Hidrulica
Central Termoelctrica Castilla
MPX Energa S.A.
Carbn
Central Termoelctrica Energa Minera
Energa Minera S.A.
Carbn
Los Robles
AES GENER S.A
Carbn
Hidroelctrica Cuervo
Energa Austral Ltda.
Hidrulica
Central Combinada ERA
ENAP REFINERIAS S.A
Gas-Cogeneracin
ALTO MAIPO
AES GENER S.A
Hidrulica
Parque Elico Talinay
Elica Talinay S. A.
Elico
Parque Elico Talinay II
Parque Talinay Sur S.A
Elico
Central Hidroelctrica Neltume
Empresa Nacional de ElectricidadHidrulica
S.A. ENDESA
Total SIC
Central Trmica Luz Minera
Central elctrica Luz Minera Spa GNL
Infraestructura Energtica MejillonesEDELNOR S.A.
Carbn
Central Termoelctrica Cochrane NORGENER S.A.
Carbn
Central a Gas Natural Ciclo Combinado
KelarKelar
S.A.
GNL
Parque Elico Loa
Aprovechamientos Energticos S.A.
Elico
Planta Termosolar Mara Elena
Iberelica Solar Atacama S.A. Solar
Planta Termosolar Pedro de ValdiviaIberelica Solar Atacama S.A. Solar
Central Termoelctrica Pacfico
Ro Seco S.A.
Carbn
Total SING
Capacity (MW)
2,750
2,354
1,050
750
640
579
542
500
500
490
10,155
CAPEX (US$ mn)

3,200
4,400
1,700
1,300
733
390
700
1,000
1,200
781
15,404
760
750
560
540
528
400
360
350
4,248
758
1,500
1,100
400
933
3,290
2,610
750
11,341
Source: CNE, J.P. Morgan
Telco/IT (Andre BaggioAC)

[email protected]
(55-11) 4950-3427
The Chilean telecom market is highly penetrated versus other LatAm markets across
all four industry segments (mobile, fixed line, broadband and pay TV). This is
unsurprising given the high GDP per capita compared to its neighbors.
SIM card penetration is high in a LatAm and global context at 124% (in 2010). The
main players, Entel (36% subscriber, 42% revenue share) and Telefonica (41% and
43%), have historically dominated the market, though America Movil (24% and
15%) has been gaining subscriber share since 2009 (at the expense of Telefonica).
ARPU reaches around US$12.5, which is also high by LatAm standards.
With most sales through nonexclusive retailers, operators differentiate on brand.
Entel focuses on quality of service (though it is moving to a more youth- oriented
segment). Telefonica plays on its community, leveraging its 12m fixed accesses.
Claro (AMX) has focused on the prepaid segment. Nextel International (NIHD) and
the cable operator (VTR, owned by Liberty Global) won 60 and 30 MHz,
respectively, of 3G spectrum in the 2009 auction. Both companies are expected to
launch service in the short term.
88
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Data penetration is low but growing fast. Data represent around 18% of Chilean
industry service revenues (Entel the highest at 20%, Telefonica at 16%, America
Movil at 15%) compared to closer to 30% in Europe. Mobile data should move
forward in two directions: Firstly, mobile data should move from being a niche
service taken by the richest customers to being a mass market product in Chile.
Secondly, with the growth now coming at the lower end of the market, we expect the
focus to move away from laptop data cards and toward smart phones. To date, Entel
has been focused more on laptop data cards (with around 90% of Entels 661k 3G
connections at FY10 being data cards).
The broadband market is one of the most developed in Latin America. For many
years Chile retained the regional leadership in terms of fixed broadband penetration.
Slow growth in 2010, however, has relegated it to third place, after Uruguay and
Argentina. The slowdown was partly due to the effects of the earthquake at the start
of the year, partly to the mobile broadband boom, and partly to the fact that
saturation has been reached in the urban middle- and upper-income segments. Due to
weak broadband competition, the government is considering the establishment of a
wholesale telecom infrastructure provider. In terms of broadband speeds, Chile is the
regional leader, with a mean download speed of 6.45Mb/s (as of June 2011), which,
though high for Latin America, is still low compared with the rest of the world.
The fixed-line market has been declining for more than a decade. Teledensity is
about 14% higher than average for Latin America but lags behind Costa Rica,
Uruguay, Argentina, Venezuela, Brazil, and a number of Caribbean small island
nations. Chiles largest telecom company is the local telephony operator Telefnica
Chile, which trades as Movistar. Its main competitors are pay-TV/triple-play operator
VTR Globalcom, long distance provider Entel Chile, the GTD group (including GTD
Manquehue, GTD Telesat, Telsur, and Telcoy), and Amrica Mvils Claro Chile. In
a bid to unify services under a single trademark, the fixed-line business previously
conducted by Telmex Chile has been taken over by mobile operator Claro Chile, both
companies being controlled by Carlos Slim.
Agro (Cassio LucinAC)

[email protected]
(55-11) 4950-3893
Agriculture only represents around 3.0% of GDP, one of the lowest levels in LatAm
(9% Argentina, 8% Uruguay, 6% Colombia, 5% Brazil). The importance of
agriculture is very low and also has been decreasing in terms of % of GDP.
Nonetheless, it is still an important sector in terms of the workforce (around 10% of
the countrys total workforce).
Due to the extreme length of the country, there is a great diversity of climates. This
condition allows the existence of a great variety of fauna and flora, which is the basis
for Chiles diversified agriculture. However, so far most of the agriculture activities
are concentrated in the central zone of the country.
During 2010, Chile exports from the Agriculture sector (except livestock) accounted
for US$4.2 billion, mainly fruits at US$3.7 billion. The most important fruit for
exports is grapes with an amount of US$1.3 billion among its varieties (Thompson,
Red Globe, Crimson and others); after grapes come apples (US$577 million),
89
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
blueberries (US$278 million), cherries (US$228 million) and avocados (US$173

million).
Chile is the second-largest producer of farmed salmon in the world after Norway.
Since the 80s, when the farmed salmon industry was introduced in Chile, it has been
growing aggressively, peaking in 2008 with US$2.3 billion of exports. However, due
to the ISA virus during 2009, production decreased significantly, to US$2.1 billion
and then to US$2 billion in 2010. Currently the industry is in a strong recovery phase,
operating under new and more strict sanitary regulations, and the industry expects to
become number one producer in the world in the next five years. Main destinations
for Chilean salmon are Japan, the US and Brazil.
90
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Annex 1: Chile Dashboards

