Chile Economy

INTRODUCTION

The economy of Chile is ranked as an upper-middle income economy by theWorld Bank, and is one [10] of South America's most stable and prosperous nations, leading Latin American nations in human development, competitiveness, income per capita, globalization, economic freedom, and low perception [11] [12] of corruption. However, it has a high economic inequality, as measured by the Gini index. In May 2010 Chile became the first South American country to join the OECD. In 2006, Chile became [14] the country with the highest nominal GDP per capita in Latin America. Chile has an inequality-adjusted human development index of 0.652, compared to 0.654, 0.641 and 0.519 for neighboring Uruguay, [15] Argentina and Brazil, respectively. 5.3% of the population lives on less than US $2 a day. The Global Competitiveness Report for 2009-2010 ranks Chile as being the 30th most competitive country in the world and the first in Latin America, well above from Brazil (56th), Mexico (60th) and [14] Argentina which ranks 85th. The Ease of doing business index created by the World Bank lists Chile as 43rd in the world that encompasses better, usually simpler, regulations for businesses and stronger [7] protections of property rights. The privatized national pension system (AFP) has encouraged domestic [16] investment and contributed to an estimated total domestic savings rate of approximately 21% of GDP. After Spanish conquest in the 16th century Chilean economy came to revolve around autarchy estates called fundos and around the army that was engaged in the Arauco War. During early colonial times there were gold exports to Per from placer deposits which soon depleted. Trade restrictions and monopolies established by the Spanish crown are credited for having held back economic development for much of the colonial times. As effect of these restrictions the country incorporated very few new crops and animal breeds after initial conquest. Other sectors that were held back by restrictions were the wine and mining industries. The Bourbon reforms in the 18th century eased many monopolies and trade restrictions. In the 1830s Chile consolidated under the ideas of Diego Portales as a stable state open to foreign trade. Foreign investment in Chile grew over the 19th century. After the War of the Pacific the Chilean treasury grew by 900%. The League of Nations labeled Chile the country hardest hit by the Great Depression because 80% of government revenue came from exports of copper and nitrates, which were in low demand. After the Great Depression Chilean economic policies changed toward import substitution industrialization and the Production Development Corporation was established. despite a steady economic decline, soaring poverty and unemployment in the decade following the coup, culminating in a dramatic economic crisis in 1982. The crisis caused the appointment of Hernn Bchi as minister of finance and a sharp revision of economic policy. Despite a general selling of state property and contrary to neoliberal prescriptions, the regime retained the lucrative state owned mining company CODELCO which stands for about 30% of government income. According to the CIA World Fact book, during the early 1990s, Chile's "reputation as a role model for economic reform" was strengthened when the democratic government of Patricio Alwen, who took over from the military in 1990, deepened the economic reform initiated by the military government. Growth in [citation needed] real GDP averaged 8% from 19911997, but fell to half that level in 1998 because of tight monetary policies (implemented to keep the current account deficit in check) and because of lower export
[13]

[9]

earnings, the latter which was a product of the Asian financial crisis. Chile's economy has since recovered [citation needed] and has seen growth rates of 5-7% over the past several years. After a decade of impressive growth rates, Chile began to experience a moderate economic downturn in 1999, brought on by unfavorable global economic conditions related to the Asian financial crisis, which began in 1997. The economy remained sluggish until 2003, when it began to show clear signs of [17] recovery, achieving 4.0% real GDP growth. The Chilean economy finished 2004 with growth of 6.0%. Real GDP growth reached 5.7% in 2005 before falling back to 4.0% in 2006. GDP expanded by 5.1% in 2007.

