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By Martin Hutchinson
Contributing Editor
Money Morning
Chilean President Michelle Bachelet rebuked British Prime Minister Gordon Brown last weekend, saying the British economy would have more room for fiscal stimulus now if he had pursued responsible budget policies previously, as Chile has.
It makes you sit up and take notice when you see a Latin American political leader rebuking a British one for financial irresponsibility, but in this case, Bachelet was completely justified. Great Britain, even more so than the United States, was running big budget deficits well before the crash hit.
Meanwhile, Chile prepared for a downturn far better than either Britain or the United States, and is in a correspondingly better position now.
Chile was the first Latin American economy in living memory to implement the free market properly under its dictator-president Augusto Pinochet (1973-90), who early in his rule decided that socialism didn't work and hired a bunch of advisors from the University of Chicago.
Pinochet privatized Chile's major companies, and in 1982, Chile became the first country to privatize its social security system. Chile's democratic governments after 1990 dismantled most of Pinochet's security apparatus, but they kept a lot of his economic policies, and so Chile has remained notably well run economically.
Bachelet was elected in 2006, on a social democratic platform, and politically has devoted a considerable amount of effort to removing the last vestiges of Pinochet's rule. However, economically, her rule has been sound with moderate budget deficits and a solid monetary policy.
Most importantly, she realized that copper, Chile's main export, is highly cyclical. Thus, in the last few years the country has built up an Economic and Social Stabilization Fund, to which copper revenues are committed when prices are high. By January 2009, that fund was worth $19.5 billion, or 10.5% of Gross Domestic Product (GDP). Therefore, Chile's recent fiscal stimulus of about 2.5% of GDP has been easily affordable.
Chile's economy grew by 4% to 5% annually during the boom years, respectable but not spectacular. The Chilean economy is expected to grow just 0.4% in 2009, but to rebound to 2.3% growth in 2010, according to the Economist forecasting panel. By the standards of the current miserable world, that's very good indeed.
Inflation is expected to run at a rate of 3.7% in 2009, and the budget deficit (after stimulus) is expected to reach just 3.5% of GDP. The currency has already dropped, by 23% against the dollar in the last year. Chile's stock market is down 30% from its October 2007 peak. But because of the country's relative stability, the market is still not especially cheap, trading at 12.2 times earnings compared to 11.0 times on the Standard & Poor's 500 Index.
With solid economic performance and little risk of further nasty surprises, Chile seems well worth looking at. What's more, is there are over a dozen Chilean American Depository Receipt (ADR) issues with full quotation on the New York Stock Exchange
As a small country, Chile has always tried to be as open as possible to foreign investment capital. Some of the most attractive companies include:
- CorpBanca (ADR: BCA): Only Chile's fifth-largest bank, but it's most consistently profitable. Trades at 8.5 times earnings currently, but has a dividend yield of 7.8%. Most Chilean banks suffered in the last quarter of 2008 because of the peso's decline against the dollar, but CorpBanca was properly hedged and avoided this problem.
- Lan Airlines S.A. (ADR: LFL): Normally I'd suggest you were mad to invest in an airline (a business that has lost money worldwide over the entire 106 years since the Wright Brothers took off). However Chile's long thin shape, remoteness and abundance of mountains make air travel both within the country and internationally a profitable business. LFL is currently on a P/E ratio of 9 times with a 14.8% dividend yield. Not a "widows and orphans" stock but well worth a little investment for the adventurous.
- Madeco SA (ADR: MAD): Manufactures all kinds of household goods and other products based on copper, aluminum and other non-ferrous alloys. Madeco had a special gain in 2008, so its annual earnings were artificially high. But it currently trades at about 6 times 2007 earnings and 40% of book value, with over $200 million in cash. Basically, this is a deep-value asset play.
- Vina Concha y Toro S.A. (ADR: VCO): I can't help it. I like the product - Chile's largest wine producer. Chile was the only country in the world whose grapes were not infected by the Great Phylloxera Blight of 1873. Wine snobs therefore claim that Chilean wines, being made with pre-Blight grapes, are the best in the world. The market seems to buy this sales pitch, since the stock trades at 19.6 times earnings with a 0.8% dividend yield, distinctly pricey in these markets. Still, if you don't buy the stock you should at least try the wine!
News and Related Story Links:
- Money Morning:
Has Anybody Seen the Bottom Yet?
