Morgan Stanley's Luis Arcentales makes a case for closely tracking Chile. Individual investors interested in following the Chilean market can do so through CEF Chile Fund (CH). Excerpts from Arcentales' essay:
Chile’s robust GDP growth in recent years may not qualify it as the most rapidly growing economy in the region, but it should be watched carefully, as it may tell us where the region is headed. While Argentina and Venezuela have posted even stronger growth rates in the past two years, neither can be held out as an example of sustainable growth.
By contrast, Chile’s growth has contained both a healthy dose of consumption and investment producing a surge in domestic demand which is now outpacing GDP growth by a margin of nearly two to one. That domestic demand driven upswing has pushed Chile’s current account into a modest deficit and is likely to set the stage for a moderate, but growing deficit during the course of 2006.
Chile’s domestic-demand driven story may come as a surprise to many who often view the country’s economy as little more than a copper exporter. With copper alone accounting for 45% of exports last year, there is no mistaking Chile’s external sector and fiscal accounts have benefited from this abundance.
Indeed, mining exports soared 31% in 2005. Meanwhile, the public sector posted a record 4.8% of GDP surplus last year, boosted in great part by record copper-related receipts. But the real Chile growth story is far from externally driven and, in fact, it is centered in domestic demand...
In an increasingly unbalanced world, Chile is doing its own rebalancing act by moving towards spending beyond its means. But this is hardly a reason for concern. The current bout of abundance is not creating the sort of spending binges that have sowed the seeds of one too many past crises in Latin America. Instead, Chile’s strong domestic-demand led upswing and the concomitant move of its current account into negative territory rest on good fundamentals.
A favorable consumer backdrop of good jobs, wages and credit growth has prompted healthy spending, windfall tax revenues have boosted public spending but also promoted record fiscal savings. Above all, Chile is showing high levels of investment spending accompanying the upturn in consumer spending. That, in turn, should help to improve its competitiveness even as it begins once again to draw on external financing to fund some of its growth.
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