Sectors
[edit]Agriculture Agriculture and allied sectors like forestry, logging and fishing accounts only for 4.9% of the GDP as of 2007 and employed 13.6% of the country's labor force. Some major agriculture products of Chile includes grapes, apples, pears, onions, wheat, corn, oats, peaches, garlic, asparagus, beans, beef, poultry, wool, [19] fish and timber. Chiles position in the Southern Hemisphere leads to an agricultural season cycle opposite to those of the [20] principal consumer markets, primarily located in the Northern Hemisphere. Chiles extreme north-south orientation produces 7 different macro-regions distinguished by climate and geographical features, which [20] allows the country itself to stagger harvests and results in extended harvesting seasons. However, the mountainous landscape of Chile limits the extent and intensity of agriculture so that arable land [19] corresponds only to 2.62% of the total territory. Through Chiles trade agreements, its agricultural products have gained access to a market controlling 77% of the worlds GDP and by approximately 2012, [20] 74% of Chilean agribusiness exports will be duty free. Chiles principal growing region and agricultural heartland is the Central Valley delimited by the Chilean Coast Range in the west, the Andes in the east Aconcagua River by the north and Bio-Bio River by the south. In the northern half of Chile cultivation is highly dependent on irrigation. South of the Central Valley cultivation is gradually replaced by aquaculture, silvi culture, sheep and cattle farming. [edit]Salmon Chile is the second largest producer of salmon in the world. As of August 2007, Chiles share of [20] worldwide salmon industry sales was 38.2%, rising from just 10% in 1990. The average growth rate of [20] the industry for the 20 years between 1984 and 2004 was 42% per year. The presence of large foreign firms in the salmon industry has brought what probably most contributes to Chiles burgeoning salmon [20] production, technology. Technology transfer has allowed Chile to build its global competitiveness and innovation and has led to the expansion of production as well as to an increase in average firm size in the [20] industry. [edit]Forestry The Chilean forestry industry grew to comprise 13% of the countrys total exports in 2005, making it one [20] of the largest export sectors for Chile. Radiata Pine and Eucalyptus comprise the vast majority of [20] Chile's forestry exports. Within the forestry sector, the largest contributor to total production is pulp, [20] followed by wood-based panels and lumber. Due to popular and increasing demands for Chiles forestry products, the government is currently focusing on increasing the already vast acreage of Chiles [20] Pine and Eucalyptus plantations as well as opening new industrial plants.
[20]

Mining

Chile produces more than a third of the world's copper.

The mining sector in Chile is one of the pillars of Chilean economy. The Chilean government strongly supports foreign investment in the sector and has modified its mining industry laws and regulations to create a favorable investing environment for foreigners. Thanks to a large amount of copper resources, progressive legislation and a healthy investment environment, Chile has become the copper mining [20] capital of the world, producing over 1/3 of the global copper output. [edit]Services [edit]Finance Chile's financial sector has grown quickly in recent years, with a banking reform law approved in 1997 that broadened the scope of permissible foreign activity for Chilean banks. The Chilean Government implemented a further liberalization of capital markets in 2001, and there is further pending legislation proposing further liberalization. Over the last ten years, Chileans have enjoyed the introduction of new financial tools such as home equity loans, currency futures and options, factoring, leasing, and debit cards. The introduction of these new products has also been accompanied by an increased use of traditional instruments such as loans and credit cards. Chile's private pension system, with assets worth roughly $70 billion at the end of 2006, has been an important source of investment capital for the capital market. However, by 2009, it has been reported that $21 billion had been lost from the pension system to [21] the global financial crisis. [edit]Tourism Tourism in Chile has experienced sustained growth over the last decades. Chile received about 2.25 [22] [23] million foreign visitors in 2006, up to 2.50 million in 2007 The percentages of foreign tourists arrivals [22] by land, air and sea were, respectively, 55.3%, 40.5% and 4.2% for that year. The two main gateways for international tourists visiting Chile are Comodoro Arturo Merino Bentez International Airport and Paso Los Libertadores. Chile has a great diversity of natural landscapes, from the Mars-like landscapes of the hyperarid Atacama Desert to the glacier-fed fjords of the Chilean Patagonia, passing by the winelands backdropped by the Andes of the Central Valley and the old-growth forests of the Lakes District. Easter Island and Juan Fernndez Archipelago, including Robinson Crusoe Island, are also major attractions. Many of the most visited attractions in Chile are protected areas. The extensive Chilean protected [22] areas system includes 32 national parks, 48 natural reserves and 15 natural monuments.

Economic policies

Chilean (blue) and average Latin American (orange) GDP per capita (1950-2007).

