Second-quarter figures show that, although the affected zones are still enduring a hard situation, especially in the housing conditions of affected areas, the disruptions of the productive process have quickly dissipated (figure 5). With respect to firms, our estimates suggest that the effects of the earthquake and tsunami on their financial situation was not severe. Estimates of the impact of the catastrophe on their payment capacity reveal focalized effects on small and medium firms of the hardest hit regions. Larger firms have relied on insurance that cushion the effects of the earthquake on their solvency, but delays in the payment of claims might generate liquidity pressures. Accordingly, output will be similar to March projections, while domestic demand will continue to grow very strongly. In the baseline scenario, the expansion of demand will begin to diminish over the course of the second half of this year, mainly because part of its current strength is temporary, related to the consumption of durable goods, investment in machinery and equipment and inventory replacement. The Board foresees that in 2010 y-o-y GDP growth will between 4% and 5%. This range is slightly lower than March estimates, due to slower effective growth in the first quarter. Domestic demand will approach a growth rate of 15% in 2010, determined by the foreseen increase in gross fixed capital formation and private consumption (table 2). The scenario for domestic demand is also based on the substantial impulse of macroeconomic policies in the past several quarters, boosted by the progressive normalization of internal financial conditions.

Accordingly, in the past several months we have seen main stock indexes falling substantially, interbank spreads rising again and commodities prices falling, with only a few exceptions, including gold (figure 2). Increased appetite for safe financial assets has triggered a worldwide reduction in interest rates on this type of instruments, while the dollar has strengthened and the euro has depreciated. The significant capital flows to emerging economies have stabilized or reversed partially, in particular stock-portfolio flows. Nevertheless the preoccupation remains in many emerging economies – especially in Asia – about the creation of bubbles in their asset prices. As shown in the IEF, the domestic financial market, like those in other emerging economies, has been fairly resilient to the instability in external markets, which is visible in several dimensions. The bulk of the price adjustment has taken place in the foreign exchange and stock markets, but even these movements have been comparatively small (figure 3). Unlike recent episodes of financial volatility, local monetary markets have operated normally, and credit spreads have no risen significant. Chilean sovereign risk premiums have not changed much, and local banks have managed to obtain external loans in similar conditions to those at the end of 2009. Recently, pension funds have reduced their assets abroad, a phenomenon that also occurred during the worst external turbulences at the end of 2008. The baseline scenario assumes that this relative resilience will continue over the projection horizon.