Morgan Stanley: Chile Remains the Real Thing

Having saved for the proverbial rainy day, Chile finds itself in an enviable position, reports Luis Arcentales in Morgan Stanley's latest Global Economic Forum. Unlike others in Latin America, Chile can afford to conduct a counter-cyclical fiscal policy, despite the fact that it is heavily dependent on commodity exports and has the smallest international reserves - at 10% of GDP - of any major Latin American economy aside from Mexico.

Chile though has acted on soaring copper prices and maintained fiscal discipline, producing massive surpluses. Arcentales argues that this is sound practice from two perspectives:

First and foremost, it makes sense for Chile to transform its copper wealth – which based on Codelco’s copper reserves of 77 million tons, we estimate to be around US$1.3 trillion at current copper prices – into financial assets which, over the long term, tend to offer superior returns. Second, the government is planning to diversify the holdings of the FEES – where most government assets currently reside and which is fully allocated to fixed-income instruments – which should provide superior risk-adjusted outcomes going forward...

Importantly, the increase in the risk profile of the FEES seems like a sensible strategy, in our view, in a context in which its assets are unlikely to be needed to shore up the government’s budget anytime soon. Copper markets are set to remain in deficit this year and next, keeping prices well supported around US$3.50 per pound, according to our Metals & Mining team (see Global Commodity Update: Supply in Crisis, February 15, 2008). Even against a backdrop of near-record-high copper, Chile’s 2008 budget incorporates a reference copper price of just US$1.37 per pound, leaving an ample cushion for copper to retrench – even as higher costs such as energy and water continue to put pressure on miners’ margins and thus point to higher equilibrium long-term prices – and still generate a fiscal surplus.

Morgan Stanley's report does raise the question, though, of whether a developing country like Chile is acting wisely by hoarding its assets in such a way. Education, for example, could benefit from extra spending, though Arcentales finds that the poor education system is a result of inefficiencies rather than lack of resources. Infrastructure could also be a worthy beneficiary of public spending, but here Arcentales notes that according to a report from the World Economic Forum:

Chile has the highest-quality infrastructure network in the region, with port quality almost matching that of Germany. There seems to be some room for improvement on roads and energy; in the latter area, significant investment is pouring in, which is expected to go a long way towards alleviating today’s tight situation by the end of next year. Moreover, Chile’s stable macroeconomic backdrop and legal framework make it the most attractive destination for private investment in infrastructure, according to the WEF."

In conclusion, Arcentales is clearly taken by Chile's decisive strategy, particularly in comparison to its regional neighbors:

Rapidly rising levels of international reserves from Brazil to Colombia and Argentina may make these countries more resilient to the coming global downturn; however, record reserves say little about the strength of their fiscal position and how much ammunition these countries have saved for a rainy day. On this front, Chile remains the real thing.

Comments

[John Egan]

Can't remember who posted it, but they referred to an article on RGE Monitor, which noted that Chile was dependent on copper exports, and that copper mining was dependent on electrical production. Apparently, Chile is approaching the same situation that the South African miners did. Not enough electricity to go around.

I'm not saying anything one way or the other... Buuut !!!!

Thx jegan ;-)

[granger]

Good info. CH has been a staple in my international portfolio for several years.

[buramma]

when a country shows such a good performance , not only in the inminent scenary but for a long datable economic-politic remarcable actitude and responsability, the international comunity should recognize and motivate those efforts reggarding the fact that a "good example" speaks more than a hundred thousens presure moves, for those countrys who still haven't take the "good way"

in that sense I feel (as a small chilean entrepeneur ) that the developed world acts slowly and late. there is an specific time when clear actions must be done , to reinforse these acomplishments , or the oportunity can goes away ...
and the the whole latinamerican world could easily lose trust in the "apropiated way" and turn back to look undemocratic practices to cope their dreams of success ..(its allready hapening in venezuela and ecuador) there is no time to lose in reacting with support...(but a real one...that means a little more than what has been done this far) chile needs the last hand to stand herself in the first world.....if she does it .....it will mean that "the promes is real "...hte good way acctually works" and the rest of the world would follows the road.....(it only takes one country).....has never hapend before ...theory would be law.....but for this ..the west must have "vision" ... "if chile did it we can doit" writen in gold on their minds ..it easy but some times first world doesnt understand latinamerican idiosincrasy......the change of a paradigmatic destiny of poverty in to just one example of asessment is the most powerfull mental revolution....

(remember irish history, they are a good example of success..but not entairly cos the second worls tends to feel that it was just a matter of time for irish development...cos they were lucky enought for have been born in a whelthy continent..and for having english as a "naturalized"... language...easyer for them the rest thinks)

the second world needs a closer example

chile represent with more probability the next one in all general opinions...in the west ,in a poor nehiberhood,in the south, an ex-colony, non english speakers....etc. in resume ...the perfect example for prove the theory...the best candidate...
best result with the nimor effor...well...
now...

.who will do this? ..europe or united states? ...the first one to doit...will win the real trust of a new deal between the two mayor western-subcivilizatio... with the best future in this new multipolar world .....

with chile there..the rest will follow as a "domino chain"
vision europeans...vision!!!!

otherwise we take the risk of been just another frustrated promise...and you know what happens after that frustration in the colective mind.........100 years before to beleave or try again....a big risk and a big price ..a big reward as well .

....time will say...but we dont have it around here.....now is the that historycal inflexional point when the west will be as one..or nothing but a battleground for china's expantion....
(maybe I went to far in this last aceveration..hahaha but it perfctly could be as I say since we are seeing the first movements just now.....chile has more economic trade with china than any other nation in the world.....USA lost that position along with credibility or trust while china shows herself like a "live and let live" actor

greetings to all

sheers