Bloomberg News

Chile Beats Development Goal as Growth Defies World Slump

November 14, 2012

Chile is on track to achieve developed-nation status ahead of target as growth in the world’s top copper producer exceeds analyst forecasts, Finance Minister Felipe Larrain said.

The nation will become the first in South America to reach the landmark a year before President Sebastian Pinera’s goal of 2018 if growth sustains this year’s pace of above 5 percent, the minister said in an interview yesterday. Per-capita gross domestic product must reach $22,000 a year on purchasing power parity, up from today’s level of almost $19,000, to meet the target, he said.

Chile’s economy was one of the 10 fastest-growing in the world for the first half of this year. The economy in 2012 will expand “slightly” more than 5 percent, said Larrain. Falling unemployment, rising wages and growing investment are driving expansion, even as the Euro regions struggles to resume growth and the so-called fiscal cliff threatens to tip the U.S. into recession, he said.

“We’re are not bullet-proof; we are not immune from what happens to the world economy,” Larrain, 54, said from his offices in Santiago. “We are seeing an effect in the price of copper and in exports. The fact is that the strength of the Chilean economy has other sources and engines of growth that are pushing us.”

Chile’s GDP climbed 6 percent last year and will increase 5 percent in 2012, more than doubling average growth for the world, according to analysts surveyed by Bloomberg. Latin America’s economy will grow 2.9 percent this year, according to the poll.

Little Threat

Unemployment fell to 6.5 percent in the third quarter from 7.4 percent the year earlier, while investment growth accelerated to 8 percent in the second quarter, according to government and central bank data.

“Chile is rapidly moving toward becoming a developed country based on tremendous growth in the economy and the labor market,” Cesar Perez-Novoa, co-head of research at BTG Pactual, said by phone from Santiago yesterday. “Still there needs to be improvement in infrastructure, which could accelerate the pace of this goal, and balance out health care and education.”

Chile has the highest level of income inequality among the 34 members of the Organization for Economic Cooperation and Development.

Its Gini coefficient, an index of the income gap where 0 represents complete equality and 1 complete inequality, is 0.497 compared with 0.476 in Mexico and 0.378 in the U.S., according to the Paris-based organization.

‘Structural Change’

Inequality has helped fuel protests, including a student movement for lower cost schooling that has raged for over a year.

While the government expects the price of copper, which accounts for more than half of Chile’s exports, to fall 12 percent this year from 2011, it is unlikely to derail the economy, Larrain said. The metal will average $3.54 a pound this year, compared with $1.79 in the decade through December 2009.

“There has been a dramatic change, a structural change, in the copper market,” Larrain said. “I don’t believe we will see copper prices going back to $2, $2.5. That would happen in the very worst part of the cycle, but not as a structural issue.”

Moreover, the government has a contingency plan in place that would entail tapping its $15 billion sovereign wealth fund to stimulate investment and employment if the global slowdown hits the country harder.

Net Creditor

Chile is the only country in Latin America that is a net creditor and posted a fiscal surplus equivalent to 1.4 percent of GDP last year.

The peso yesterday fell to its lowest level in 16 weeks on concern global economic weakness may sap demand for the country’s key export, copper.

The currency depreciated 0.2 percent to 484.78 per dollar at the close in Santiago, the weakest since July 26.

The extra yield investors demand to own Chilean government dollar bonds instead of Treasuries rose three basis points to 142 basis points yesterday, according to JPMorgan Chase & Co.

Chile’s benchmark stock index, the IPSA Index (IPSA), has gained 0.2 percent this year, closing at 4187.73 yesterday.

Year-End Liquidity

The government stands ready to join the central bank in providing extra liquidity to the market as it did in December of last year, Larrain said.

The central bank said Nov. 8 it would allow banks to pawn peso bonds in return for cash, so-called repo operations, once a week until Dec. 18. The government is weighing up whether to repeat last year’s auctions of dollar deposits, he said. It’s not clear as yet whether the measure is necessary, he added.

“It all depends on the market,” said Larrain. “If we see an episode of drying liquidity, we will be prepared to do the same as we did last year. So far we haven’t seen that.”

Liquidity often falls at the end of the year in Chile as companies seek cash to bolster balance sheets, withdrawing dollars and pesos from the short-term debt funds that lend to the banks.

The spread between 30-day interbank loans and the central bank’s benchmark rate fell two basis points to 1.03 percentage point yesterday after the central bank the day before loaned $177 million through its new repo window. That spread reached as high as 2.39 percentage points in December last year.

To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.


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