Market Performance versus LatAm
Source: Bloomberg.
91

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
IPSA Performance by Stock

Mcap
3m ADTV
Price
Name
Ticker
US$ mn
US$ mn
(Local)
High
Low
1d
5d
1m
3m
6m
y td
1 yr
AES GENER SA
AESGENER CC Equity
4380.0
1.1
334.2
348.0
270.7
1.3
1.5
(0.3)
5.1
4.0
3.6
17.5
AGUAS ANDINAS-A
AGUAS/A CC Equity
3384.2
1.8
365.6
382.0
315.5
1.4
(0.6)
(0.9)
5.6
4.0
4.1
11.7
ANDINA-PREF B
ANDINAB CC Equity
2203.4
0.8
1610.5
2349.5
1550.2
(3.4)
(7.0)
(8.2)
(8.1)
(14.5)
(6.2)
(18.8)
ANTARCHILE
ANTAR CC Equity
5265.7
0.4
7400.0
8050.0
7050.0
0.0
(0.7)
(5.0)
(0.7)
(7.3)
1.5
2.2
BANMEDICA
BANMED CC Equity
1505.6
0.4
1200.0
1325.0
853.1
(0.3)
(4.0)
(1.6)
6.2
20.6
11.1
38.9
BANCO CRED INVER BCI CC Equity
4767.5
4.9
28129.0
34015.5
26100.0
0.6
1.3
(2.7)
(5.3)
(15.5)
(6.1)
(10.4)
BESALCO
315.2
0.1
355.0
536.3
300.0
(1.4)
0.0
0.9
1.4
(17.8)
1.4
(25.6)
BANCO SANTANDER BSAN CC Equity
9655.2
4.4
32.9
37.5
29.3
1.4
2.9
5.6
8.1
(3.6)
8.3
7.2
BUPA CHILE SA
BUPACL CC Equity
512.0
0.4
515.0
517.0
448.4
0.0
0.9
1.6
3.8
6.2
3.6
11.7
CAP
CAP CC Equity
481.9
3.0
2068.1
9226.3
1500.0
(4.6)
(19.6)
(38.3)
(26.6)
(69.6)
(22.9)
(74.2)
CERVEZAS
CCU CC Equity
3410.1
1.2
5918.9
6900.0
5479.4
(0.2)
2.8
3.2
5.1
(11.8)
3.1
(5.1)
CENCOSUD SA
CENCOSUD CC Equity
6290.2
8.6
1396.4
1980.0
1279.3
2.3
(1.4)
(12.4)
(2.8)
(24.3)
(7.8)
(14.2)
BANCO DE CHILE
CHILE CC Equity
10565.8
3.8
71.6
75.5
65.5
(0.3)
0.6
0.1
1.1
(3.3)
1.8
2.3
CMPC
CMPC CC Equity
6257.5
2.7
1605.3
1699.8
1150.0
1.3
2.5
(2.2)
5.6
11.5
5.7
35.6
COLBUN SA
COLBUN CC Equity
4730.0
2.6
173.0
184.0
127.3
(0.4)
(0.2)
(3.3)
7.3
9.2
7.1
35.6
CONCHATORO
CONCHA CC Equity
1466.6
0.9
1259.2
1300.0
1065.0
(2.4)
(1.5)
(0.9)
8.3
8.3
6.1
14.2
EMPRESAS COPEC
COPEC CC Equity
14088.3
4.0
6951.2
7680.0
6600.0
1.0
0.2
(2.7)
0.9
(5.6)
1.5
(3.4)
CORPBANCA
CORPBANC CC Equity
3605.0
2.4
6.8
7.9
6.2
(0.9)
(2.2)
(8.9)
(5.8)
(10.5)
(6.8)
8.3
E.CL SA
ECL CC Equity
1640.3
1.0
998.8
1042.7
666.0
0.5
1.9
(1.1)
12.1
13.9
12.9
39.1
BESALCO CC Equity
COCA-COLA EMBO-B EMBONOB CC Equity
52 Week
Performance
671.6
0.3
910.3
1100.0
830.0
0.0
3.4
2.3
(0.5)
(6.6)
0.8
(7.7)
ENDESA (CHILE)
ENDESA CC Equity
11813.9
4.7
923.8
960.0
739.3
(0.0)
1.8
(0.2)
3.7
0.8
0.3
20.3
ENERSIS SA
ENERSIS CC Equity
15091.0
6.4
197.2
210.8
154.9
(0.2)
(0.5)
(2.4)
3.8
(4.1)
(0.8)
22.2
ENTEL
ENTEL CC Equity
2288.0
1.8
6204.2
7460.0
5877.9
(1.5)
0.2
(2.1)
1.4
(6.4)
1.8
(3.0)
FALABELLA
FALAB CC Equity
16604.3
5.1
4425.4
5150.0
3700.0
2.5
(0.2)
0.9
7.9
0.1
8.7
(6.3)
FORUS
FORUS CC Equity
1048.9
0.9
2602.7
2780.0
2165.0
(1.8)
(2.9)
2.1
8.0
3.9
4.9
4.9
GASCO SA
GASCO CC Equity
1441.0
0.5
5501.0
6180.0
3450.0
(1.0)
(6.0)
(4.3)
11.8
28.1
5.8
5.3
AGUAS METROPOLIT IAM CC Equity
1525.4
0.9
978.3
999.0
824.0
(0.1)
1.1
(0.7)
7.4
3.1
4.1
15.6
LA CONSTRUCCION ILC CC Equity
1141.3
0.5
7320.0
8670.1
6400.0
(1.0)
(2.4)
(6.2)
1.6
(9.4)
(0.5)
1.3
LATAM AIRLINES
LAN CC Equity
4674.7
5.5
5432.9
8879.6
5150.0
2.8
(5.9)
(17.5)
(21.5)
(24.3)
(23.1)
(33.9)
PARQUE ARAUCO
PARAUCO CC Equity
1491.3
1.3
1169.6
1260.1
943.5
(0.9)
(2.4)
(4.0)
(0.8)
6.6
0.6
21.4
QUINENCO
QUINENC CC Equity
3370.4
0.4
1300.0
1350.0
1100.1
0.0
0.0
(2.6)
2.4
3.2
0.0
14.1
RIPLEY CORP SA
RIPLEY CC Equity
950.6
1.1
314.9
390.0
247.2
5.9
1.4
0.7
7.2
(4.1)
7.1
(1.1)
SALFACORP
SALFACOR CC Equity
356.3
0.3
507.9
532.0
401.0
3.6
(1.4)
12.1
14.7
12.9
10.6
0.0
GRUPO SECURITY
SECUR CC Equity
1011.5
0.1
199.0
244.3
181.4
0.5
(0.3)
(3.2)
(10.0)
6.7
(7.8)
5.8
SIGDO KOPPERS
SK CC Equity
1475.0
0.1
880.0
1019.9
770.0
(0.1)
1.1
2.3
(4.3)
(11.6)
(6.4)
(2.2)
SM-CHILE SA-B
SMCHILEB CC Equity
3719.5
0.9
181.5
187.5
166.4
0.8
1.7
2.0
1.0
0.5
0.9
4.1
SAAM SA
SMSAAM CC Equity
774.3
0.3
51.0
53.0
42.6
0.9
4.1
6.3
9.0
6.3
8.7
17.4
SONDA SA
SONDA CC Equity
1959.4
4.2
1442.7
1700.0
1125.0
0.8
0.7
(9.0)
(1.2)
3.2
(0.1)
20.7
SOQUIMICH-B
SQM/B CC Equity
6110.9
2.1
14168.0
17761.1
12883.0
(0.5)
(6.9)
(11.4)
(1.4)
(12.5)
(3.9)
(16.1)
CIA SUD AMERICAN
VAPORES CC Equity
IPSA Index
1196.7
1.0
24.6
27.2
20.7
(0.6)
(5.2)
1.0
12.1
11.4
7.8
(7.2)
163240.7
83.1
3849.7
4120.2
3616.8
0.5
(0.6)
(3.5)
1.1
(4.4)
(0.0)
4.8
Source: J.P. Morgan and Bloomberg. / Pricing as of March 27, 2015
92