According to the CIA World Fact book, Chile's "sound economic policies," maintained consistently since the 1980s, "have contributed to steady economic growth in Chile and have more than halved poverty [18][19] rates." The 1973-90 military government sold many state-owned companies, and the three [24][25] democratic governments since 1990 have implemented export promotion policies and continued privatization, though at a slower pace. The government's role in the economy is mostly limited to regulation, although the state continues to operate copper giant CODELCO and a few other enterprises (there is one state-run bank). Chile is strongly committed to free trade and has welcomed large amounts of foreign investment. Chile has signed free trade agreements (FTAs) with a whole network of countries, [26] including an FTA with the United States that was signed in 2003 and implemented in January 2004. Chile's independent Central Bank pursues an inflation target of between 2% and 4%. Inflation has not exceeded 5% since 1998. Chile registered an inflation rate of 3.2% in 2006. The Chilean peso's rapid appreciation against the U.S. dollar in recent years has helped dampen inflation. Most wage settlements and loans are indexed, reducing inflation's volatility. Under the compulsory private pension system, most [18] formal sector employees pay 10% of their salaries into privately managed funds. As of 2006, Chile invested only 0.6% of its annual GDP in research and development (R&D). Even then, two-thirds of that was government spending. Beyond its general economic and political stability, the government has also encouraged the use of Chile as an "investment platform" for multinational corporations planning to operate in the region, but this will have limited value given the developing [specify] business climate in Chile itself. Chile's approach to foreign direct investment is codified in the country's Foreign Investment Law, which gives foreign investors the same treatment as Chileans. Registration is reported to be simple and transparent, and foreign investors are guaranteed access to the [18] official foreign exchange market to repatriate their profits and capital. Faced with an international economic downturn the government announced a $4 billion economic stimulus plan to spur employment and growth, and despite the global financial crisis, aimed for an expansion of between 2 percent and 3 percent of GDP for 2009. Nonetheless, economic analysts disagreed with government estimates and predicted economic growth at a median of 1.5

percent.
needed]

[27]

According to the CIA World Fact Book, the GDP contracted an estimated -1.7% in 2009.

[citation

The Chilean Government has formed a Council on Innovation and Competition, which is tasked with identifying new sectors and industries to promote. It is hoped that this, combined with some tax reforms to encourage domestic and foreign investment in research and development, will bring in additional FDI to [18] new parts of the economy. According to the Heritage Foundation Index of Economic Freedom in 2012, Chile has the strongest private property rights in Latin America, scoring 90 on a scale of 100. Chile maintains the best credit rating (S&P A+) in Latin America. There are three main ways for Chilean firms to raise funds abroad: bank loans, issuance of bonds, and the selling of stocks on U.S. markets through American Depository Receipts (ADRs). Nearly all of the funds raised through these means go to finance domestic Chilean investment. The government is required by law to run a fiscal surplus of at least 1% of GDP. In 2006, the Government of Chile ran a surplus of $11.3 billion, equal to almost 8% of GDP. The Government of Chile continues to pay down its foreign debt, with public debt only 3.9% of GDP at the [18] end of 2006.
[28]

GDP Growth Rate

The Gross Domestic Product (GDP) in Chile expanded 1.40 percent in the third quarter of 2012 over the previous quarter. GDP Growth Rate in Chile is reported by the Banco Central de Chile. Historically, from 1997 until 2012, Chile GDP Growth Rate averaged 1.0 Percent reaching an all time high of 4.5 Percent in June of 2010 and a record low of -2.7 Percent in December of 1998. Chile has a dynamic market-oriented economy characterized by a high level of foreign trade. Chile's economy is based on the export of minerals (copper), which account for about half of the total value of exports. The dependence of the economy on copper prices and the production of an adequate food supply are two of Chile's major economic problems. This page includes a chart with historical data for Chile GDP Growth Rate. The GDP Growth Rate shows a percentage change in the seasonally adjusted GDP value in the certain quarter, compared to the previous quarter. Because of climatic conditions and holidays, the intensity of the production varies throughout the year. This makes a direct comparison of two consecutive quarters difficult. In order to adjust for these conditions, many countries calculate the quarterly GDP using so called seasonally adjusted method. The Gross Domestic Product can be determined using three different approaches: the product, the income, and the expenditure technique, which should give the same result. In sum, the product technique sums the outputs of every class of enterprise. The expenditure technique works on the principle that every product must be bought by somebody, therefore the value of the total product must be equal to people's total expenditures in buying products and services. The income technique works on the principle that the incomes of the productive factors must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes.