- Money Morning:
The Five Most Promising Emerging Market ETFs for 2009
- Chilean Government:
Michelle Bachelet
- Wikipedia:
Augusto Pinochet
The Chilean government steals a large slice of copper revenues each year and you cheer that on?
great article and discussion. We here is Australia have a universal health care system, and we know everyone will get treated. We also have a private "top-up" system, which adds greater choice to the consumer. we are constantly amazed at this ultra private approach to medicine, to the detriment of the populace. we have had one quarter of negative growth, (second one coming soon I guess) but at this stage not in a recession. I can only hope the US policy makers put pride aside, realise they are not the only ones in the world, and learn from other strong economies such as Chile, Canada and Australia.
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This is contradicted by the readily verifiable fact that nearly 50 cents of every dollar spent on health care in the US is disbursed by the public sector.
Dr. Robert Buckman, a renowned oncologist, moved to Canada and not the US from Britain exactly for that reason. Every year, many Canadian doctors actually move back. The US spends 17% of GDP or almost double that of most western countries (Canada is around 10%). Yet more than 1/3 of Americans have no insurance, many who do cannot change jobs because they cannot afford to lose their private insurance and the US has insurance companies who employ doctors whose only job is to deny benefits to policy holders (hoping claimants will die before they have to pay out). America can clearly not afford this health care system. No matter, they just keep borrowing from the rest of the world….
One thing that is very important to clarify Mr Frank Hendriksen.
When the author says "and hired a bunch of advisors from the University of Chicago", he does not mention that those were Chileans that went to get MBAs and PHDs to the U of Chicago, the so called "Chicago Boys".
I have spoken to many people from Canada and the UK. Some of which left their countries to live in America for the sole expressed purpose of escaping socialized medicine. If it works so well why is that happening? I haven't finished researching this but speaking to those who have experienced it first hand I find this to be very convincing that taking medicine out of the hands of the private sector, especially after what is already happening with our government on every level, will come with dire consequence. I disagree with the concept of universal health care stringently, it will open a Pandora's box especially with the current leadership in play. Not to mention we risk loosing these new residents who are bringing their money to our economy. They have already expressed disappointment with the current state of affairs and how things continue to evolve. Personally I was beginning to think about moving to Australia but maybe I should research Chile. Although it hurts me to think of leaving my beloved country it is beginning to seem like it is not my country anymore.
The reason Canada seems to do so well is not because they are socialist, but simply because they share a border with the most prosperous superpower the world has ever seen (that just happens to have a representative republic form of government). They most definitely would not have done so well if they were next to the USSR or the PRC. Their economy would be in shambles and its people would be living in abject poverty just like the former "Iron Curtain" and “Bamboo Curtain” countries. Their history would contain quite a bit more bloodshed, war, and genocide, too!
The same is true for the universal healthcare idea. If the US leans to the left instead of the right on healthcare, the world (including its socialists!) can kiss goodbye the many advances in the medical field that have come out of our free market system. If anything, the government (and its countless regulations) has smothered many innovations we may have seen otherwise.
You cannot argue with results, Frank. I think it is great that Chile has seen the truth. I pray to God we in the US see it before it is too late.
Talk to Canadians needing serious medical attention and they'll tell you that they are not "ALLOWED" to purchase advanced (and more expensive) treatments/medications because it is "unfair" to the others who can't afford it! This is MADNESS. Oh now you know why they and countless others come to America for medical attention.
It's a Disaster waiting to happen to have the Federal Gov't run anything especially our Healthcare Industry. Look at Fannie, Freddie, both now really bankrupt (both of these have always been really gov't agencies run by bureaucrats to intervene in the free mortgage market and keep mortgage rates artificially low and badger banks to lower underwriting standards so ALL can own homes).
Needless to say the regulatory bodies in place for Decades did Nothing (including listen to warnings of impending problems) to help prevent the credit problem.
Government Intervention, Lack of existing government oversight and yes greed by financially wreckless individuals from Main Street and Wall Street all caused the current mess. The Federal Reserve has been and continues to be an unnecessary agency. Government CANNOT run anything!
Mr Martin Hutchinson states the S&P 500 P/E ratio is about 11
I have been trying to find out on the internet (among other places the Standard and Poor site) the current S&P 500 P/E ratio, but could not find it. Could you tell me where to find it?
In 1974 it dropped to 7.71.
(The current P/E on the ISHARE S&P 500 INDX (VVI) ETF is indeed at 10.58 but this ETF sells at a slight discount and is inaccurate)
Thank you
So Chile hired American experts to put its economy on a sound footing. These are obviously not the same "experts" that helped devise the American approach to economic development (i.e. let's just borrow all the money we need and pay ourselves million dollar bonuses). Why doesn't mr. Hutchinson use Canada as an example? Probably because Canada's too socialistic for his taste and he can't very well admit that some forms of socialism (think universal health care) work quite well!