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
IPSA Consensus Growth Expectations & Valuations

3M ADTV
Price
Name
Ticker
Market Cap
USD mn
Weight
USD m n
(Local)
2015e
2016e
2015e
2016e
AES GENER SA
AESGENER CC Equity
4380.0
2.1
1.1
334.2
26.7
21.9
19.5
16.0
AGUAS ANDINAS-A
AGUAS/A CC Equity
3384.2
2.7
1.8
365.6
7.1
4.8
17.2
16.4
ANDINA-PREF B
ANDINAB CC Equity
2203.4
1.0
0.8
1610.5
16.1
10.5
18.7
16.9
ANTARCHILE
ANTAR CC Equity
5265.7
2.2
0.4
7400.0
BANMEDICA
BANMED CC Equity
1505.6
1.0
0.4
1200.0
BANCO CRED INVER
BCI CC Equity
4767.5
3.2
4.9
28129.0
(7.8)
BESALCO
BESALCO CC Equity
315.2
0.2
0.1
355.0
BANCO SANTANDER
BSAN CC Equity
9655.2
5.2
4.4
32.9
BUPA CHILE SA
BUPACL CC Equity
512.0
0.4
0.4
515.0
8.4
CAP
CAP CC Equity
481.9
0.5
3.0
2068.1
(262.6)
NM
NM
NM
(5.5)
(2.0)
0.3
CERVEZAS
CCU CC Equity
3410.1
2.2
1.2
5918.9
2.4
7.9
17.0
15.7
11.4
11.8
2.0
CENCOSUD SA
CENCOSUD CC Equity
6290.2
4.1
8.6
1396.4
40.6
13.8
12.6
11.0
5.6
6.9
0.9
BANCO DE CHILE
CHILE CC Equity
10565.8
3.5
3.8
71.6
(5.0)
9.4
12.1
11.1
21.0
21.4
2.5
CMPC
CMPC CC Equity
6257.5
4.5
2.7
1605.3
52.7
34.7
19.7
14.6
3.4
4.4
0.7
COLBUN SA
COLBUN CC Equity
4730.0
3.9
2.6
173.0
41.6
6.7
13.0
12.2
7.5
8.0
1.3
CONCHATORO
CONCHA CC Equity
1466.6
1.5
0.9
1259.2
27.7
2.1
17.1
16.7
11.3
11.4
1.9
EMPRESAS COPEC
COPEC CC Equity
14088.3
9.0
4.0
6951.2
3.5
4.6
14.8
14.2
8.6
8.6
1.3
CORPBANCA
CORPBANC CC Equity
3605.0
3.3
2.4
6.8
0.0
14.8
9.5
8.2
14.1
13.5
1.2
E.CL SA
ECL CC Equity
1640.3
1.3
1.0
998.8
(11.9)
1.2
21.0
20.7
5.1
4.9
0.9
COCA-COLA EMBO-B
EMBONOB CC Equity
671.6
0.3
0.3
910.3
20.5
15.8
13.1
9.0
10.6
ENDESA (CHILE)
ENDESA CC Equity
11813.9
7.7
4.7
923.8
27.5
17.2
17.2
14.7
14.6
16.0
2.4
ENERSIS SA
ENERSIS CC Equity
15091.0
9.7
6.4
197.2
31.8
11.9
13.4
12.0
10.9
11.6
1.4
ENTEL
ENTEL CC Equity
2288.0
1.7
1.8
6204.2
(10.6)
32.2
22.0
16.6
7.5
8.4
1.5
FALABELLA
FALAB CC Equity
16604.3
5.4
5.1
4425.4
16.0
13.0
20.3
18.0
14.8
14.8
2.8
FORUS
FORUS CC Equity
1048.9
0.6
0.9
2602.7
0.3
9.6
17.6
16.0
22.8
21.4
3.8
GASCO SA
GASCO CC Equity
1441.0
1.0
0.5
5501.0
(16.0)
19.1
22.7
10.9
10.4
AGUAS METROPOLIT
IAM CC Equity
1525.4
1.1
0.9
978.3
6.2
5.4
15.3
14.5
10.5
10.8
1.7
LA CONSTRUCCION
ILC CC Equity
1141.3
0.6
0.5
7320.0
150.1
(64.6)
4.2
11.7
28.7
9.5
1.3
LATAM AIRLINES
LAN CC Equity
4674.7
5.6
5.5
5432.9
NM
44.2
13.4
9.3
7.2
8.5
0.8
PARQUE ARAUCO
PARAUCO CC Equity
1491.3
1.8
1.3
1169.6
12.2
2.1
18.4
18.0
7.9
7.6
1.4
QUINENCO
QUINENC CC Equity
3370.4
1.0
0.4
1300.0
RIPLEY CORP SA
RIPLEY CC Equity
950.6
0.7
1.1
314.9
21.5
36.2
14.9
11.0
5.4
6.9
0.7
SALFACORP
SALFACOR CC Equity
356.3
0.4
0.3
507.9
(9.3)
7.8
8.6
7.9
8.2
9.5
GRUPO SECURITY
SECUR CC Equity
1011.5
1.5
0.1
199.0
SIGDO KOPPERS
SK CC Equity
1475.0
0.6
0.1
880.0
11.4
SM-CHILE SA-B
SMCHILEB CC Equity
3719.5
2.1
0.9
181.5
SAAM SA
SMSAAM CC Equity
774.3
0.7
0.3
51.0
SONDA SA
SONDA CC Equity
1959.4
1.7
4.2
1442.7
17.9
11.7
20.3
18.2
11.5
12.3
2.3
SOQUIMICH-B
SQM/B CC Equity
6110.9
3.0
2.1
14168.0
1.5
24.0
17.3
13.9
14.2
15.2
2.3
CIA SUD AMERICAN
VAPORES CC Equity
1196.7
0.9
1.0
24.6
NM
NM
NM
4081.0
2.5
2.1
4.3
12.2
16.1
14.4
11.4
11.1
1.7
15.4
13.3
14.8
14.8
1.4
Raw Average
IPSA Index
Earnings Growth (%)
P/E
ROE
2015e
P/B
2016e
2015e
8.0
8.1
1.7
20.3
20.6
3.6
8.9
10.0
1.6
23.9
21.5
9.9
8.1
15.4
17.2
1.6
(66.4)
49.1
31.7
21.3
5.1
6.3
(10.2)
8.6
12.7
11.7
18.9
19.0
2.3
Source: J.P. Morgan and Bloomberg. / Pricing as of March 27, 2015
93

