Chile is a very beautiful country located in the Southern west coast of South America that enjoys a diverse topography including a 2650-mile Pacific coastline. Today, Chile is prosperous and stable as it enjoys first world comforts, it currently holds the best credit rating in all of South America with an investment grade status enabling Chile great access to global capital markets. Santiago is a large modern cosmopolitan city, the country for the most part enjoys relatively good infrastructure for an emerging economy including railroads, hi-ways, airports and telecommunications.
The Chilean peso has depreciated to the US-dollar ('USD') since 1998 as Chile has encountered several external shocks. Some of these shocks have included the collapse of the global commodity markets and the resulting fall in copper prices, the 1997-98 Asian economic crisis, the economic turmoil in neighbouring Argentina, the banking and currency collapse more recently in Uruguay and the devaluation of the Brazilian real in January 1999. However, Chile has successfully escaped the carnage these external pressures have displayed as the Chilean peso has acted as a shock absorber by gradually depreciating. At present, Chile is stable and is considered to be the star performer amongst the very volatilie South American economies.
Why this reasonable stability amongst a sea of volatility in South America? In 1985 under former Chilean leader Gereral Pinochet, Chile changed course in its economic thinking. It has been a very successful transition as the nation privatized, freed the economy, implemented attractive laws for foreign investment, removed capital controls and began the process of diversifying the economy away from copper. But most importantly, the government provided sound fiscal management during this time unlike many of its neighbours which benefitted Chile with a much lower level of poverty and a higher standard of living. The information provided below is further discussion regarding Chile's current situation and outlook for the Chilean peso.
POLITICS: obtained independence from Spain in year 1810. Chile is presently a democracy under the leadership of a centre-left coalition government that has held power since the return of democracy in 1990. President Ricardo Lagos was elected in January 2000 and took power in March 2000, the next scheduled election will be held in 2005. President Lagos is Chile's first socialist leader since former socialist President Allende was removed from power after a 1973 coup when General Pinochet took over command as his tenure lasted 17 years. Today, Chile and its 15.5 million people are a divided nation politically between the left and right, but the country has matured politically as stability has taken hold. Chile's violent unstable political past is no longer, the future looks very bright politically with a pledge from the opposition to work together to solve problems with the overall objective of advancing Chile forward. Recently, there have been political and financial scandals relating to the 'Inverlink' scandal. However for the most part, there are currently no serious difficulties with institutional corruption unlike Argentina as Chile still holds a positive image free of corruption. In fact, President Lagos' centre-left government is committed to maintaining a pro-business atmosphere including free trade and foreign investment although further attention will be directed towards improving Chile's infrastructure with investment monies into education and health care.
ECONOMY: stable emerging economy with the goal of being a developed nation with standard of livings similar to those in Europe and North America by year 2010. The government is committed to free-market principles & economic growth, foreign investment as Chile has very attractive laws in place for international investors. These policies coupled with sound management have resulted in Chile obtaining an investment grade rating. Chile is starting to rebound from the deep recession years in 1998-99 correlated to the global slump in commodity prices and the Asian financial crisis. This followed tremendous economic growth from 1986 to 1997 where GDP grew 7 percent annually. A period of fiscal prudence since 1985 has enabled Chile to enjoy strong access to global capital markets as noticed more recently in January 2003 where their biggest bond deal to date was issued at $1 billion USD. Export markets include the United States and Japan. Major industries do include autos, mining, wood products, tourism, iron & steel, fish processing (including salmon fishing), agriculture and textiles. The government during the 1990's ran fiscal surpluses and modest current account deficits with 1998 being the exception where difficulties arose. Chile is well known for its "Free Zones"- government monies available for export businesses. Tourism is now an important foreign exchange earner valued at $1 billion USD/year.
Economic Statistics
GDP as measured by purchasing power parity is at $153 billion USD (2001) and GDP/Capita is at $10,000 USD. GDP/Capita at $3,500 USD at market prices.
Year 2002 GDP growth was measured at 2.6 percent, 2001at 3.1 percent, year 2000 at 5.4 percent and 1999 at negative 1 percent compared to 1997 at a buoyant 6.6 percent. Year 2003 GDP growth estimate is higher at 3.6 percent. Inflation for 2002 was at 2.2 percent, 2001 is at 2.6 percent, year 2000 at 4.5 percent, 1998 at 4.7 percent. Chile has posted a fiscal surplus during most of the 1990's although 2001 fiscal deficit came in at a modest 1 percent of GDP while 2003 deficit is estimated at 0.7 percent. Chile's current account deficit for year 2001 at 2 percent of GDP, this figure over the years has fluctuated between 2 percent and zero. Year 2003 current account deficit is projected at a lower 1.3 percent. The trade number is in surplus as is the vitally important overall balance of payments figure due to strong foreign investment levels. External debt is at $40 billion USD (2001). FDI inflows are healthy at around $5 billion USD/year. Unemployment is at 10 percent, this is much higher than 6 percent recorded in mid 1997.
