For decades Chile has been Latin America’s star performer. Blessed with commodities, and the sense to manage them responsibly, Chile carved out an incredible three-decade long growth streak. During the last quarter of the century GDP grew at an average 5.5% per year – an incredible record that has put it within touching distance of developed world status. But this year jitters have started to hit the Chilean growth story. Recent figures showed that the economy grew just 0.8% in the first half of 2014, the slowest rate of expansion since the Financial Crisis.
For a country that’s become used to economic success the slowdown is hard to take.
What’s gone wrong?
It’s no secret that the motor of the Chilean economic miracle was mining. You could argue that the Chileans were lucky to have the world’s largest reserves of copper but you also have to admire how they’ve handled it. Unlike other Latin American countries, such as Venezuela, they have avoided the ‘resource curse’ and managed their copper bounty well. Moreover they’ve also tried hard to use the money from copper to diversify their economy and invest in other areas. Agriculture is a huge business here and Chile has become the world’s second-biggest salmon exporter and its fifth biggest wine exporter. The economic boom has also helped to create retail giants, listed firms such as Cencosud and La Polar that are now spreading out across the region. Finance is another strong area where local banks and funds have sprung up to make Santiago an emerging regional hub for financial services.
“The good news is that we have all the tools to provide a stimulus if necessary….”
All in all copper accounts for ‘just’ half of Chilean exports, down from two/thirds in 1973. But while its made progress its clear that Chile’s fortunes are still very much tied to the red metal. As a result the Chilean economy has been hit by the fall in the copper price, which has slid by around 25% in the last few years.
So how serious is this?
That’s the question LatAm INVESTOR put to Chile’s Minister of Economy, Luis Felipe Céspedes, when we interviewed him in Santiago last month. “What we are experiencing now is a cyclical deceleration”, says Céspedes. “Between 2010 and 2013 we had a significant increase in investment, which was being driven by high commodity prices and the resultant increase in mining projects. Moreover international finance conditions were very attractive, which made it easy to issue debt abroad and there was lots of liquidity. So while all of these factors were giving additional stimulus to our economy then we knew, before coming in March, that the economy was facing a cyclical slowdown.”
Now there is probably a need for a bit of a political disclaimer here. A lot of people in Chile are putting at least some of the blame for the slowdown on the new government. The left-wing administration came to power promising a huge tax overhaul that would raise an extra 3% of GDP taxing companies and the rich. And, so the argument goes, the uncertainty and debate about this reform, has led to businesses delaying their investments. So Minister Céspedes has a vested interest in describing the current slowdown as a cyclical problem that begun before his government.
Nevertheless what he said next will really interest investors. “The good news is that we have all the tools to provide a stimulus if necessary. So with monetary policy we have seen rates come down from 5% in 2013 to 3.75% at present. If needed it can come down more, so we have a monetary policy that can help further. That reduction in interest rate is causing the peso to depreciate which helps export sectors in economy.”
That should be good news for Chile’s non-copper exporters. The large salmon producers and winemakers should benefit from a falling peso as it will reduce their costs and make their wares more competitive on the international market. Proof, if it was needed, that every cloud has a silver lining.
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