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Chile Valuation Indicators

Consensus 12-Month Forward Earnings Factor
200
Consensus Forward P/Es
Gordon Growth P/E
30
23.0
180
21.0
25
160
140
19.0
17.0
20
120
15.0
15
100
13.0
80
11.0
10
60
9.0
40
7.0
20
0
95
97
99
01
03
05
07
09
11
13
15
5.0
0
96
98
00
02
04
06
08
10
12
03 04 05 06 06 07 08 09 09 10 11 12 12 13 14
14
Forward P/E
P/BV and ROE (%)
Dividend Yield
4.0
25.0
3.5
20.0
3.0
2.5
15.0
2.0
10.0
1.5
1.0
5.0
0.5
0.0
0.0
96
98
00
02
04
06
08
10
12
14
12mnth Fwd PE relative to LatAm
4.5
2.40
4.0
2.20
3.5
2.00
3.0
1.80
2.5
1.60
2.0
1.40
1.5
1.20
1.0
1.00
0.5
0.80
0.0
P/BV
Source: Bloomberg and J.P. Morgan
94
ROE (RHS)
Gordon Growth P/E
0.60
95
97
99
01
03
05
07
09
11
13
15
03
04
05
05
06
07
08
09
10
10
11
12
13
14
15

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Value: Regional, Countries and Sector Valuations

P/E
P/B
ROE %
Div Yield
Current
Consensus
10Y Hist.
# of SD
Current
10Y Hist.
Current
10Y Hist.
Current
10Y Hist.
Trailing
12M Forw ard
Av erage
from Av g.
Trailing
Av erage
Trailing
Av erage
Trailing
Av erage
World
16.3
15.4
13.4
1.1
2.0
2.0
13.0
14.5
2.6
2.7
US
17.9
17.1
14.1
1.8
2.5
2.4
14.6
16.5
2.0
2.2
Emerging Markets
13.3
10.9
10.9
0.0
1.5
1.8
14.0
16.7
2.4
2.7
Emerging Asia
13.0
11.5
11.6
(0.1)
1.6
1.8
14.0
15.4
2.3
2.5
Emerging Europe
8.9
5.7
8.0
(0.9)
0.9
1.4
15.1
17.6
2.6
2.7
LatAm
16.3
11.5
11.1
0.3
1.5
2.0
12.6
18.0
2.8
3.1
Argentina
8.0
10.2
8.9
0.4
1.9
1.6
18.8
18.4
1.4
2.9
Brazil
13.0
9.0
9.8
(0.4)
1.1
1.8
12.5
18.3
3.8
3.8
Chile
19.3
15.2
16.1
(0.5)
1.6
2.1
10.4
13.0
2.2
2.2
Colombia
13.9
13.5
14.2
(0.2)
1.2
1.7
8.6
12.4
2.8
3.0
Mex ico
25.1
17.7
14.4
1.3
2.7
2.8
15.4
19.5
1.3
1.8
Peru
19.3
12.7
12.0
0.3
2.0
3.2
16.0
27.2
1.2
3.5
Energy
7.1
7.1
8.9
(0.8)
0.5
1.6
6.5
18.1
7.8
3.5
Materials
22.5
11.9
9.6
1.0
0.9
1.8
7.9
19.7
4.2
3.5
Industrials
21.6
19.0
15.9
0.9
2.3
2.5
12.3
16.0
2.2
2.1
Financials
10.3
9.0
10.8
0.2
1.5
2.1
17.2
19.3
3.7
3.3
Cons. Discretionary
25.7
17.3
15.9
0.5
2.8
3.2
16.3
20.2
1.5
1.5
Cons. Staples
24.1
18.7
18.3
0.2
3.1
3.0
16.8
16.3
2.3
2.6
Inf. Technology
19.2
16.1
15.5
(1.4)
11.4
17.7
70.5
111.2
3.0
3.2
Health Care
22.8
11.7
22.3
(2.2)
2.6
4.0
22.3
18.3
1.1
0.8
Telecom, Media, Tech
18.2
9.9
11.5
(0.7)
2.7
3.0
27.4
26.1
2.9
3.1
Utilities
21.2
10.7
11.2
(0.4)
1.1
1.1
9.9
9.8
6.1
5.0
China
10.7
9.9
11.6
(0.5)
1.6
2.0
15.7
16.7
2.9
2.8
Korea
11.9
10.0
9.5
0.3
1.0
1.3
10.3
13.4
1.2
1.5
Taiw an
15.9
13.0
14.0
(0.3)
2.0
1.8
15.2
13.7
3.6
3.8
India
20.1
17.9
15.4
1.0
3.3
3.0
18.2
19.5
1.3
1.4
South Africa
19.9
16.2
11.5
2.8
2.8
2.4
17.4
20.7
2.8
3.3
Russia
6.3
3.8
6.9
(1.2)
0.7
1.3
17.7
18.6
3.0
2.4
Turkey
11.6
9.7
9.6
0.0
1.5
1.6
15.6
16.7
2.0
2.8
Country / Sector
Pricing as of 17-Mar-2015
95

