Last week Anthony was back on the road headed for South America’s hottest economy: Chile.
With a population of more than 17 million and nominal GDP over $248bn, Chile’s economy is currently the 6th largest in the Latin American continent, after Brazil, Mexico, Argentina, Colombia and Venezuela.
Yet, Chile’s economy delivered a growth rate over 4.6% in 2012, comfortably outpacing the regional average of 3.2%. Chile’s booming economy is characterised by near-full employment, strong foreign trade relationships and sound economic policy. Global exports account for 32% of Chile’s GDP, with China being its largest trade destination. But could a Chinese slowdown, fuelled by a buildup in China’s private sector credit, have major implications for this South American nation?
Chile is definitely exposed to any future significant slowdown in China that would drive the price of copper down. They think they are diversified, but they don’t seem to understand who has been driving prices up. GDP growth these past years has been driven by post-earthquake construction and a consumer consumption binge, which makes sense but that cannot last forever. The current mix is not sustainable, as reflected in the current account deficit.
Ask yourself:
- How can you speak of full employment when the labor participation rate is barely 60%? This is 4 points below the US where the labor market is thought of as depressed. Chile’s peak demographics dividend is behind it, so these structural questions will start to matter more and more.
- How long can a regional retailer like Cencosud continue to milk consumers through usurious credit rates (30%/y) to command a market cap comparable to a behemoth like Carrefour? How many more nondescript malls does the country need when physical retail is getting hammered by ecommerce in developed countries? Are obsolete retail formats from the 80s the way to modernity just because there is some short term pent consumer demand?
- What is the productivity growth rate and are primary and secondary education improving enough to prepare the country for anything beyond a commodity economy?
- What is the price of electricity and has anyone in the country got a clue how to get new projects on-line, given knee-jerk popular opposition explained by a track record of highly polluting plants set right next to population centers?
- How far down the copper value chain has Chile been able and willing to get?
- What is the GNP/capita outside of Santiago and the Antofagasta region?
Once you have lived in Chile for a while and know the answers to the questions above, you realize it is a country with stellar macro metrics hiding very mediocre micro. In recent years there have been some timid reforms in education and consumer protection, but the country will have middle income trap written all over it as long as it is run as a company town.