Chile: The One Country That Was Prepared for the Financial Crisis

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