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Pension Fund (AFP) Tracker

Pension Fund (AFP) Equity Holdings Evolution (US$mn)
Date
2007
2008
2009
2010
2011
2012
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Total Total
AUM Equities
111,037
59,551
74,313
30,966
118,053
57,342
148,437
71,543
134,962
54,795
162,021
67,239
161,925
64,932
162,572
65,354
168,276
67,647
170,081
69,223
168,595
69,882
167,986
69,882
163,196
67,465
168,696
68,642
168,229
71,113
165,432
66,679
163,992
66,419
168,476
69,465
% Foreign
Total Equities
53.6%
38,604
41.7%
18,819
48.6%
38,270
48.2%
44,053
40.6%
33,336
41.5%
43,260
40.1%
46,553
40.2%
46,918
40.2%
48,564
40.7%
50,633
41.5%
51,809
41.6%
52,395
41.3%
50,362
40.7%
51,182
42.3%
53,529
40.3%
49,798
40.5%
50,178
41.2%
52,512
Equity Exposure by Fund (US$bn) - Feb 2015
% Local
Total Equities
34.8%
20,947
25.3%
12,147
32.4%
19,072
29.7%
27,491
24.7%
21,459
26.7%
24,141
28.8%
18,411
28.9%
18,484
28.9%
19,066
29.8%
18,556
30.7%
18,073
31.2%
17,504
30.9%
17,103
30.3%
17,460
31.8%
17,584
30.1%
16,881
30.6%
16,241
31.2%
16,953
%
Total
18.9%
16.3%
16.2%
18.5%
15.9%
14.9%
11.4%
11.4%
11.3%
10.9%
10.7%
10.4%
10.5%
10.4%
10.5%
10.2%
9.9%
10.1%
65,403
48.77
Net
Invest
-165.8
-44.0
-508.4
517.1
379.8
446.1
14.2
39.8
-12.7
-65.4
-60.7
-91.0
-46.6
99.5
11.1
18.9
32.3
11.8
A
B
C
D
E
Total
% Local Equity
Jan-12
Source: SAFP, J.P. Morgan
96
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
%
78.1%
58.6%
39.0%
19.5%
4.9%
41.2%
Limit
22.6
17.0
25.1
5.4
1.1
71.2
%
80.0%
60.0%
40.0%
20.0%
5.0%
42.2%
Cushion
(0.5)
(0.4)
(0.6)
(0.1)
(0.0)
(1.7)
%
-1.9%
-1.4%
-1.0%
-0.5%
-0.1%
-1.0%
Top Net Investments / Divestments - Feb 2015 (US$mn)

Company
CENCOSUD
COLBUN
LAN
ENDESA
PARAUCO
COPEC
CORPBANCA
ECL
GENER
Divestments
Net Flow
23.16
17.07
14.91
11.58
8.42
6.62
5.88
4.28
3.88
% Issuer
16.9%
18.1%
17.9%
15.4%
9.4%
5.1%
0.9%
21.4%
16.5%
Company
ENERSIS
FALABELLA
BSANTANDER
SONDA
CHILE
ENTEL
CAP
CCU
RIPLEY
Net Flow
-25.26
-14.45
-12.32
-10.24
-9.23
-7.63
-4.13
-3.81
-3.39
% Issuer
12.4%
3.4%
5.2%
22.9%
3.0%
9.2%
7.3%
2.1%
14.0%
Top Net Investments / Divestments - Last 12 Months (US$mn)
Net Invest
Sep-11
Equity
22.1
16.6
24.5
5.2
1.1
69.5
Investments
Pension Fund Net Monthly Investment and Exposure in Domestic Equities (US$mn)
1,200
1,000
800
600
400
200
0
-200
-400
AUM
28.3
28.3
62.7
26.8
22.4
168.5
Jan-15
20%
19%
18%
17%
16%
15%
14%
13%
12%
11%
10%
Company
LAN
COPEC
CMPC
ENDESA
GENER
PARAUCO
VAPORES
COLBUN
SONDA
Investments
Net Flow
125.46
93.75
69.78
68.03
55.98
47.25
25.24
24.43
22.74
Holds Company
1037.15 FALABELLA
779.41 SQM-B
724.56 BSANTANDER
1886.08 ENERSIS
750.01 CONCHATORO
147.82 CGE
80.05 QUINENCO
897.66 ANDINA-A
515.36 CORPBANCA
Divestments
Net Flow
-78.52
-72.49
-62.74
-55.57
-50.11
-47.48
-43.82
-39.69
-26.76
Holds
608.59
145.45
505.48
1997.16
77.94
0.00
74.93
43.52
36.44
.

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Mutual Funds Tracker

Mutual Fund Equity Holdings Evolution (US$mn)
Date
2008
2009
2010
2011
2012
2013
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Total
AUM
17,544
33,737
37,626
32,928
37,456
39,018
39,643
41,835
43,243
43,189
44,962
44,385
45,525
44,873
44,180
46,828
43,234
42,998
44,919
Foreign
Investment
1,258
4,379
5,381
3,188
3,521
3,871
3,997
4,209
4,300
2,451
4,617
4,781
5,011
4,867
4,600
4,921
4,813
4,930
5,168
%
Total
7.2%
13.0%
14.3%
9.7%
9.4%
9.9%
10.1%
10.1%
9.9%
5.7%
10.3%
10.8%
11.0%
10.8%
10.4%
10.5%
11.1%
11.5%
11.5%
Local Fixed
Icome
15,421
27,394
27,580
27,219
31,431
33,646
34,328
36,306
37,655
39,449
39,127
38,447
39,417
38,927
38,505
40,828
37,400
37,101
38,683
%
Total
87.9%
81.2%
73.3%
82.7%
83.9%
86.2%
86.6%
86.8%
87.1%
91.3%
87.0%
86.6%
86.6%
86.8%
87.2%
87.2%
86.5%
86.3%
86.1%
Top Net Investments / Divestments - Feb 2015 (US$mn)

Local
Equities
846
1,950
4,628
2,501
2,480
1,485
1,303
1,307
1,279
1,278
1,208
1,150
1,089
1,069
1,065
1,067
1,010
958
1,046
%
Total
4.8%
5.8%
12.3%
7.6%
6.6%
3.8%
3.3%
3.1%
3.0%
3.0%
2.7%
2.6%
2.4%
2.4%
2.4%
2.3%
2.3%
2.2%
2.3%
Net
Invest
-720.3
339.1
1,277.0
-859.7
-334.6
-328.7
-18.0
-38.7
-42.9
-14.6
-56.9
-20.3
-46.4
-6.0
-13.9
-5.2
-10.9
-22.0
42.2
Company
Bsantander
Parauco
Endesa
LAN
Cencosud
Cruz Blanca
Enersis
Forus
Ripley
CMPC
Investments
Net Flow
Hold
6.8
48.6
5.9
28.9
5.4
89.9
4.6
53.1
4.2
35.8
3.2
8.1
3.0
92.6
3.0
15.2
2.5
15.6
1.9
38.2
% Issuer
0.5%
1.8%
0.7%
0.9%
0.5%
1.5%
0.6%
1.4%
1.6%
0.6%
Net Monthly Investment
Divestments
Net Flow
Hold
-5.5
24.7
-2.4
36.9
-2.4
41.1
-1.6
10.9
-1.0
27.8
-0.6
6.7
-0.5
26.4
-0.3
6.6
-0.2
4.4
-0.2
19.7
% Issuer
1.1%
0.8%
0.2%
0.9%
1.9%
0.1%
0.8%
3.3%
0.3%
1.2%
Top Net Investments / Divestments - Last 3 Months (US$mn)

