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 cyclical Chilean peso has performed very well from March 2003 up until March 2008 as the world entered a strong commodity pricing cycle. Again previous Chilean peso cycles is noticed during the 1990’s with economic shocks which 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 neighboring Argentina (2000-01), the banking and currency collapse 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 floating Chilean peso acted as a shock absorber by gradually depreciating. At present, Chile is stable, well managed and is considered to be the star performer amongst the very volatile South American economies.
Why this reasonable stability amongst a sea of volatility in South America? In 1985 under former Chilean leader General 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 neighbors 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 centre-left coalition government headed by President Michelle Bachelet. Next election is scheduled for December 2009; the centre-left has ruled Chile since 1990 although recent polls may favor a change to the centre-right. Today, Chile and its 16.45 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. 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 Bachelet’s 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. The government is committed to free-market principles & economic growth, healthy 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, strongest sovereign credit rating in South America. Chile is currently entering a period of economic slowdown due to the significant collapse in metal prices, cyclical nature of the economy. Chile had a strong period of economic advancement where GDP growth averaged 4 percent per year from 2000 – July 2008. This followed tremendous economic growth from 1986 to 1997 where GDP grew 7 percent annually. Export markets include the United States and Japan. Major industries do include: autos, mining, wood products, tourism, iron & steel, and fish processing (including salmon fishing), agriculture and textiles. Chile is well known for its "Free Zones"- government monies available for export businesses. Tourism is now an important foreign exchange earner valued at over 1 billion USD per year.
Economic Statistics
GDP as measured by purchasing power parity came in at 253 billion USD (2008) with corresponding GDP per capita at 15,400 USD. Market GDP measured at 181.5 billion USD. Year 2009 GDP growth is projected at 2.5 percent of GDP helped by a 4 billion USD stimulus, 2008 came in at 4.45 percent. Inflation quotes include December 2008 at 7 percent, year 2008 at 8.8 percent (boosted due to high energy prices), year 2007 at 3.2 percent, year 2002 was at 2.2 percent. Year 2009 inflation is forecasted at 6.5 percent. Chile has posted a fiscal surplus during most of the 1990's although 2000’s except for a modest fiscal deficit at 1 percent of GDP in 2001, 2003 deficit came in at an estimated at 0.7 percent. Year 2008 fiscal surplus came in at 8.8 billion USD, 2006 surplus at 8 percent of GDP. Year 2008 current account deficit came in at 1.6 billion USD; the trade component was in surplus at 10 billion USD. FDI inflows were very strong in 2008 at 17 billion USD, massive increase from the 3.4 billion USD in 2006. External debt stands at 65 billion USD (December 2008). Energy: net oil importer at 223,000 bpd (2006); net gas importer at 2.4 billion cu m (2007). Unemployment stood at 7.5 percent (October 2008).
POSITIVE: very high savings rate at 20 percent, very low violent crime, lowest level of corruption in Latin America, 50 percent of the population are under age 24, world’s number five exporter of wine. CONCERN: drought at times as this significantly impacts Chile's electrical energy production as 90 percent of output is relied on rainfall, very uneven distribution of wealth.
BANKING SYSTEM: sound, competent and relatively strong. Chile's Central Bank, Banco Central de Chile has managed monetary policy prudently coupled with an inflation targeted goal of 2 to 4 percent. The Central bank cut its Benchmark interest rate by 250 basis points to stand at 4.75 percent in February 2009. The Chilean banking sector is highly regulated with the majority of system assets being held in domestic Chilean pesos which further provides stability. International reserves for Chile are strong with January 2009 valued at 23.45 billion USD.
REGIONAL & GLOBAL ANALYSIS Argentina, Brazil, Uruguay, MERCOSUR, European Union, United States
Please contact us at BankINTRO.com for further details.
KNOWLEDGE: Copper – ‘The Chilean Currency Cycle’
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, copper represents 30 percent of Chilean government revenues. 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.
BankINTRO.com believes that copper prices will begin a gradual upswing in USD based pricing since the metal bottomed out in late 2008 trading around 1.50 USD per pound, previous cyclical bottom was 10 years prior in 1998 when copper traded around the 70 US cent level reflecting a return to a bull market in commodities likely to begin in 2010 and to last several years. A quick glance at the copper market has the following quotes: March 2, 2009 at 1.51 USD per pound, July 2008 at 4 USD, January 2007 at 2.5 USD, Summer – Fall 2006 at 3.75 USD, March 2004 at 1.3 USD per pound, 1998 bottom at 70 US cent level ( last major cyclical bottom). During the copper boom from 2006 to July 2008, the government of Chile established a sovereign wealth fund that has accumulated 20 billion USD equivalents from primarily from its natural resources. The wealth fund will grow when copper prices are high and accordingly decline when the government requires stimulus spending during recessionary times. The authorities have recently announced a 4 billion USD wealth fund spending package to help offset the global economic slowdown currently underway.
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 March 2, 2009, the Chilean peso had an exchange valuation of 601.08 CLP to 1 USD and/or 758.02 CLP to the Euroland euro (EUR). 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 tax reforms that were implemented. 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 in 2001-02, 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: the CLP (also known as the second peso) came into circulation in 1975 when it replaced the first peso ‘escudo’ at a rate of 1000 escudo to 1 CLP. The escudo
was in use as Chile’s currency from year 1817 to 1960. Paper notes first came about in 1840. Approximate historical valuations include 1975 at 3 CLP to 1 USD, year 1976 at 10, 1978 at 25, 1980 at 45, 1982 at 50, 1984 at 100, 1986 at 200, 1990 at 300, 1992 at 350, 1994 at 400,
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, March 2003 at 742.08, January 2004 at 573.35, January 2005 at 576.45, January 2006 at 526.05, January 2007 at 541.24, March 2008 at 441.94 and December 2008 at 650.05. The CLP took a nose dive in valuation to the USD from March 2008 to December 2008 declining by 47 percent reflecting the collapse in global copper prices and the deleveraging of commodity currencies in favor of the USD. Currency crisis dates include 1985, 1999, 2008.
CURRENCY FORECAST: short term choppy, medium term positive. The CLP is underpinned by low gross external debt at 25 percent of GDP, a strong position in the country’s sovereign wealth fund which is held outside the country coupled with a solid official reserve asset position of 23.4 billion USD equivalents held at the Central Bank of Chile. The economy is close to a cyclical bottom as noticed with the fiscal account projecting a deficit of 2.9 percent of GDP for 2009 after years of strong surpluses. A modest current account deficit for 2009 is also projected. Steady capital inflows, political stability and sound economic fundamentals coupled with expanding export markets and a return to higher commodity prices in 2010-2011 suggests that the Chilean peso has stabilized and is likely to begin to appreciate versus the USD later in 2009 – 2010.