POSITIVE: very high savings rate at 20 percent, elimination of the 15 percent capital gains tax, very low violent crime, lowest level of corruption in Latin America, 50 percent of the population are under age 24, fairly well educated. CONCERN: the Chilean economy is vulnerable to a sustained rise in the oil price (net energy importer) and drought at times as this significantly impacts Chile's electrical energy production as 90 percent of output is relied on rainfall, increase in government borrowings over the last 2 years.
BANKING SYSTEM: competent and relatively strong although 1998 saw system profitablity fall due to higher interest rates protecting the peso from a sharp devaluation due to the deteriorating trade situation from low copper prices. Chile's Central Bank, Banco Central de Chile has managed monetary policy prudently coupled with an inflation targeted goal of 2 to 4 percent. Interest rates are in the 3 percent range (2002). It is a highly regulated banking sector with the majority of system assets being held in domestic Chilean pesos which further provides stability. During 2001, the Central Bank helped to co-ordinate an orderly depreciation in the Chilean peso, this would be a rare circumstance reflecting the very difficult economic environment at that time with a global recession underway. Gross official reserves in percent to short term debt is at 200 percent for year 2002 which is favorable but well down from 1997 at 500 percent coverage. International reserves for Chile are strong with February 2003 valued at $16.44 billion USD.
REGIONAL & GLOBAL ANALYSIS Argentina, Brazil, Uruguay, MERCOSUR, European Union, United States
The Argentine devaluation during 2001-02 where the Argentine peso fell from par to the USD to a figure close to 4 to 1 reflecting a 75 percent currency collapse did impact the Chilean peso, but not with devestating consequences. At presently, there are fewer tourist visitors from Argentina, in fact, the reverse has taken course with a large number of Chileans now touring Argentina, particularly Beunos Aires. During year 2002, the Argentine economy contracted by 10 percent of GDP although year 2003 is forecasting modest growth as stabilization has finally taken hold. The region has had a spectacular history of currency crashes and chaos including Suriname, Venezuela, Colombia, Uruguay, Brazil and Argentina. Chile is currently an Associate member of MERCOSUR
(Southern Cone Common Market). Free trade agreements in place with the European Union 'EU' will help to offset the sluggish domestic Chilean demand. At present, the EU is a larger buyer of Chilean products than markets in Asia for Chile although this may change. Other free trade deals Chile is currently negotiating include India, South Korea and the United States. An agreement with Canada is also approved.
KNOWLEDGE: Chile is rich in natural resources particularly with large reserves of copper and gold. The lifeline of the Chilean economy for the most part remains in copper mining as it is Chile's largest foreign exchange earner. Chile is currently the world's largest producer of copper representing 35 percent of global output. Chile's Codelco is the world's largest copper producer. Average copper price for 2002 was at 73.8 US cents/lb, well below 1995 at $1.33/lb USD. Mining represents 45 percent of Chile's export revenues and attracts a large share of foreign investment monies due to the massive capital investments required to build a mine, thus providing for many well paid jobs. BI.C believes that copper prices will begin a gradual upswing in USD based pricing since the metal bottomed out in 1998 reflecting a return to a bull market in commodities over the next several years. In addition to copper, Chile will realize an increase output in other minerals including gold and silver where many analysts are calling for a historical bull market to develop. This all bodes well for the Chilean peso going forward.
CURRENCY: ISO symbol 'CLP', Chilean peso. At time of review on April 27, 2003, the Chilean peso had an exchange valuation of 711.90 CLP to 1 USD. When compared to purchasing power parity to the USD, the Chilean peso is presently 25 percent undervalued. Floating exchange rate regime is in place after the crawling exchange peg to the USD was removed in 1999 in reaction to the Asian financial crisis and collapse of copper price at that time. The Chilean peso accordingly depreciated by 20 percent as it was floated. Currency exchange and capital controls have been removed in 2001 reflecting the recent tax reform implemented. More recently in 2001, the peso fell 12.5 percent versus the USD. In 1998, the peso came under significant exchange pressure as the current account deficit was in serious difficulties running at 5 percent of GDP directly correlated to the collapse in copper prices. At the height of the Argentine crisis, the CLP fell to 690 to the USD. The low for the CLP came in October 2002 when it hit a valuation of 760 to the USD.
CURRENCY HISTORY: historical valuations for the Chilean peso include: November 1995 at 411.50 CLP to the USD, February 1997 at 415.41, January 1998 at 453.49, January 1999 at 476.65, January 2000 at 519.14, January 2001 at 570.27, July 2001 at 658.70, October 2001 at 709.02, April 2002 at 650.57, October 2002 at 741.03 and March 2003 at 742.08. In 1975, the peso replaced the escudo at 1000 escudos to the new peso. In 1960, the escudo replaced the old peso. Currency crisis dates include 1985, 1999.
CURRENCY FORECAST: positive with a bull market in commodities currently at early stages and developing including metals such as nickel & copper rising in value coupled with precious minerals such as gold & silver. It is important to note that the CLP has already declined by 5 percent versus the USD during QTR1 2003 of which itself is declining in relation to the euro. Major rating agencies have a stable positive outlook for Chile's sovereign risk ratings. Steady capital inflows, political stability and sound economic fundamentals coupled with expanding export markets and rising commodity prices suggests that the Chilean peso may stablize and begin to appreciate versus the USD in the months ahead.
UPDATED: April 27, 2003
