Chile Fin Min: Alternatives To New Copper Royalty Undesirable

22nd Jun 2010 20:54

By Anthony Esposito Of DOW JONES NEWSWIRES LOS BRONCES MINE, Chile (Dow Jones)--If Chile's Congress doesn't approve changes to the copper-mining royalty, the government will have to use alternative sources to partially finance earthquake reconstruction which will have undesirable macroeconomic effects, Finance Minister Felipe Larrain said Tuesday. The government put together a $3.2 billion reconstruction-financing bill after a massive earthquake rocked central-southern Chile. The bill, currently being discussed in Congress, includes permanent tobacco-tax increases and temporary corporate- and property-tax increases as well as a modification to the existing copper royalty. The copper-royalty modifications are expected to fetch $600 million to $700 million, if approved. The quake, the fifth-strongest on record, killed 521 people, left thousands homeless and damages upwards of $30 billion, of which the government will pay $8.4 billion. While $3.2 billion is expected to come from the reconstruction-financing bill, the other $5.2 billion will come from budget allocations, a $1.5 billion international sovereign-bond issue, and local debt issues, among other sources. "We're committed to reconstruction...if we can't get the royalty [modifications] approved, we're going to look at alternative financing sources. But these alternatives will have undesirable macroeconomic effects on the exchange rate and on interest rates," Larrain told reporters on a visit to Anglo American PLC's (AAUKY, AAL.LN) Los Bronces copper mine. Larrain has already suggested that the government could issue more debt or dip more than it wants to into one of Chile's sovereign-wealth funds to obtain the additional funds if Congress fails to ratify the royalty modifications. Analysts expect the government won't pull out more than $1 billion from its so-called Economic and Social Stabilization sovereign-wealth fund. The government has said on several occasions that it intends to make only "moderate" use of the fund, which currently holds some $11 billion. A strong inflow of dollars would pressure the peso to firm against the dollar, making Chile's exports less competitive abroad. An increase in local sovereign-debt issues could also pressure local interest rates just as the central bank begins withdrawing its significant monetary stimulus to bring the benchmark rate to more neutral levels in the next year or so. The government is making a last-ditch effort to get support for the proposed modifications before a joint congressional commission convenes next week to vote on the matter. The Senate already voted against the royalty modifications last week. -By Anthony Esposito, Dow Jones Newswires; 56-2-715-8929; [email protected] (Carolina Pica contributed to this article.) (END) Dow Jones Newswires June 22, 2010 15:54 ET (19:54 GMT)