Company
Cencosud
CMPC
Parauco
Enjoy
BCI
Investments
Net Flow
Hold
10.0
35.8
9.9
38.2
5.6
28.9
0.0
6.6
4.7
24.9
% Issuer Company
0.5%
Chile
0.6%
IAM
1.8% Sm Chile B
3.3% Conchatoro
0.5%
Sonda
Net Monthly Investment (US$ mn) VS Local Equity Mutual Fund Parcipants (%)
300
Company
Sonda
Gener
Falabella
ILC
Conchatoro
SQM-B
Sm Chile B
Enjoy
Sigdo Koppers
IAM
Local Equity Mutual Fund Particpants Change %
8.0%
180
6.0%
120
4.0%
60
2.0%
0.0%
-2.0%
-60
-4.0%
-120
-6.0%
-180
-8.0%
-240
-10.0%
Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14
% Issuer
0.3%
1.2%
0.8%
1.9%
1.1%
Top 15 Hold Feb 2015 (US$mn)

12.0%
10.0%
240
Divestments
Net Flow
Hold
-8.7
32.2
-8.6
19.7
-6.6
26.4
-6.1
27.8
-5.1
24.7
Company
Enersis
Endesa
Copec
LAN
Bsantander
Colbun
Falabella
CMPC
Gener
Edelnor
Cencosud
Aguas-A
Chile
Corpbanca
Parauco
Total
Hold
92.6
89.9
83.9
53.1
48.6
45.1
41.1
38.2
36.9
36.6
35.8
32.6
32.2
31.8
28.9
727
% of Total Hold
8.9%
8.6%
8.1%
5.1%
4.7%
4.3%
3.9%
3.7%
3.5%
3.5%
3.4%
3.1%
3.1%
3.0%
2.8%
69.8%
% issuer
0.6%
0.7%
0.6%
0.9%
0.5%
0.9%
0.2%
0.6%
0.8%
2.1%
0.5%
0.9%
0.3%
0.8%
1.8%
12.3%
Source: SVS, J.P. Morgan
97

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Chile Economic Indicators

2015 Consensus Economic Forecasts (% oya)
6
5
4
3
2
1
0
-1
Policy Rat
Mar-13
Jul-13
Real GDP
Nov-13
Mar-14
Inflation
Jul-14
Nov-14
CPI Inflation (% oya) and Monetary Policy Rate
Real GDP Growth (% oya)

5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Internal Demand
Investment
Consumption
10.0
0.0
-10.0
-20.0
1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14
1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14
Unemployment Rate (Monthly % oya)
IP (LHS) vs. Business Confidence

15.0
IP
Bus Conf
10.0
5.0
0.0
National
Santiago
Source: Chile Central Bank, Adimark, CNC, INE, J.P. Morgan
15
10
5
0
-5
-10
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
Import / Export Growth (% oya)
20.0
20
Internal Demand Growth (% oya)

30.0
Jan-08 Dec-08 Nov-09 Oct-10 Sep-11 Aug-12 Jul-13 Jun-14
98
Imacec (GDP proxy) Growth (% oya)
12.0
CPI
MPR/TPM
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
Mar-15 -4.0
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
-5.0
-10.0
Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14
80%
60%
40%
20%
0%
-20%
-40%
-60%
Import Growth
Export Growth
Jan-08 Nov-08 Sep-09 Jul-10 May-11 Mar-12 Jan-13 Nov-13 Sep-14
Retail Sales Growth (LHS) vs. Consumer Confidence

65
60
55
50
45
40
35
30
25.0
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
Retail Sales Growth
Cons Conf (Index)
Jan-08 Feb-09 Mar-10 Apr-11 May-12 Jun-13
Jul-14
65
60
55
50
45
40
35
30
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Chile Economic Forecasts

Av erage
2008-12
2013
2014f
2015f
2016f
Real GDP, % change
3.9
4.1
1.8
2.7
3.5
Consumption
4.1
4.2
1.9
2.0
2.4
Inv estment
2.4
(0.7)
(2.8)
0.2
1.1
Net trade
(2.6)
0.6
2.8
0.5
(0.1)
Consumer prices, %oy a
3.3
2.1
4.4
3.4
3.0
% Dec/Dec
2.6
3.0
4.6
2.8
3.0
Producer prices, %oy a
5.0
(3.9)
4.2
3.3
3.0
Gov ernment balance, % of GDP
0.9
(0.7)
(2.0)
(2.2)
(1.9)
Ex change rate, units/$, eop
521
525
607
640
630
Merchandise trade balance (US$ bn)
10.1
2.1
8.6
8.4
8.8
Ex ports
70.1
76.7
76.6
78.1
82.1
Imports
60.0
74.6
68.1
69.7
73.2
(2.2)
(9.5)
(2.2)
(2.8)
(3.6)
(1.0)
(3.4)
(0.9)
(1.1)
(1.4)
Current account balance

% of GDP
International reserv es, (US$ bn)
31.9
41.1
40.4
40.4
40.4
Total ex ternal debt, (US$ bn)
87.2
130.7
142.0
146.0
139.2
17.7
20.5
19.0
19.0
19.0
Total ex ternal debt, % of GDP
Short term
37.2
44.8
53.4
58.3
55.1
Total ex ternal debt, % of ex ports
89.0
124.2
136.1
141.2
134.0
Interest pay ments, % of ex ports
2.7
4.0
4.0
3.4
3.8
No tes: 1. Co ntribution to gro wth of GDP , 2. Debt with original maturity of less than o ne year. 3. Exports of go ods, services, and net
Source: J.P . M o rgan
99

