Post-quake rebuild fuels Chile recovery a year on

SANTIAGO (Reuters) - A year after one of the biggest earthquakes on record slammed Chile with a $30 billion hit to its economy, a massive reconstruction effort is underpinning a strong rebound seen continuing in 2011.

But even as Chile celebrates its recovery from the massive 8.8 magnitude quake and ensuing tsunamis that ravaged south central Chile, its growth outlook is clouded by a sharp rally in its peso currency and rising price pressures.

The state says it has completed 50 percent of its end of the rebuilding effort after the February 2010 quake, which killed more than 500 people.

Even though regular aftershocks still rattle nerves and serve as a constant reminder of the disaster, Chile's hammered wood pulp industry is back on its feet, and the hard-hit wine and fruit sectors are recovering strongly. Chile, the world's No. 1 copper producer -- whose linchpin copper mining sector was basically unscathed in the quake -- is seen growing around 6 percent this year, driven by record copper prices.

"The impact of reconstruction on growth is becoming stronger as time goes on," said Finance Minister Felipe Larrain, who financed an $8.4 billion reconstruction package with a mix of sovereign debt issuance, higher royalties levied on mining companies, and copper boom savings.

Larrain attributes part of the expected strong growth rate this year to a low base of comparison, with Chile having exited the recession triggered by the global financial crisis only in the first quarter of 2010. The earthquake struck just days before President Sebastian Pinera took power, forcing him to revamp his agenda to focus on the recovery effort.

Both the government and central bank trimmed their growth outlooks after the quake, estimating it could shave around 0.25 to 0.5 percentage point off annual growth. But data points to a 5.2 percent expansion in 2010, within the original range.

The first quarter of 2010 bore the burden of the quake, with the economy expanding just 1.6 percent as it exited recession, but growth jumped to average 6.4 percent in the following three quarters.

Regional growth data shows the hardest hit regions of Bio Bio and Maule are firmly on the mend.

But among all the signs of economic strength, Chile faces some bumps in the road that could derail the strong growth rate.

Already grappling with rising inflation, Chile could suffer if the political unrest in the Middle East and North Africa that has recently boosted oil prices becomes prolonged. In addition to importing nearly all of its fuel, Chile would face the risk that higher oil prices would drag on the global economy and on China, the world's biggest copper consumer.

On the plus side for Chile, the copper supply is seen remaining tight, and prices are expected to remain high, supporting Chile's economy.

"The main risk, not just for Chile but the whole region, is inflation that comes from the international market, particularly from commodities, food and energy," said Alfredo Coutino, Latin America director for Moody's Analytics.

As in regional powerhouse Brazil, inflation in Chile quickened in January, driven partly by rising fuel prices. That put pressure on central bankers to follow the lead of a host of emerging market economies from China to India and Thailand to Peru raise interest rates.

As copper prices rose to lifetime highs and the dollar weakened internationally, so too Chile's peso has rallied back towards near three-year highs despite a $12 billion central bank currency intervention. The strong peso is hammering exporters.

That trend puts the central bank in a bind, forced to prioritize inflationary concerns over the strong peso. The central bank raised its benchmark rate to 3.5 percent this month after prices rose in January, and signalled more hikes are to come -- but creating an environment that will probably put even more upward pressure on the peso.

Analysts say Chile's benchmark rate would look restrictive at around 6 percent. Chile's market sees the rate just below that a year from now, according to the central bank.

STARTING OVER

In the real economy, quake survivors are still struggling.

Jose Recabal, a 46-year-old fisherman, has seen his earnings slump because with tourism yet to pick up again in his small, battered coastal fishing town of Curanipe, he must rely more on bulk sales to restaurants, which pay lower prices than sales made directly to tourists.

He and fellow residents of Curanipe, which lies around 37 miles (60 km) from the quake epicentre, are happy with the pace of reconstruction, but worry about the continued weakness in tourism. Many new wood-built houses pepper the town, though bare foundations of homes destroyed by tsunami recall the disaster.

"I think the reconstruction is great," he said, as he tended his small fishing boat. "But tourism is down, which is what moves the local economy. Without fishing, the town dies."

His previous boat, swept away by the tsunami, still sits encrusted on jagged black rocks further up the coast where the swell dumped it on February 27 last year.

The government says it has repaired 940 miles (1,500 km) of damaged roads and rebuilt over 200 bridges, and rebuilt and repaired damaged ports and airports. But tens of thousands of homes and several large hospitals are still pending.

Beyond damage to wood pulp plants and the country's two main refineries, the quake also pushed back completion dates for two new coal plants, keeping energy supply tight because of a drought sapping hydroelectric reservoirs.

Nonetheless, Chile seems to have emerged from the quake with its economic strength intact.

"The damage to the economy has been very, very mild. It didn't leave a permanent scar," said Alberto Ramos, senior economist at Goldman Sachs in New York.

"Even purging the data from what could be the extra kick from reconstruction, confidence is high, credit is firming, monetary conditions are still supportive ... So everything is aligned for the economy to perform well throughout 2011."

(Reporting by Moises Avila, Fabian Cambero, Maria Jose Latorre, Brad Haynes and Felipe Iturrieta in Santiago and Ivan Alvarado in Curanipe; Writing by Simon Gardner; Editing by Leslie Adler)

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