With the Latin American economy set to contract by 2.6% this year, Chile's sound macro fundamentals and prudent policies are placing the country in a league of its own to deal with global recessionary forces.

Although large fiscal reserves make Chile well-placed to cope with the global economic downturn, the country has been hit by falling levels of trade - in particular by falling demand for copper, which is the country's most important export. Lower levels of trade have also reduced foreign investment in the country. Indeed, the macroeconomic headwinds facing Chile are hitting the economy hard and are presenting the most challenging climate since the country's 1999 recession. Despite stalling domestic demand, the report is holding to its existing forecast for the Chilean economy to grow by 0.1% in 2009.

Consumer retrenchment has already become evident during the first quarter of this year, when private consumption contracted by 1.4% year-on-year (y-o-y), a slightly smaller magnitude than in Q199, when private consumption fell by 2.8%.

Indeed, the indicators coming from the country’s major food, drink and retail players over the last quarter remain quite mixed. For example, at the start of April, the chairman of Chile's largest supermarket operator D&S said that the firm may not enter Peru this year as originally planned. This review may have been driven by the global economic downturn or may reflect opposition to this strategy from Wal-Mart, which has recently raised its stake in the business to about 73%. Up to now, D&S has been able to piggyback on Chile's high economic growth and has achieved buoyant sales growth over the last 10 years.

However, with the firm's domestic market showing signs of maturity, D&S has been looking to increase its exposure to markets where the retail sector is less developed. At the same time, Chile’s largest brewer, Compañía Cervecerías Unidas (CCU), announced plans to invest around US$70mn this year, half the level of 2008. The company also reported in its first quarter results that in Chile, sales of beer, soft drinks, bottled water and wine all declined. CCU's beer sales in Chile fell by 4%, sales of soft drinks fell by 5.2%, sales of bottled water fell by 5.9% and sales of wine fell by 2.9%.

On the other side of the coin, Chile-based Coca-Cola affiliated bottler Embotelladora Andina has announced plans to invest US$67mn in capital projects in 2009, despite the global economic crisis. The company will invest US$26m in Chile, US$28m in Brazil and US$13m in Argentina in 2009, primarily to revamp production lines and logistics plants in each country. Equally, Chilean soft drinks bottler Coca- Cola Embonor announced that the company is planning to boost investment for expanding business operations in Chile and Bolivia by 22% to US$33mn in 2009. Although Chile remains the Latin American country best placed to ride out the recession, only developments in the second half of the year will confirm whether the nation has indeed managed to stave off the problems seen by many of its regional neighbours.