For thirty years, Chile has been the most fiscally prudent
nation in Latin America. This is best exemplified
by its credit ratings, which at Baa1 (positive
outlook) with Moody’s and A with Standard & Poor’s
is the highest in the region. Through the 1990s
until the present, Chile’s interest rate
spreads have tightened substantially.
From an investor’s perspective, Chile is a textbook
example of employing orthodox free market policies in
the development process. Chile’s Central bank is
legitimately independent. Its elections, on both the
national and local levels, are contested by various parties
with viable chances of victory. Inflation is low (3.0%),
consensus growth forecasts for 2005 are in the 5.5-6.2%
GDP range (it was 5.9% in 2004), and international reserves
were US $16 billion as of year-end 2004. Further, government
fiscal policy-making is among the most prudent in the
Chile is rapidly developing and various quality of life
indicators in the country have improved dramatically
in the past few years. Investment is expected to grow
by about 13% in 2005 and GDP per capita is US $5000.00
in 2005, which is second only to Mexico. A sizeable middle
class has emerged with all the attendant demands on the
political and economic system that one would expect.
Chile’s corporate sector has been the major contributor
to Chile’s strong growth. In fact, corporate revenue
growth in 2005 is expected to grow by about 40%. The
most important reasons for this are strong commodity
prices, particularly for copper, pulp, paper and wood
products. For example, the national copper company’s
(CODELCO) 2004 EBITDA is likely to be 150% higher than
in 2003. CODELCO is the largest copper-producing company
in the world. As of March 2005, copper prices continue
to hit record levels on world markets and comprise 45%
of Chile’s total exports and 16% of GDP. Chile
also exports salmon, fish meal, fruit and wine overseas.
Chile’s economy is exceptionally dependent on foreign
trade. In 2004, exports accounted for about 36% of GDP
in total. The trade balance for 2004 showed a US $9.0
billion surplus, which was considerably higher than 2002.
Total exports in 2004 were $32 billion, a 52% increase
from $21 billion in 2002.
Perhaps the greatest risk faced by Chile’s growing
economy is posed by shortages of gas from Argentina.
Natural gas consumption in Chile has grown at an annual
rate of 12.3% since 1993, and accounts for 30% of Chile’s
energy consumption. Most of the gas comes from Argentina.
Sharp (20-40%) cutbacks in gas exports during 2004 shocked
the nation, and forced the public and private sectors
to seek alternative sources of energy. But with the benefit
of hindsight, it is also clear that the gas shortages
were not as damaging as first feared. Consensus estimates
are that they might have reduced GDP growth by only 0.2%
in 2004. Hydropower accounts for about 70% of domestic
Chilean President Lagos enjoys a 61% approval rating
as of February 2005, but he is in the sixth and final
year of his tenure and elections will be held in December
2005. As of March 2005, Lagos
Concertation party coalition is favored to be re-elected
under new leadership. The conservative opposition will
mount a viable challenge however. No matter who wins,
there is broad agreement that prudent fiscal and monetary
policies will prevail.
a Senior Consultant at KWR International