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Chile’s Economic Success Gives Upside to Future Investors

Former President Michele Bachelet, the frontrunner in Chile’s 2013 presidential election as it goes into a second round of votes on December 15, will, if she wins, come back to power at a time when Chile is set to embark on a new and decisive economic and social chapter in its history.

The country has always been lauded as a model for other Latin American and emerging market nations, and in 2010, Chile became the only Latin American nation to join the Organisation for Economic Co-Operation and Development (OECD), a grouping of the world’s 34 wealthiest market economies.

But in the past couple of years, Chile has been at the crossroads, with some serious gaps in its fabric that must be addressed. Data has shown staggering inequalities between the wealthiest segments of the population and the poorest, for example, and anger against Chile’s expensive education system, which puts quality schooling out of the reach of many, brought people out into the streets in 2011.  

The government of outgoing president Sebastian Pinera did a good job of appeasing the uprisings at the time, said Santiago Mosquera, a sovereign analyst covering Chile for Fitch Ratings. But the fact remains that education reform is one of the key issues for Chile to “get to the next stage of development, because what people want is for the [Chilean] model to be more inclusive and to offer greater social mobility, better education, better healthcare and all the other demands that are typical of a country that is becoming more developed,” he said.

Addressing these demands will be the big challenge for Chile’s new president. But although some have expressed their doubts over left-wing Bachelet’s plan to raise corporate taxes to fund education reform, it’s clear that Chile’s economic success over the past two decades has set up a strong foundation that will allow a good amount of maneuvering without any downside risk.

Chile has sustained a high economic growth—buoyed by revenues from copper exports—coupled with low inflation and an enviably low unemployment rate, Mosquera said. A serious reconstruction effort after the 2010 earthquake brought a lot of investment into the country, and the Chilean mining industry remains an attractive investment proposal.

“Fiscal policy in Chile is very well anchored in the fiscal framework, and they have a fiscal rule that no one questions, that everyone respects, and that allows the government to set aside money when copper prices are higher,” Mosquera said.

Chile’s forte definitely lies in astute planning, according to Clem Miller, investment strategist at Wilmington Trust. “Chile is in a great position to flexibly handle the longer-term issues they haven’t dealt with yet,” Miller said. “For example, both the public and the private sectors in Chile have very low debt. In fact, if you look at the numbers, the Chilean government is a net creditor of 7% of GDP to the rest of the world, so they have a lot of flexibility to draw down on those assets, to take on additional debt and to run a higher deficit for some time while they handle some of these other issues, like improving the education system and making it free. After all, Chile was admitted to the OECD so there’s a supposition that they should be moving toward some kind of standardization with the other countries in the group.”

Although the Chilean economy is slated to grow at 4%, there are still some challenges ahead for the country, particularly figuring out how to remain competitive in mining, its key industry.

Mining is key for export and fiscal revenues, Mosquera said, but increased energy and labor costs are making things more challenging. For instance, energy prices in Chile are among the highest for OECD countries.

“If you put everything together, the value proposal is still there, but Chile has been losing ground compared to other mining countries, and dealing with the high cost structure is a medium-term challenge,” Mosquera said.

Although it is more costly compared to many other copper-producing nations, Chile still remains an extremely attractive proposal, according to Miller. Chile has some of the easiest-to-access copper mines in the world, he said, and given that it’s a politically stable country where the rule of law works, it continues to attract a great deal of investment into mining.

However, copper currently represents 40% of export revenue, Miller said, so “while you obviously don’t want to stop copper exports, and Chile isn’t your typical commodity exporter, it would be a good idea to be less dependent on them and to diversify industry.”

To that end, longer-term reform, specifically education reform in particular, would help in allowing Chile to develop and mine its human capital.

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