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:
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