Economic outlook in 2012

The Chilean economy has long been the model for Latin America and maintains the regions highest credit ratings with Aa3 from Moodys and A+ from Standard & Poors and Fitch.

The Chilean economy reported its fastest growth in three quarters with 5.6% in the first quarter. Moderating pricing pressures and global risks have allowed the central bank to keep from raising rates. Despite a fairly strong Chilean economy, the country has not been immune to global headline risks. The market has gained about 1.9% year-to-date but underperformed the S&P500 by 1.7%. While it has underperformed the broad U.S. index, it has outperformed the iShares S&P Latin America Index (ILF,quote) and its loss of 6.8% since the beginning of the year. The selloff is more an aversion to risk than a valuation perspective on Chilean equities and should rebound once global markets calm. Given its credit rating and stability, the country is a core holding in regional allocations providing high risk-adjusted returns. The outlook for the Chilean economy is for moderate growth, outperforming Brazil and Argentina but below that of regional peers Colombia, Mexico, and Peru on a risk-adjusted basis. Economic outlook The International Monetary Fund (IMF) forecasts growth for the Chilean economy in 2012 at 4.3%, just above the regional average of 3.7%. The country has strong economic ties to the growing Asian economies which should help it to withstand weakness in Europe through the first half of the year. Reuters reports manufacturing output surged by 13.3% in March, but largely due to seasonal factors and widespread vacationing holding down February data. Domestic demand, normally a strength within the region, advanced at its slowest pace since 2009 in the first quarter. Rapid growth in manufacturing risks an inventory overhang if exports remain weak and consumer demand cannot fill the void. An increase in the unemployment rate in March to 6.6% and a 2.6% reduction in copper production is driving fears of a second half slowdown for the Chilean economy, but this is tempered by the considerable resources available to the government for stimulus measures. Productivity growth rates in Chile, a systemic problem in the region, are comparable to those in developed markets at an average of 5.8% per year. The country is also the first in the region to successfully establish counter-cyclical economic policies and a sovereign wealth fund. This helps the Chilean economy break from the traditional boom and bust cycle that keeps Latin America from moving forward relative to other regions. In the event of a further slide in global growth, the government may tap its $14.9 billion sovereign wealth fund to protect the Chilean economy. This helps put a floor under asset prices and would help companies in the domestic space outperform exporters.

Risks The Chilean economy, like Brazils, stands to bear the brunt of globally-induced volatility as the country is relatively more dependent on commodity exports. Copper prices have fallen almost 20% from a year earlier and account for approximately 45% of the countrys export revenues [pdf]. The windfall from copper represents about 20% of fiscal revenues and 4% of GDP. While China has recently announced a program to speed up infrastructure and construction projects which should help support copper prices, significant short-term risks remain from headlines out of Europe. The government has recently buckled to student protests and promised an increase in corporate taxes to offset more spending in education. Also proposed are cuts to personal income taxes and fuel surcharges partially paid for by an increase in taxes on hard alcohol. The government of neighboring Peru has recently declared a state of emergency as mining protests threaten output, and the risk remains that the labor unrest will spread to Chile. Civil unrest over worker rights and inequality are common in the region and usually end in some form of arbitration between the corporate and public sector. While specific events may scare investors and drive asset prices in the shortterm, they often provide a good entry point on a valuation basis. Investment options Sociedad Quimica Y Minera de Chile (SQM, quote) is a Chilean Chemicals manufacturer operating in four segments: specialty plant nutrients and fertilizers, iodine derivatives, lithium, and industrial chemicals. The company has operations in every continent and is distributed in more than 110 countries. Though its current price-to-earnings ratio of 26 times makes it fairly expensive from a valuation standpoint, the company controls its expenses better than its peers and has a net profit margin of 22.5% and a return on equity of 26.7%. The company is a leader in fertilizers and industrial chemicals and should benefit from the strong growth in agricultural products going forward. The iShares MSCI Chile ETF (ECH, quote) holds equity in 38 companies and seeks to replicate the equity market performance of stocks traded in the Chilean market. The top four sector holdings of the fund make up more than 75% with utilities (25.5%), materials (19.7%), industrials (16.3%), and consumer staples (13.8%).