Invest in Chile's stellar growth

Until not too long ago Chile was typical of many Latin American countries - with a damaging legacy of colonialism, extremes of rich and poor, and a repressive government. But now it boasts one of the best growth rates of the emerging world. Simon Wilson looks at Chile's economic turnaround, and picks some of the best ways to invest.

By Simon Wilson

published 22 October 2010

in Features

Chile boasts one of the best growth rates of the emerging world. Why? Simon Wilson reports.

Has Chile always been a good bet?

Until recently Chile shared many problems common to Latin American countries. With its legacy of colonialism, it has historically been a nation of extreme economic inequality and political oligarchy. It was plagued by polarisation between rich and poor; between the lighter-skinned elite with its proudly European heritage and the majority of the population; and between soldiers and democrats. Those extremes culminated in the seizure of power in 1973 by the head of the army, General Augosto Pinochet. His brutal dictatorship lasted 16 years.

Over the past two decades, almost miraculously, Chile's troubled legacy has begun to fade. Indeed, it has quietly gone about turning itself into one of the success stories of the Americas, and many would say of the entire developing world. It boasts high-growth, balanced budgets, anti-poverty campaigns, public health provision and a guaranteed minimum income for the elderly. And much of this transformation can be traced to the market-based economic reforms laid down under Pinochet. Politically, Chile can also thank an unusually long and stable coalition government known as the Concertacion which lasted in one form or another from 1989 until this year. Under its rule, which included the nation's first woman president, Chile has enjoyed a period of relative calm and gradually growing prosperity, and signed a series of free trade agreements with the US, EU, China, and many other nations. Between 1990 and 2010 poverty fell from 40% of the population to 15%.

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Sebastin Piera, an economics professor turned billionaire credit-cards-to-telecoms businessman, took charge in March this year. He brought in a socially inclusive, but conservative and free market, agenda; a promise of 6% growth a year and one million new jobs during his first four-year term. That always looked ambitious, especially after a devastating earthquake struck the country two weeks before he took office. It caused $30bn of damage (on official figures), or some 17% of GDP.

Nevertheless, Chile is bouncing back strongly from last year's recession (a modest contraction of 1.5% in 2009), in part driven by post-earthquake reconstruction. And Piera has this week been cashing in the personal credibility he earned from the miners' rescue (he immediately took charge of the project, despite the huge political risk of a failed rescue). He's on a tour of European capitals, planned months ago, to promote his country and its economy.

Chile now boasts one of the best macroeconomic performances in the emerging world. It was glowingly praised by the IMF last month (low government debt, low inflation, high but not excessive growth) for having an open market economy where it is easy to invest and do business (Chile is the only Latin American nation accepted as a member of the OECD). Exports are vibrant and focused on high-growth economies (Chile runs a trade surplus, with 45% going to Asia, 20% to Europe, 16.7% to NAFTA, and 18% to Latin America).

As evidenced by the impressive events last week in the Atacama desert, Chile these days has a government in the words of a public advertising campaign in Chile that knows how to "do things well". For all these reasons, Chile now has the second-highest net inflow of foreign direct investment in Latin America, after Brazil. That's impressive when you consider Mexico and Argentina have far larger populations and are similarly blessed with natural resources. Now Chile has set itself the target of achieving "developed nation" status this decade, which its government defines as boosting its per-capita income from $15,000 to $23,000, slightly more than Portugal and Slovenia, and a little behind the Czech Republic ($25,000) and New Zealand ($27,000).

Wine, for starters. Here in Britain we have the (arguably dubious) honour of being Chile's largest export market for wine. But more importantly, the Andean nation is the world's biggest producer of copper and it also produces significant amounts of lithium, iodine, nitrates, gold, silver, iron ore, and molybdenum. Chile's mining sector accounts for $40bn a year, or around 20% of GDP. In some ways, this export-driven industry is obviously a boon: soaring commodities prices have helped boost its economy in recent years. A controversial new mining levy, quietly passed by parliament last week during the miners' rescue, is intended to help fund post-earthquake reconstruction. But it also presents Chile with challenges. Abundant natural resources can create huge wealth imbalances. And the Chilean peso is now at a two-and-half-year high against the US dollar, leaving export-based growth looking vulnerable. But for now Chile is powering on.

A further $50bn of state investment in mining is planned for the rest of the decade. But since the biggest firm, Codelco, is state-owned, it will be hard for foreign investors to take advantage. Many of the Latin American fund specialists have some holdings in Chile. But a good way of making a more targeted investment in Chile is through the iShares MSCI Chile Investible Market Index Fund (NYSE: ECH). The biggest wine producer, Vina Concha y Toro, also lists in the US (NYSE: VCO). Meanwhile, a major listed mining company worth investigating is Freeport McMoran Copper and Gold (NYSE: FCX), which has three copper/gold mines, and is investing heavily in new extraction.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.