In the period from 2003-2006, Latin America registered a 5.3% average annual growth rate.
By AARON LEITNERcopper biz 88 224(photo credit: Bloomberg)
In the past, Latin America was associated, in people's minds, with instability and economic crises, but lately this perception has changed as Latin America created great opportunities for investors as the world economy has provided for a strong growth environment.
Indeed, the last four years have probably been the best for the region since the 70s. In the period from 2003-2006, Latin America registered a 5.3 percent average annual growth rate. The poverty rate fell from 44% in 2002 to 38% in 2006, and the average GDP per capita increased by 16%. During the same period, the region's contribution to global economic growth grew by 9%.
During 2003-2006 and the first half of 2007, accommodating liquidity conditions and strong international demand for commodities stimulated strong capital inflows into the region, enhancing growth and strengthening local currencies. Commodities exports - oil and gas, as well as coal, metals, chemicals and agricultural produce - were main growth engines, although fast improvement of living standards helped boost domestic demand. Stronger external balances and rising capital inflows have led to a rapid accumulation of currency reserves. The region's governments have used profits to solidify debt profiles and prepay external debts.
As local governments continue to accumulate higher foreign currency reserves and reduce debt, the effects of an adverse impact of the U.S. economic slowdown and credit crisis on the region's economies will be significantly reduced. Latin America is better placed than in the past to cope with unfavorable external conditions; the most developed countries in the region, such as Chile and Mexico, should be able to weather the current turmoil, thanks to their healthy and consistent fiscal policies, stronger domestic markets and better external liquidity.
Though most global investment houses have sited Brazil and Mexico as Latin America's flagship economies; Chile is catching up. Chile borders Argentina, Bolivia and Peru. It has a population of 16 million, with a GDP per capita of $8,947. Chile is a presidential republic and a democracy. The chief of state and head of government is the president Michelle Bachelet, elected in 2006 on a pledge to invest in the education and health system and to implement pension reforms.
Chile has a developed market economy with a competitive and large private sector. It is a relatively open export driven economy, particularly copper. Chile attracts strong investment inflows, allowing for steady economic growth: 5% per annum in 2003-2006, 5.9% expected this year and 5.0-5.5% in 2008. Chile's economic growth rate may not be the highest in the region, (especially in comparison with Venezuela or Argentina) but unlike others, Chile's growth is steady and sustainable led not only by commodities exports, but also by consumption and investment in producing a rise in domestic demand.
Chile is the world's largest copper producer supplying about 35% of the world's copper. Copper revenues represent about 35% of government revenues and 55% of export goods. This makes the economy somewhat vulnerable to price fluctuations, although during the last four years copper prices quadrupled and the trend is not expected to shift. The high price of copper is prompting more companies to invest in the mining industry in Chile and the authorities expect that annual copper production will increase 15-20% by 2011. Demand for the metal is easing in the US, due to the collapse of the US housing market, but China has overtaken the US as the world's main copper importer.
Chile's fiscal position is stronger then most non-oil producers in the region. The government's official forecast for its fiscal surplus for 2007 is 8.1% of GDP. Chile's macroeconomic performance has been characterized by vigorous public financing within a healthy fiscal framework as well as an effective and credible monetary regime amid a freely floating currency. The inflation rate is rather high lately, driven by food and energy prices, but still low by Latin America's standards. Chile's 2007 CPI is expected to rise by 5.5%. A relatively high interest rate (5.75%) and a strengthening currency are expected to help curb inflation. Chile's success in effectively reducing public debt levels, over the last two decades, contrasts with the experience of the rest of the region and has allowed the country to reduce the burden of interest payments.
Chile's tax regime is simple and relatively stable; it is also the most effective, in Latin America, in terms of collection. These factors, coupled with a highly liquid financial system and political consensus on key economic policies, have ensured macroeconomic stability, steady GDP growth, and growing resilience to external shocks. International credit rating agencies, such as Standard & Poor's, Fitch and Moody's recognize Chile as a highly creditworthy country. It is rated "A" by S&P and "A2" by Moody's (Israel is rated "A-" and "A2," respectively). It is widely expected that Chile's economy will continue growing by 4-5% annually and that the government will pursue sound economic policies. It is these factors that will prompt the country's shift to a "developed economy" category.