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Bulk Commodities Prices

Key Bulk Commodity Prices
Price change % (from 18-Feb-15 to 18-Mar-15)
Pulp
Price change % (from 31-Dec-14 to 18-Mar-15)
1.1
Copper
-5.0
Gold
-5.2
Iron Ore
-9.3
300
280
260
240
-16.1
220
Oil-18.4
Oil -16.6
-15.0
-10.0
-5.0
0.0
-20
5.0
Copper - Spot (USD/lb)
-15
-10
-5
Gold - Spot (USD/troy ounce)
500
150
140
130
120
110
100
90
80
70
60
50
M-10
320
-13.0
Steel
-8.0
-20.0
Nickel
Iron Ore
-6.2
CRB
-9.1
Oil WTI - (USD/barrel)
380
340
-6.9
CRB
CRB - Commodity Index
360
-3.0
Copper
-3.7
Steel
1.8
Gold
0.7
Nickel
Pulp
200
M-10
M-11
M-12
M-13
M-14
M-15
Iron Ore - Spot (USD/metric ton)
2,000
210
1,100
1,000
900
800
700
600
500
400
300
M-10
190
450
1,800
400
1,600
350
1,400
300
1,200
250
M-10
1,000
M-10
170
150
130
M-11
M-12
M-13
M-14
M-15
Market Pulp - BHKP European CIF (USD/ton)
70
50
M-12
M-13
M-14
M-15
850
800
750
700
650
M-11
M-12
M-13
M-14
M-15
M-10
M-11
M-12
M-13
M-14
25
M-14
M-15
Russia Exports
1,800
15
M-15
M-13
2,100
20
M-14
M-12
2,400
30
M-13
M-11
2,700
35
M-12
M-15
3,000
40
M-11
M-14
3,300
45
M-10
M-13
LME Alum HG - Futures (USD/25 metric ton)
50
10
M-10
M-12
US Exports
M-15
Silver - Futures (USD/5,000 troy ounce)
30,000
28,000
26,000
24,000
22,000
20,000
18,000
16,000
14,000
12,000
10,000
900
100
90
Nickel - Futures (USD/metric ton)
950
600
M-10
110
M-11
M-11
Steel - Hot Rolled Coil FOB (USD/metric ton)
1,500
M-11
M-12
M-13
M-14
M-15
M-10
M-11
M-12
M-13
M-14
M-15

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Soft Commodities Prices

Key Soft Commodity Prices
Price change % (from 18-Feb-15 to 18-Mar-15)
Corn
Price change % (from 31-Dec-14 to 18-Mar-15)
-2.7
Corn
-6.0
-6.0
Live Cattle
-3.5
Soybean
Soybean
-3.8
Live Cattle
Lean Hogs
-3.8
Sugar
Wheat
-4.7
Coffee 'C'
Sugar
-11.7
Wheat
-14.8
Coffee 'C'
-12.3
-19.6
Orange Juice
-15.0
Orange Juice
-7.3
-16.4
-19.9
Lean Hogs
-20.0
-15.0
-10.0
-5.0
0.0
Soybean - Futures (USD cents/bu)
-23.9
-30.0 -25.0 -20.0 -15.0 -10.0 -5.0
0.0
Corn - Futures (USD cents/bu)
M-14
M-15
15
250
M-10
400
M-11
M-12
M-13
M-14
M-15
M-11
M-12
M-13
M-11
M-12
M-12
M-13
M-14
M-15
M-13
M-14
M-15
M-14
M-15
10
M-10
M-11
M-12
M-13
M-14
M-15
Lean Hogs - Futures (USD cents/lb)
90
70
M-10
M-10
M-11
Sugar - Futures (USD cents/lb)
20
110
M-15
50
M-10
500
130
M-14
M-15
350
150
M-13
M-14
25
170
M-12
M-13
600
190
M-11
M-12
450
280
80
M-10
75
M-11
30
330
130
100
700
Live Cattle - Futures (USD cents/lb)
180
125
35
Coffee 'C' - Futures (USD cents/lb)
230
150
800
550
M-13
175
40
650
M-12
200
900
750
M-11
225
1,000
850
M-10
Orange Juice - Futures (USD cents/lb)
230
210
190
170
150
130
110
90
70
50
30
M-10
Wheat - Futures (USD cents/bu)
950
1,700
1,600
1,500
1,400
1,300
1,200
1,100
1,000
900
800
700
Cotton - Futures (USD/5,000 lbs)
M-14
M-15
140
130
120
110
100
90
80
70
60
50
40
M-10
M-11
M-12
M-13
Commodities Prices Forecast

J.P. Morgan Commodities Forecasts
14Q1A
14Q2A
14Q3A
14Q4A
15Q1E
15Q2E
15Q3E
15Q4E
16Q1E
16Q2E
16Q3E
16Q4E
CY13A
CY14A
CY15E
CY16E
Long Term
Gold (US$ per ounce)
1,292
1,289
1,282
1,200
1,300
1,230
1,180
1,220
1,200
1,200
1,200
1,200
1,413
1,266
1,233
1,200
1,400
Silv er (US$ per ounce)
20.5
19.6
19.7
16.5
18.1
17
16.7
17
17
17
17
17
23.9
19.1
17.2
17
17.5
99
103
96
72
40
41
50
53
45
47
55
60
98
93
46
52
80
107
109
104
78
42
43
53
58
50
52
60
65
109
99
49
57
90
3.19
3.08
3.17
2.96
2.63
2.81
2.9
2.88
3.04
3.04
3.04
3.04
3.33
3.1
2.81
3.04
3.4
(period average)
Oil (WTI) (US$/bbl)

Brent (US$/bbl)
Aluminium (US$/lb)
Copper (US$/lb)
Lead (US$/lb)
Nickel (US$/lb)
Zinc (US$/lb)
6.64
8.37
8.47
7.22
6.71
7.26
8.62
9.07
9.98
9.98
9.98
9.98
6.82
7.67
7.92
9.98
8.16
Iron ore spot CFR (US$/t)
120
103
90
74
75
65
60
65
64
65
65
66
135
97
66
65
75
Iron Ore - Fines (USc/Fe%)
180
152
134
107
110
92
82
90
87
88
88
89
204
143
93
88
105
Iron Ore - Lump (USc/Fe%)
192
164
150
141
137
116
103
106
100
100
101
102
216
162
116
101
117
Coking Coal (US$/t)
143
120
120
119
117
115
115
118
123
123
123
123
162
126
116
123
145
Thermal Coal (US$/t)
78
73
68
63
60
58
58
58
61
61
61
61
84
70
59
61
80
Uranium (US$/lb)
35
30
31
38
36
36
37
37
41
42
42
42
39
34
37
42
75
Source: J.P. Morgan
Updated as of March 17, 2015
Source: Datastream, J.P. Morgan Estimates. / Pricing as of March 27, 2015
101
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Companies Discussed in This Report (all prices in this report as of market close on 08 April 2015)
Banco Santander Chile (BSAC/$21.93/Overweight), Endesa (ELE.MC/18.22/Neutral)
Disclosures
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per
KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or
intervention.
In compliance with Instruction 483 issued by Comissao de Valores Mobiliarios (the Brazilian securities commission) on July 6, 2010, the
Brazilian primary analyst signing this report declares: (1) that all the views expressed herein accurately reflect his or her personal views
about the securities and issuers; (2) that all recommendations issued by him or her were independently produced, including from the entity
in which he or she is an employee; and (3) that he or she will set forth any situation or conflict of interest believed to impact the
impartiality of the recommendations herein, as per article 17, II of Instruction 483.
Important Disclosures
Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in
Endesa.
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Banco
Santander Chile, Endesa within the past 12 months.
Beneficial Ownership (1% or more): J.P. Morgan beneficially owns 1% or more of a class of common equity securities of Endesa.
Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Banco Santander Chile,
Endesa.
Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment
banking clients: Banco Santander Chile, Endesa.
Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following
company(ies) as clients, and the services provided were non-investment-banking, securities-related: Banco Santander Chile, Endesa.
Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients,
and the services provided were non-securities-related: Banco Santander Chile, Endesa.
Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking Banco
Santander Chile, Endesa.
Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking
services in the next three months from Banco Santander Chile, Endesa.
Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services
other than investment banking from Banco Santander Chile, Endesa.
MSCI: The MSCI sourced information is the exclusive property of MSCI. Without prior written permission of MSCI, this information
and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any
indices. This information is provided on an 'as is' basis. The user assumes the entire risk of any use made of this information. MSCI, its
affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of
originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without
limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or
compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and
its affiliates.
Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for
compendium reports and all J.P. Morgancovered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406,
or e-mailing [email protected] with your request. J.P. Morgans Strategy, Technical, and Quantitative
Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-4770406 or e-mail [email protected].
102

