By Mark Artherton, fund manager at F&C Management Chile has tried over the past 15 years to cre...
By Mark Artherton, fund manager at F&C Management
Chile has tried over the past 15 years to create the textbook small open economy and has achieved this goal except in a few small areas. The country is impacted negatively by its geographic position.
The latest fad in the currency markets in Latin America is to short the Chilean peso as a proxy for the Brazilian reals.
This is symptomatic of the problems that developing nations face in the current economic environment and under the prevailing system. The real links between the Chilean economy and the Brazilian economy are very limited and there are very few financial similarities, yet the financial markets are making a link. Geography can be the only answer.
The Chilean economy has religiously followed the prescriptions of mainstream neoclassical economics, freeing up markets and leading the world in significant microeconomic reforms. The current finance minister refuses to even contemplate policies outside of this model.
The Chilean authorities have played all of their cards and this has kept the economy from falling into recession but has not stimulated the economy strongly. The Central Bank has cut interest rates to levels where real interest rates 0% and the government will not be able to loosen fiscal policy further under the rules based system in Chile.
Fiscal profligacy has been a concern for the business community in Chile over the past couple of years. However, running a fiscal deficit of 1% in a counter-cyclical attempt to stabilise the economy does not strike me as a large issue, especially as the level of public debt to GDP stands at only 11%.
With no further room for policy action, the main hope is for a recovery in trade volumes as G7 growth accelerates. Chile has experienced an adverse movement in its terms of trade as a copper exporter and oil importer.
The growth in non-traditional exports, such as wine and salmon, has helped the economy but the extremely strong growth rates seen in the past few years are not sustainable.
Consumption is weak due to the high level of unemployment at 9%. This is actually very good when compared to other South American countries, where the average is in the high teens but as it has grown from levels closer to 6% this has dented consumer confidence.
The major concern is a lack of labour flexibility and the finance ministry and corporate Chile want to reform labour laws to strip unions of their power and to make hiring and firing much easier. However, due to the left-leaning nature of the ruling coalition this is unlikely to occur and is in my opinion is more of a smokescreen from corporate Chile rather than a real problem.
Within the Chilean market, there has been a sharp dichotomy of performance with stocks with no ADR listing outperforming those with ADR listings massively. Until growth is clearer in the G7 and financial conditions for emerging markets improve this situation is likely to continue with ADRs experiencing extreme volatility. That said the underlying fundamentals for the Chilean economy and market remain sound and the equity market having given up a lot of its premium valuation over the last seven years would argue for a good long-term performance.
Chilean public debt is low.
Traditional exports are holding up well.
Lower unemployment to its neighbours.
Country is depending on an exports boost.
Concerns over the lack of labour flexibility.
Consumption remains weak.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till