Chile's Velasco, Harvard Professor, Picked for Finance Ministry

Jan. 31 (Bloomberg) -- Andres Velasco, a Harvard University professor who researched financial crises in emerging markets and ways to avoid them, takes over as Chile's finance minister amid optimism he will keep spending in check and the economy growing.

``I see him as very committed to fiscal discipline,'' said Leonardo Suarez, head of research at brokerage Larrain Vial SA in Santiago. ``It's a good signal to the market.''

President Michelle Bachelet, a member of the Socialist Party and part of the coalition that ousted Augusto Pinochet from power in 1990, late yesterday named Velasco among her first cabinet appointments since winning election Jan. 15. Velasco will replace Nicolas Eyzaguirre after Bachelet takes office March 11.

Velasco, who holds a doctorate in economics from Columbia University, has been a professor of international finance and development at Harvard University's John F. Kennedy School of Government since 2000. He formerly worked at Chile's Finance Ministry as chief of staff and director of international finance.

Chile, the world's largest producer of copper, enjoys the highest credit rating among any nation in Latin America for policies investors expect Velasco will maintain.

``It's an important asset to have the rating that Chile does - - Velasco should continue along that line,'' said Francisco Lepeley, who manages $1.77 billion of bonds at MetLife Chile Seguros de Vida SA in Santiago.

Growing Economy

Chile's $103 billion economy is set to expand at least 6 percent for a third year, bolstered by higher copper prices.

A 53 percent increase in copper prices in 12 months helped push the government's budget surplus in 2005 to an estimated $5.4 billion, or 4.5 percent of gross domestic product, from 2.2 percent of GDP in 2004. The surplus is the largest in government budget records that date to 1987.

Bachelet also expanded the number of cabinet members to 22 from 18 under President Ricardo Lagos, including ministers for the environment and public security whom she said she will name in March. Of the 20 posts she named last night, nine were granted to women, compared with four in Lagos's current cabinet.

Bachelet will be Chile's first woman president.

Among Bachelet's new ministers are Andres Zaldivar, a former senator who was tapped as interior minister, and Karen Poniachik, currently head of the government's foreign investment committee, who was named mining minister.

Ratings

Chile has an A credit rating from Standard & Poor's, the highest in Latin America. Investors demand 0.55 percentage point more yield to hold Chile's 5 1/2 percent bond due in January 2013 instead of a U.S. Treasury maturing in November 2015. That compares with a spread of 2.02 percentage points for Brazil's 7 7/8 percent bond due in 2015, according to JPMorgan Chase & Co.

During her campaign, Bachelet said she will keep in place current rules that cap spending when copper prices surge. In contrast, oil-rich Venezuela is spending its windfall from a surge in oil prices.

Velasco will face pressure from lawmakers who want Chile to spend more of its copper revenue on social programs. Almost 19 percent of Chileans live in poverty.

``Velasco is an academic, so his big challenge will be confronting the politicians,'' Suarez said.

``There's going to be pressure from all parties to increase spending,'' Julio Espinoza, an economist at brokerage BICE Corredores de Bolsa said prior to the announcement.

The next finance minister also probably will have to find funds to increase pension coverage for workers and the elderly, one of Bachelet's campaign pledges, Espinoza said.

Bachelet said during her campaign that the costs of the country's private pension system, created in 1980 during the dictatorship of Pinochet, is too high for workers.