Chile moved further and faster than any other South American country to reform its economy in the 1980s.

In fact, the reforms succeeded so well that Chile is struggling with a glut of foreign cash that threatens to upset the country's hard-fought battle against inflation.

And bankers saying there's no letup in sight.

"We're looking at 7% to 8% growth this year," said James Callahan, country manager for Bank of Boston Corp. in Chile. "I expect boom times to continue, with the economy growing at close to 5% per annum for the next three or four years."

Tapping Chile's Potential

"Chile's got enormous potential," agreed Geoffrey Dennis, senior vice president and head of Latin America research for James Capel in New York.

Foreign investments last year equaled more than 5% of Chile's annual gross domestic product, and the inflow of funds drove up the Chilean peso's exchange rate against the dollar by more than 20% during the last two years.

In moves to dam the flood of dollars, the Chilean government revalued the peso by 5% this year and imposed a 30% reserve requirement on foreign currency borrowings.

Equally important, the government approved legislation allowing foreign investors to repatriate dividends after one year rather than three, and it authorized Chilean pension funds and life insurance funds to increase their international investments to 3%, from 1.5%, of their total portfolios.

Bank Debt Cut Sharply

The reform program's success is impressive by any standard.

Launched in 1980 under the dictatorship of former president Augusto Pinochet, the program slashed Chile|s foreign bank debt by more than two-thirds, from $15 billion in 1985 to $4.6 billion in 1991, out of a total $16 billion foreign debt.

Since then, Chile has evolved from a military dictatorship with a cumbersome state-run economy to a political democracy with a free-market economy.

"Chile has probably made more progress than any other country in Latin America in terms of a free economic model," said Carlos Fucks, Citicorp's country corporate officer in Chile.

The government's fiscal balance is in surplus. And debt servicing accounts for about 25% of Chile's gross domestic product - down form 75% in 1985.

Robust Investment Record

Meanwhile, foreign equity investment has topped $5 billion, while Chilean companies have invested $500 million to $1 billion abroad, of which a large part has gone to neighboring Argentina.

And although many Chilean companies are looking to tap international capital markets for funding in the future, most find Chile's low interest rates even more attractive.

Statistics show that the boom is far from over.

In the first six months of 1992, $1.2 billion in foreign capital flowed into Chile - more than the $1 billion for all of 1991.

Exports have more than doubled, to $8.3 billion in 1991, from $3.8 billion in 1985 and will grow by at least 10%, to $9.6 billion, in 1992, according to prevailing estimates.

Copper Exports Boom

Shipments of copper, Chile's No. 1 foreign exchange earner, increased 15% last year. The copper business brought in windfall profits after the price moved to about $1.20 per pound this year, form an average $1.05 in 1991, according to estimates compiled by bankers and the Washington-based International Finance Corp.

Every two-cent increase in the price of copper brings Chile $100 million. As the world's lowest-cost producer, Chile is well placed to profit from any surge in demand or price.

Meanwhile, noncopper exports are growing even faster - at an annual rate of more than 20%.

As other Latin American countries grope to establish local capital markets, Chile is strengthening its own buoyant domestic capital markets.

Financial Markets' Stature

Its stock market, valued at about $12 billion, is the developing world's seventh-largest, surpassed only in Taiwan, South Africa, Brazil, Mexico, Malaysia, and Thailand.

The local bond and money markets are also growing fast, and Chile is one of the few developing countries where 20-year and 25-year corporate bonds are actively traded.

Unlike borrowers from countries like Mexico, Argentina, Brazil, and Venezuela, which depend heavily on international capital markets funding for investments, Chilean banks and companies have been able to raise funds at cheaper rates in domestic markets.

The strength and liquidity of local capital markets is a direct result of reforms of the pension industry in the early 1980s, which opened the way for private pension fund management.

Fourteen pension funds manage an estimated $12.5 billion; life insurance companies, $2.5 billion more.

Eying Asset Management

Their success and strong profits have not escaped the attention of foreign banks and insurance companies, which see Chile as a base for developing asset-management businesses and capital markets across Latin America.

Among the most active are Bankers Trust New York Corp., which recently acquired a 40% stake in Provida, the country's largest fund manager. Provida has 1.2 million savers and funds worth $2.3 billion.

In further move in March, BT Inversiones SA, the U.S. banking company's Chilean investment banking unit, paid $1.5 million for a seat on the Santiago Stock Exchange.

Other U.S. banks are also developing in Chile.

Bank of Boston, which has eight branches in the country, is investing more than $1 million a year to expand treasury operations, consumer banking, and corporate lending. "Most of our focus is toward developing upscale personal banking and regional corporate banking," said Mr. Callahan, the company's manager for Chile.

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