Goldman Sachs (NYSE:GS): Chile Earthquake to Dampen 2010 GDP Growth

The devastation from the earthquake in Chile will cause economic expectations in the country to be revamped as it attempts to pull out of the global recession in 2010, said Goldman Sachs (NYSE:GS).

This isn’t what the new conservative government needed, as it was put into office based on cutting back on excessive government stimulus programs from the outgoing administration.

Now with enormous infrastructure problems they face, Sebastian Pinera, the incoming president of the country, may have to spend more than he wanted in response to the natural disaster.

One particular part of the country that may need an enormous amount of work is in the southern central part of Chile, where extensive damage on their road system has been reported, along with other emergency relief need as a consequence of the destruction.

Sebastian Pinera, who takes office on March 11, already faces a tight budget, and must balance the reason he was placed in power by the people with the inherent needs generated by the earthquake.

This weekend Pinera stated that he may put aside about 2 percent of his initial budget to deal with the costs of emergency relief in the country.

According to the report from Goldman Sachs, the economy of Chile was poised to grow its gross domestic product from between 4.5 percent to 5.5 percent in 2010, in contrast to the approximate 1.9 percent economic contraction Chile experienced in 2009. The Goldman report said they will have to revise those growth numbers, and real growth won’t be experienced until the last half of 2010, after the tragedy is dealt with.

Chile is actually on pretty sound financial ground in comparison to many other countries, as their debt is about 6 percent of their GDP, and they have approximately $11 billion in one of their sovereign wealth funds to use as needed.

Once this period of disruption is taken care of, Goldman Sachs economist Alberto Ramos wrote in a note that after the second quarter ” … we will likely see an extra bounce in activity anchored on the reconstruction effort to rebuild the lost or damaged capital stock of the economy,”

Another factor playing out in the Chile scenario is how the central bank of Chile takes the stimulus money out of the economy. It’s thought the bank may wait longer than they were originally thinking to tighten things up, said Ramos. Much of that will be dependent on the severity of the damage after it is accurately accessed.