Chile, a Rare Succes Story?
[Update: Stefan Karlsson responds to this small snippet, taking me to task on the fact that I ascribe the relative overperformance of Chile's economy to sound government policy. Specifically, he notes that the reason the Peso might have performed better in recent months (i.e. during the worst bouts of the crisis in Q4-08 and Q1-09) is that the Copper price has increased markedly. Point taken.
I would add that it is difficult to untangle short term from long term factors, and that Chile remains in a stronger position than many of its peers. However, the fact that Copper and the performance of the Peso (and Chile's economy) is correlated is undisputable, so Stefan's correction is timely in this regard.]
Yes, I know. Everybody is talking about a recovery and how the worst is over and investors are still bathing in the soothing calm of longest bear rally so far in this crisis. But seriously, you don't believe that this will last do you? Well, even if you do, this will not be the topic of this entry [1].
Rather, I thought it would be interesting to have a look at one of the (relative) success stories in the midst of the economic mire in which we find ourselves. The economy in question is Chile, and apart from Bloomberg's report that Finance Minister Andres Velasco, after having been "burned" back in November, is now almost a rock start the point is well worth pondering.
(cut and paste at my discretion)
The Chilean peso has risen almost 10 percent against the dollar this year to become the best-performing currency among emerging markets. The country’s economy is expected to grow 0.1 percent in 2009, as the region contracts 1.5 percent, according to the International Monetary Fund. While Chile stashed away copper profits, neighboring Argentina boosted spending when revenue from soybean exports rose, leaving it short on cash to stimulate the economy this year.
(...)
Velasco set up funds to invest the copper windfall abroad, mostly in government bonds. He announced plans to spend the interest from savings on scholarships and helped Bachelet extend social security to 1.3 million people. In his first three years in office, Velasco posted the biggest budget surpluses since the country returned to democracy in 1990. In 2007, Chile became a net creditor for the first time since independence from Spain in 1810.
Last July, copper reached a record of $4.08 a pound. By year-end, the central bank had built $23.2 billion of reserves. The government had $22.7 billion in offshore funds and about $2.8 billion in its own holdings.
After Lehman Brothers Holdings Inc.’s Sept. 15 bankruptcy sparked a global credit freeze, Velasco and De Gregorio had the equivalent of more than 30 percent of GDP available if needed to shore up Chile’s banks and defend the peso. The price of copper plummeted 52 percent from Sept. 30 to year-end, and Velasco dusted off his checkbook. In the first week of January, he and Bachelet unveiled a $4 billion package of tax cuts and subsidies. “He has been vindicated,” said Luis Oganes, head of Latin American research at JPMorgan Chase & Co. in New York, who studied under Velasco.
The story about the copper windfall in Chile is a remarkable story really and as I reported in an extensive review of the economy back in October Chile's government went into the crisis in the rare role as a net credit with debt to gdp at -11%. Moreover, I have also shown how Chile has managed to wield the benefits of the demographic windfall (the demographic dividend) rather well.
If we look at some indicative economic evidence it does indeed seem as if Chile is the odd man out in Latin America with the Peso performing somewhat better than the main benchmark (according to me) in the form of the Brazilian Real as well as the markedly lower increase in sovereign debt spread due to the crisis.
So, I guess the question is then. Should you invest in Chile? Clearly, Chile is also like most other countries currently in a recession, but then again why not? I hold that Chile is one of the best opportunities to pick up a decent return in the context of an otherwise rather rugged emerging market edifice. But then again, I am not an investor.
[Disclosure for Seeking Alpha: No positions]
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[1] Although please do retort in the comments section. And RP, you can bugger off!