Insight

Chile - a rocky ride to a brighter future

September 2015


What the indicators tell us

International Monetary Fund data shows us that GDP fell from a strong 4.3% in 2013 and 5.5% in 2012 to an uninspiring 1.8% in 2014. Inflation is on the rise too, up from 1.8% in 2013 to 4.4% in 2014.

As for foreign direct investment, the amount of FDI slowed from USD28bn in 2012 to USD20bn in 2013. And labour costs shot up 127 points on the index in 2014; this is 27 points higher than 2009 and illustrates how quickly the cost of doing business has risen in only five years.

The political landscape

It's not only the economy that's in a state of flux; there has been social unrest too - protests and strikes disrupt some parts of Santiago quite regularly.

Politically things have been shaky. Relatively speaking, Chile has always been perceived as one of the less corrupt nations in Latin America. Not anymore. Corruption scandals have pounded the main parties, mainly involving tax fraud and fraudulent expense claims.

Nonetheless, the system is generally stable. The sometimes fierce political rhetoric and scandals aside, snap elections are highly unlikely and the current ruling coalition is certain to hand over to the next one in an orderly manner in 2017.

Chile as an investment destination

Not everything is negative - Chile firmly occupies a prime spot in Latin America as an investment destination. There are three main reasons for this:

  1. Chile scores well for financial stability, physical security, doing business, and expropriation.
  2. The financial system operates without ideological influence and the banks are unlikely to collapse because they are subject to strict regulation - stricter than US and European banks were before the crisis.
  3. Corruption, although present at the higher political and economic level, has not permeated into institutions that support the establishment of business, such as visa and permission issuing authorities.

This stable backdrop bodes well for the government's initiative to open Chile up to more FDI and strengthen competition in an attempt to spark investment and economic growth. Although such measures have not yet yielded tangible results, they are nonetheless attractive for new entrants into the market. Also, unlike other Latin American countries such as Bolivia and Venezuela, expropriation and nationalisation isn't the Chilean way. On the rare occasions the government intervenes in the public interest, the compensation is generous. Outside urban areas the risk of expropriation is virtually zero.

The present rise of Latin America more generally is also very helpful to Chile. Relatively high public security, an environment not overburdened by bureaucracy and a main port in Valparaiso, 100km west of Santiago, make Chile a hub from which to conquer other regional markets.

The outlook is bright

Chilean society is entrepreneurially minded and enthusiastic about new technologies, but a high level of social inequality prompted the current labour market reforms and restructuring of the education system. These reforms have generated a lot of uncertainty in the short-term and account for a sharp drop in investments. This should not deter foreign businesspeople, as they can fill that void and take advantage of various government initiatives. The move to higher growth may be turbulent but Chile is still growing faster than some developed economies. The country has a history of surviving worse.

Geopolitically, Chile finds itself in a tense security environment. There are historically tense relations with all its neighbours, but even though problems revolve around crucial issues like sovereign territory, armed conflict in the Southern Cone is highly unlikely. Chile's traditional and most potent ally is the United States. In recent times, however, Chile has also struck closer ties with China and Russia, resulting in rising trade with and capital influx from these countries. This reflects not only the Chilean government's pragmatic approach to economic policy but also its capacity to take advantage of the rising multipolar world order.

A return to higher growth is not likely this year, but probable by the end of the next. In the long run, as the education reforms take effect and better educated and wealthier consumers and employers appear, Chile will turn into a small but profitable market that investors will be unable to ignore.

Author: Christian Scheinpflug