Socialized health care does not work well. You can die waiting for surgery in places like Canada and Europe. Sure it's universal and free, but it also sucks. I work for an international company with offices in Canada, the United States, and most European countries. Our European employees end up buying private insurance because the free healthcare isn't very good.
Chile is definitely one country that has been doing things as they are supposed to be done for a long time, despite all political challenges it has been thru.
Even things are a more complex you can explain the current resilience Chilean economy is showing to the world because two factors.
The first one the counter cyclical economic policy they have been running during the "commodities bubble".
The second factor is that Chilean economy is highly dependent on copper price, and cooper has been experiencing a wild ride this year.
So nice country, with professional people and economic policy committed to growth that holds over changing governments.
A glimpse of light in a foggy Latin America.
Martin.. wrong way..chile is a third world country and will never improve..and yes..we had the IMF and the so called "chicago boyz"….and as a matter of fact..we just lost40% of our private pension funds ..and of course..the owners didnt loose a dime….70% of the population is in the public health sector…private health works only for a few bacause it's too expensive….
If Obama keepon printing paper…americans will only get hiperinflation..and the rest will be history..like in Rome !!
As a Chilean the last ten years (a U.S. expat) I can confirm that Martin’s article is spot on, and very accurate. I would like to clarify one thing: When Martin says the Chilean peso fell this year 23% to the dollar, one must understand in context that the dollar has been falling in a consistent and constant fall for 6 years relative to the Chilean peso and the dollar had lost 56.08% of its total value (765 to 429) or a change of 43.92%! In otherwords, before the stock market crashed, it had already lost 50% of its value due to the crashing dollar relative to a stable currency, or a 300% loss relative to real money–gold. But then the dollar suddenly spiked this year and gained back 23% when the stock market crashed, because too many countries and projects were chasing too few dollars. But since mid November, that TEMPORARY aberration has returned to the normal pattern, but this time the dollar is falling in a far steeper crash from 625 in mid- November to 575 today. That means with the total $25 M investment needed in my Savage Jungle private island resort, one could have gained by converting to pesos $1,250,000,000 Chilean pesos or U.S. $2,173,913 in just 4-1/2 months! And that is just the beginning. If you look at the slope of the dollar crash since mid November it is the same slope as the stock market–very steep. Had someone funded our entire $25 M resort over six years ago, they would have made U.S. $7,196,969 just on their Chilean peso investment alone!
Because the U.S. is printing money out of nothing like there is no tomorrow (something that 10 years from now people will look back and say how could they have been so stupid), I project an absolute minimum of a 50% return on a Chilean peso investment alone.
In response to the ignoramus blogger Frank, the economic “experts” that caused the current crisis were all Keynesians. Even Greenspan, who claims he is not a Keynesian, admits in his book that he strayed far from his Ayn Rand roots, but he devotes a large part of his book to her early influences on him. Martin, in his very accurate article, used the best economic model currently known in the world: That of Nobel Prize Winning economist F.A. Hayek, as well as Ludwig von Mises, and Nobel Memorial Prize winner Milton Friedman, commonly referred to as the “Chicago School.” Had the “Chicago Boys” not stopped at just re-engineering the macro-economy, but also fixed Chile’s bureaucratic, Spanish Mercantilism micro-economy, Chile would not only be ranked above England and Switzerland, as Chile now stands in the Heritage Foundation’s Economic Freedom ranking, Chile would likely be ranked above the U.S. and it soon will be as the macro changes they made in Chile are causing the micro to change very slowly.
Its always fascinating to hear Canucks and Yanks arguing over which health care system is better-according to the last study that I am aware of Canada was 27 out of 28 in terms of efficency-can you guess who we beat? Yeah-our neighbours. In North America we have the two extremes in healthcare-cradle to grave government care up north and total laissez-faire capitalism down south. Neither works.
There are dozens upon dozens of national health systems around the world that are a mix of private and public care. The one thing that they all have in common is that they deliver care more efficently than either "pure" model.
Chile was prepared this time because they have already seen the other side of the picture. They were in crisis when I was there in the late 80's through early 90's with inflation so bad taxi fares changed several times daily. At one point they changed their currency, simply striking three zeros to change the prices on everything. I have seen armed guards on every street to quell the public outrage at grocery stores that were empty even in the capital.
So, are they a good model today? Perhaps so, considering the lessons they had to learn the hard way. Unfortunately, it appears we may have to learn some difficult economic lessons the hard way as well.
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