As the world’s largest copper producer, Chile has seen brighter days. The metal’s price has fallen 54 percent since its 2011 peak, and Chile’s economy has tumbled along with it, with growth slowing from 5.8 percent in 2011 to 2.3 percent last year. An industrial slump in China, Chile’s largest trade partner and the world’s biggest copper consumer, has hit export earnings. The country’s small and open economy leaves it vulnerable to decelerating growth among its other trade partners, including the U.S. and Mexico.
Rogério Studart, associate professor of economics at the Federal University of Rio de Janeiro, says this extended trend will weigh on Chile’s balance of payments and public finances considering that copper typically accounts for 55 percent of exports and generates 20 percent of government revenue.
The trade deterioration has knocked the peso for a loop, compounding the economy’s woes. The peso has lost a third of its value against the U.S. dollar since May 2013, briefly topping 730 to the greenback in January, its lowest level since 2003, before rebounding to just below 700. The currency’s slide has eroded consumers’ purchasing power and pushed inflation up to 4.8 percent in January, above the Banco Central de Chile’s target range of 2 to 4 percent. In a bid to bring prices under control, the central bank raised its policy rate by 25 basis points in September and again in December, leaving it at 3.5 percent.
“It’s more expensive to buy capital and consumer goods today because of the trajectory of the Chilean peso,” says César Pérez-Novoa, head of research at BTG Pactual in Santiago.
President Michelle Bachelet has struggled to quell consumer and investor fears about the economy. Her approval rating has dipped from 84 percent when she ended her first four-year term in office, in 2010, to 28 percent in January, according to local pollster Adimark. The center-left leader won a fresh mandate two years ago by pledging to carry out an ambitious economic and structural reform program aimed at reducing inequality and bolstering long-term growth, but the collapse of copper has undermined those plans. Bachelet’s administration has had to delay or scale back several initiatives, such as the provision of free higher education for all and the expansion of collective bargaining rights for union workers. Corruption scandals, including one implicating Bachelet’s son for abusing his political power to get a $10 million loan, have dented the president’s credibility and shifted legislative focus away from reforms. Last July, Bachelet questioned the feasibility of delivering the reforms in full before her term ends in 2018.
Corporations and investors oppose many of the initiatives as too ambitious and expensive. To help finance free university education, for instance, the administration is hoping to raise an extra $3 billion a year by gradually lifting the corporate income tax rate from 20 percent to 27 percent by December 2017. Business executives say higher taxes will weigh on investment and growth. They also fear labor reforms, such as strengthening the power of trade unions, could harm corporate profitability and push up retail prices and unemployment, says Pérez-Novoa. “In the coming year there may be an increased risk of labor strikes as discussions continue,” warns David Anderson, a Washington-based credit and political risk director at Zurich Insurance Group, though he notes demand for insurance coverage of investments in the country has not risen since Bachelet’s second term.
Chile’s economy is expected to grow around 2 percent in 2016 — below its potential perhaps, but well above the Latin American average, which is expected to be down by 0.3 percent. Chile is diversifying and redefining its commercial relationships, says BTG’s Pérez-Novoa, most notably in signing the Trans-Pacific Partnership with 11 other Pacific Rim nations this February. Chile is also expanding its export basket beyond copper, shipping out more wine, seafood and manufactured goods. “Chile is the lowest-risk country in Latin America,” concludes Zurich’s Anderson. “Bachelet is going through some difficult times politically, but we don’t see anything now or on the horizon that would give us pause.”
Follow Georgie Hurst on Twitter at @Ghurst_iimag.
