HI DJ, would you take the other side of my bet that Chile will be down and out within 12 months?
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Chile keeps its head
By Mark Mulligan in Santiago
FT.com site; Aug 05, 2002
Even by Latin American standards, last week was a particularly bleak one for economic ews. As Argentina continued to search for solutions to its acute economic and political crisis, Uruguay raced towards a financial meltdown, while political uncertainty drove a sharp depreciation in the Brazilian currency.
Amid this chaos, the International Monetary Fund - on which all three countries are relying for survival - published a staff report on the Chilean economy.
While its conclusions went largely unnoticed amid the convulsions in the Atlantic countries, on the Pacific coast they gave rise to grumbles of dissatisfaction among business leaders and opponents of the centre-left government of Ricardo Lagos, the Chilean president.
Growth in Chile's gross domestic product this year, the IMF said, would be 2.6 per cent, not the 3 per cent previously calculated.
As the country's business lobbyists point out, Chile may no longer be the "Tiger of Latin America", as in the days when high commodity prices and generous capital flows in the mid-1990s allowed it to grow at about 7 per cent a year.
However, with expanding output, a solid financial system and a country risk premium of barely 200 basis points above US Treasuries, the economy has been able to keep its head while all around it are losing theirs.
It was not always like this. Chile's chaotic experiment with socialism in the early 1970s resulted in a bloody military coup and a 17-year dictatorship led by General Augusto Pinochet. The radical neo-liberalism and inflated currency of the Pinochet years led to a banking collapse in 1982.
Most agree it was those two shocks that helped shape the Chilean economic model of free trade and fiscal prudence, and create a nation of austere, risk-averse, largely law-abiding people.
"Many like myself never wanted to see a repeat of the military coup, while everyone has bad memories of the banking crisis," says Nicolýs Eyzaguirre, finance minister.
In the 1990s, while Argentina was borrowing extravagantly to finance a yawning fiscal deficit, Chile was putting aside excess cash from record high copper prices to guarantee future budget surpluses. Argentina, to its eventual peril, fought to sustain an unrealistic one-for-one peg to the US dollar: the Chilean peso, was allowed to depreciate slowly to help exporters through a series of global shocks.
In April this year, as Uruguay was being stripped of its investment grade rating, Mr Eyzaguirre was in New York overseeing the placement of about $900m in international bonds, priced at 116 and 59 basis points above their respective reference issues. Total government borrowing, at $6.75bn, represents less than 10 per cent of GDP.
While the Argentine and Uruguayan banking systems suffered because of their vulnerability to capital flight and exchange rate shocks, assets in Chile's highly regulated banking sector are largely inflation indexed and denominated in the local currency.
But although Chile may be mainly protected from spreading financial corruption, the country has not been impervious to jolts to the real economy from across the Andes.
The Central Bank estimates that a 60 per cent collapse in exports to Argentina - which normally accounts for 3.2 per cent of total shipments - combined with a dramatic fall off in tourists from the neighbouring country could cost it about half a point of GDP growth.
Chilean assets in Argentina, accounting for about 16 per cent of total foreign investment, have been written down, shaving 0.7 per cent off national income, according to the bank.
There are concerns about cheaper exports from Brazil, Argentina and Uruguay replacing Chile's in Europe and the Americas, and an impact on the informal economy as Chileans spend on shopping trips in Buenos Aires. "If you calculate the whole Mercosur effect, it could mean more than 1 point off GDP growth," says Mr Eyzaguirre.
Although investor sentiment towards Chile remains positive, it has borne more than its share of the heavy decline in capital flows to the region. It hopes a recently signed free trade agreement with the European Union, and the prospect of a deal with the US, will help offset this.
Business confidence and investment remains sluggish - partly a legacy of a 1999 recession - and critics say the banks are so risk-averse that great ideas by small enterprises fail to find financing. Mr Eyzaguirre counters this by pointing to capital market reforms that promote riskier equity investment, and the easing of banking restrictions. Many of the bureaucratic blocks to doing business in Chile have also been removed.
Anyway, he says, Chile owes its stability today to prudent economic management and sensible regulation. "Conservatism has its price," he says. |