The World Economic Forum's annual competitiveness report named Chile as the most competitive economy in Latin America. Chile ranked 26th among the WEO's list of the world countries. It was far ahead of Mexico, who took second place in the region and 52nd in the world (Israel ranks 17th). The country outperformed the region, as well as many developed countries, in macroeconomic stability, infrastructure and institutions development, market efficiency and other parameters. According to Office National du Ducroire, Chile is the safest investment in Latin America when it comes to war, expropriation, nationalization or transfer risk. Surely, Chile is a part of Latin America, and as such, it is affected by the region's political, economic and financial volatility. It is also susceptible to the copper prices change on the world markets, but analysts forecast that given ever increasing demand from China, copper prices are not likely to drop significantly over the medium- to long-term.
It looks like Chile, as well as Latin America's other most developed economies, is weathering the US economic slowdown well. From the trade point of view, a slowdown in the US won't be a deathblow to Chile since Chile exports only about 15% of its products to the US.
Sound, market-oriented policies have created significant opportunities for foreign capital to participate in the country's impressive economic growth. For the last three decades, foreign investments have been an essential part of Chile's economic development. Chile's business climate is generally straightforward and transparent; corruption is rare. The Chilean banking system is healthy and competitive; banks are characterized by the high quality of their loan portfolios, due partly to the government's strict regulation on lending. Chile's capital markets are well-developed and open to foreign institutional investors. Capital market reforms, implemented by succeeding governments, leveled the terms for foreign investors in the local market and those who invest through Chilean bonds abroad. This has increased demand for local debt instruments among foreign investors.
Equity markets in Chile are less volatile than other Latin markets. Chile's stock exchange - Santiago - was established in 1893. The exchange trades in stocks, bonds, investment funds, stock options, futures, gold and silver coins minted by the Banco Central de Chile and US dollars. Three stock market indices are published. The general IGPA index is a market capitalization-weighted index that measures price variations of the majority of the exchange's listed stocks, classified by sectors. The most cited index is the selective IPSA, composed of the 40 most heavily traded stocks. There is also the Inter-10 Index - the volume weighted index of the 10 main Chilean stocks listed in foreign markets through ADRs. From the beginning of 2007 to mid-October the IGPA index has risen by 24%, IPSA - by 27%, and Inter-10 - by 26%; during the last three years these indexes have risen by 75%, 95% and 94%, respectively. The markets have been volatile July through September, but from mid-September to mid-October all losses have been recuperated.
Exchange Traded Funds (ETFs), that invest in multiple stocks, allowing for broader diversity, are seen as a handy tool for investing in Latin America. Unfortunately, most of the ETFs do not concentrate solely on Chile, investing in a range of Latin America markets and allocating to Chile typically less than 10% of total exposure. However, ABN Amro Bank NV offers a number of Chilean ETFs, such as, for instance, Chile Inter 10 Certificate, which since its inception in December 2006 till the end of October 2007, has risen around 45%. There is also Credit Suisse's closed-end ETF, The Chile Fund (CH), which has generated a return of approximately 25% year-to-date.
Despite market volatility and the fallout from the US subprime crisis, Latin American stock markets have been hugely profitable and investors from all over the world are still drawn by the opportunities. However, most institutional investors are concentrated in Brazil, while Chile offers comparable potential for growth with lower risk. Notwithstanding their relatively small size, financial markets in Chile continue to develop, broaden, deepen and evolve in ways that will no doubt blaze trails for future products and transactions in markets across the region.
aleitner@tandem-capital.com The author is global investment strategist at Tandem Capital.
Yulia Vaiman/macro research analyst at Tandem Capital contributed to this report.
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