08 April 2015
Diego Celedon
(56-22) 425-5245
[email protected]
Date
Banco Santander Chile (BSAC, BSAC US) Price Chart

66
N $39
N $30
OW $24
55
N $41
44
Price($)
OW $29.5
N $29.5
N $37
UW $32
UW $36N $36 UW $30
OW $27
OW $31 OW $25.5
UW $28
UW $29 N $26
OW $29 OW $29
33
22
11
0
Oct
09
Jul
10
Apr
11
Jan
12
Oct
12
Jul
13
Apr
14
Jan
15
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Nov 24, 2009.
Rating Share Price

($)
Price Target
($)
24-Nov-09 OW
23.31
29.50
12-Apr-10
27.67
29.50
30-Jul-10
32.20
37.00
01-Nov-10 N
35.67
41.00
25-Jan-11
32.74
39.00
26-Apr-11
UW
34.75
36.00
18-Aug-11 N
31.01
36.00
25-Oct-11
29.94
32.00
01-Dec-11 N
25.68
30.00
03-Feb-12 UW
30.11
30.00
17-Aug-12 UW
29.63
28.00
21-Dec-12 UW
28.35
29.00
10-Jun-13
23.84
26.00
26-Jun-13
OW
23.29
27.00
02-May-14 OW
24.48
29.00
03-Jul-14
OW
26.87
31.00
07-Nov-14 OW
21.84
29.00
07-Jan-15
OW
19.36
25.50
06-Feb-15 OW
19.97
24.00
UW
Endesa (ELE.MC, ELE SM) Price Chart
Date
55
OW 18.6
44
OW 32.4
N 35.999
N 36.5
N 36.8
OW OW
32 20
N 24
N 24.7
33
UW 24.3 N 18.5
UW 16.2UW 19.5 OW 33
N 18.6
Price()
22
11
0
Sep
06
Mar
08
Sep
09
Mar
11
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Nov 22, 2007.
Sep
12
Mar
14
Rating Share Price

()
Price Target
()
22-Nov-07 N
28.00
36.00
21-Apr-08
24.89
36.50
05-Aug-08 N
21.34
36.80
18-Dec-08 OW
21.73
32.00
16-Apr-09
OW
14.96
20.00
07-Oct-09
23.48
24.00
19-Feb-10 N
21.77
24.70
12-Apr-11
UW
22.70
24.30
27-Jan-12
15.23
18.50
25-Mar-13 UW
16.70
16.20
17-Dec-13 UW
20.70
19.50
07-Oct-14
OW
30.65
33.00
10-Oct-14
OW
29.20
32.40
31-Oct-14
OW
15.22
18.60
17.81
18.60
04-Feb-15 N
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stocks expected total return is
compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear
in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research
website, www.jpmorganmarkets.com.
103
Diego Celedon
(56-22) 425-5245
[email protected]

08 April 2015
Coverage Universe: Celedon, Diego: ILC (ILC.SN)

J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2015
J.P. Morgan Global Equity Research Coverage

IB clients*
JPMS Equity Research Coverage
IB clients*
Overweight
(buy)
43%
55%
44%
75%
Neutral
(hold)
44%
49%
48%
68%
Underweight
(sell)
13%
37%
9%
54%
*Percentage of investment banking clients in each rating category.

For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table
above.
Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered
companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst
or your J.P. Morgan representative, or email [email protected].
Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for
compendium reports and all J.P. Morgancovered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406,
or e-mailing [email protected] with your request. J.P. Morgans Strategy, Technical, and Quantitative
Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-4770406 or e-mail [email protected].
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upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.
Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US
affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS,
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appearances, and trading securities held by a research analyst account.
Analysts' Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various
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(56-22) 425-5245
[email protected]

08 April 2015
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08 April 2015
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Latin America Equity Research

SC/AN Equity Strategy

Pedro Martins Junior, CFA

Emy Shayo Cherman

Nur Cristiani, CFA

Other LatAm Country Handbooks:

Latin America Equity Research

Cover Image: Morgue File

Latin America Equity Research

Our View in a Nutshell

Latin America Equity Research

Santiago is Chile's capital and

Iconic cities and landmarks

Open economy and capital

Credible and autonomous

Benefiting from lower oil prices

Domestic stock market losing

Pension Funds reducing

In the 80's Chile introduced an individual capitalization accounts pension system

Counter-cyclical Fiscal Policy

President Michelle Bachelets government has begun a strong reform agenda,

Latin America Equity Research

Source: CIA World Fact book

After its independence in 1810, Chile experienced significant changes in its

Latin America Equity Research

so there is some subjectivity to the interpretation. As of now Chile still exerts

Source: UN and J.P. Morgan

Source: INE and J.P. Morgan

Latin America Equity Research

According to the World Health Organization, Chile has an average life

Figure 3: Life Expectancy

Source: DANE and J.P. Morgan

Figure 4: Urbanization Levels

Source: WHO and J.P. Morgan

Chiles population is largely concentrated in the Santiago metropolitan area

Figure 5: 2015 Population Breakdown

Source: INE, J.P. Morgan

Latin America Equity Research

Table 4: Chile's Political Parties

Chile operates as a presidential representative democratic republic, whereby the

Latin America Equity Research

La Polar is a Chilean retailer that

Latin America Equity Research

Figure 7: Congressional Elections

Bachelets Second Term

Source: Servel, J.P. Morgan

Michelle Bachelet is the current President of Chile. Bachelet is currently

Figure 8: Presidential Elections

Source: Servel, J.P. Morgan.

Source: Local surveys, J.P. Morgan

Latin America Equity Research

Bachelets administration has proposed profound changes to labor regulations.

Latin America Equity Research

Figure 9: Labor reform

Quick list of the main labor reform topics

Latin America Equity Research

Source: WHO, J.P. Morgan

Table 6: Total Expenditure in Health

Latin America Equity Research