Whilst suffering from shrinking export markets, led by the all important 20% supply of global copper, a shrinking economy and climbing unemployment, Chile continues to buck global trends, with ratings agency, Moody’s Investors Service making it the first investment- grade country to be awarded a higher credit rating this year. The South American country’s $22 billion of savings in wealth funds has put it in a position to recover more quickly from the global credit crisis than other, similarly rated nations, Moody’s said yesterday in raising Chile’s foreign debt to A1 from A2 with a positive outlook.
This has been the result of a canny economic long game by President Michelle Bachelet; while near neighbors have splashed out on the commodities boom over the last decade, Chile has followed a prudent path of pumping profits from state owned copper giant Codelco into sovereign funds, providing the nation with a $22Bn cushion against global turmoil. That cushion is equal to roughly 13% of Chile’s GDP ($154Bn), so Chile looks as thought it should weather the storms of 2009 quite nicely.
“Nobody else compares with Chile,” Moody’s analyst Mauro Leos said in a phone interview from New York. “Like everywhere else, they’re getting hit hard. But because of the work they did ahead of time, they can go from a 5 percent surplus to a 5 percent deficit without any additional borrowing.”
Also helping is the price of copper on global markets, which is on a slow uptick, and an expectation that China’s economic recovery package will drive demand for the metal towards the end of 2009, reflected in current long term copper contracts on the London Metal Exchange. The central government has acted promptly, with Bachelet committed to a $19.5 billion package incorporating tax cuts and subsidies that should help stymie economic contraction. Even with copper prices at all time lows, economists think that Chile can still exit the current crisis without hitting recession.
Codelco announced its full year results earlier this month, generating a pre-tax profit of $4.968 billion to December 2008, it is estimated that Codelco has provided an average of $7.5 billion per annum in revenues for the last 4 years. This follows Fitch rating $600 million of the company’s debt as “A” back in January.
According to Fitch :
The company had USD 4.6 billion of total debt, of which USD 1.3 billion was classified as short-term. Codelco has adequate liquidity, backed by a track record of accessing debt in the local and international markets and a well-diversified debt maturity profile. Short-term debt is expected to be refinanced through a combination of the 2019 notes, bank loans from undrawn facilities and cash flow from operations.
Chile’s banking sector is also helping stem the flow, business loans grew sharply in January, despite a deep economic slowdown amid the financial crisis, the country’s superintendent of banks said on Monday. Gustavo Arriagada told lawmakers that loans continued to grow, though at a slower pace, as Chilean banks, in counterpoint to their Western counterparts pass on a series of aggressive from the central bank to customers
“Although we have seen tighter credit conditions in the last few months and a fall in requests for credit, that is due to factors like an increase in risk and worsening of employment conditions and client income,” Arriagada said in his presentation.
This has led analysts to rethink their strategy regards South America, the single country ETF - iShares MSCI Chile Investable Index : (NYSE : ECH) has seen some good buying activity of late, even if there is a 15% weighting towards Codelco within this product. ECH managed to add 5% over the last five days, with a huge spike in trading in yesterdays surge on the US markets. Along with Brazil / EWZ and Mexico / EWW, it looks as though Chile could be an interesting mid to long term long within the country specific ETFs.
View my stock portfolio on kaChing.
Disclosure: Author holds long positions in EWZ, ECH and EWW