Economic Revival in Chile

New construction at Chile's stalled Costanera Center, the unfinished 984 foot tall tower in the heart of Santiago's gleaming financial district, is a highly visible reminder that even though the country's economy was rocked off course by the 2009 global financial crisis, in 2010 the country's economy is already starting to recover. A billboard
hanging in front of the $US600 million skyscraper, a development that is overseen by Chile's Cencosud S.A., announces that the project is an "icon of Latin American development."

According to Chilean press sources, on December 5, 2009 Horst Paulmann, Cencosud's chairman, told close associates that he was ready to re-start construction on the Costanera tower. As the new phase gets under way, the project could employ as many as 3,000 construction workers by March, 2010. On December 17, 2009 Michelle Bachalet, then Chile's president, whose administration is widely credited with effectively managing the country's economy both during the early boom years of her administration and during the recent downturn, attended a ribbon-cutting ceremony to mark the official re-launch of the Costanera project. Contacted on January 11, 2009, Alfredo Merlet, a market risk analyst at Rabobank Chile, which is located in Santiago's financial district next to the Costanera project, explained that from the street in front of his office he can already see that workers have been called back to the Costanera site. Construction is expected to be completed by the end of 2012.

As workers are now being called back to the site, new construction on the tower can be seen as evidence that the country's economy is emerging from recession.

According to January 2010 data from Adimark GfK, a Santiago, Chile based market research firm, Chile's Economic Perception Index (IPEC), a measure of consumer confidence, has reached a 35 month high.

Chile, Latin America's sixth largest economy, has long been viewed as a model of successful growth. Thomas Trebat, the former Head of Latin America Research at Citigroup, currently the Executive Director of the Institute of Latin American Studies at Columbia University in New York, explained in a recent interview that "from 1990 until 2007 Chile led the region with 17 years of solid growth."

When the Costanera project broke ground in 2006, it was seen as a testament to the country's successful track record and high expectations for its own future. The 7.5 million square foot project was slated to include a 12 screen cinema, a world-class hotel, and more than 300 retail stores, catering to the middle and upper income segments of Santiago's five million residents as well as the estimated 2 million foreign tourists who visit Chile every year. The tower was designed to be a visual reminder of Chile's goal to be classified as a developed country by 2020.

However, like many other countries in the region, Chile had its development plans put on hold by the 2008 financial crisis. On January 28, 2009 Cencosud filed a report with Chile's securities market regulator, the SVS, stating that the company would resume construction on the project "once the economic uncertainty is overcome." No new work on the tower was completed as overall economic activity in the country slowed.

According to data from Chile's Central Bank, unemployment increased by a third, from 7.6% in April 2008 to 10.2% in September, 2009. Data from basemetals.com, a U.K. based research group, shows that prices for copper, Chile's main export, fell by two-thirds between April and October, 2008. As earnings from copper exports fell, the country experienced its worst recession in a decade, with GDP contracting by 2% in the fourth quarter of 2008.

As long as Chile's economic indicators remained bleak, it was unlikely that any new work would be completed on the Costanera tower. In a telephone interview in early December, 2009, Alfredo Merlet, a market risk analyst, said, "I walk past there every day and have not seen anything new." Merlet explained that only when the country's economy started to recover would work begin again on the tower.

However, despite recent lack-luster performance, many market analysts take a positive view of Chile's long-term prospects. Marpin Binghim, an economist and independent management consultant who specializes in Latin America, said, "Chile is the most outstanding country in Latin America in terms of macro-economic policy management in the last twenty years." Binghim explained that "even though there is a global crisis, Chile has been able to tap into its rainy-day fund and smooth output, avoiding a major downturn."

Using accounting methods that subtract the cyclical revenues that were earned from unusually high export earnings, Chile's government ran a structural surplus of 1% in 2006, compared to a structural deficit of worth almost one fifth of GDP in Venezuela and a 4% deficit for Latin America as a whole during the same year. Chile's windfall copper earnings were stored in an offshore account which eventually held US$22 billion.

Chile's frugality during the boom years has appeared to pay off. Cameron Brandt, Senior Global Markets Analyst at EPFR Global, a Cambridge Massachusetts based consultancy, explained that "because of its stockpiled copper reserves, now Chile's government can spend a lot of money on its stimulus package, without having to worry about when the bill will come due."

Data from Chile's Central Bank show that despite the fact that the country's economy contracted by 2% in the forth quarter of 2008, in 2009 Chile has been well equipped to take immediate measures to counteract the effects of the downturn. According to data from the World Bank, in 2009 Chile has been able to implement a stimulus package worth 2.4% of GDP.

Such measures are important, and are part of the reason why Chile's year on year growth is expected to fall by only 1.5% in 2009, compared to a 3.2% drop for Latin America as a whole. Contacted this week, Martin Schwerdtfeger, a Senior Economist who covers Chile for HIS Global Insight, a leading economic research firm, explained that although Chile did feel the effects of the effects of the global financial crisis in 2009 as foreign direct investment (FDI) fell by 7.4%, a US$800 million drop, during the first three quarters of the year, "the country's total fiscal stimulus package amounts to roughly US$7.8 billion, ten times the magnitude of the drop in FDI."

Chile's low interest rates and continued government spending measures are expected to boost business activity, bring down the unemployment rate and help the country's economy recover during 2010. Luis Oganes, the Latin American research director at J.P. Morgan said that "Chile is bound to display particular dynamism in 2010" as growth picks up around the globe. According to Martin Schwerdtfeger, the Senior Economist at Global Insight, Chile will resume growth and report a 4.5% increase in economic output in 2010. According to a study published on Chile's Central Bank website on January 11, 2009, the median expectation for the country's growth in 2010 of a group of 26 economists was 4.6%.

However, although Chile has had success in countering the effects of the global downturn, there is still work to be done in other areas. Chile still has an unemployment rate of over 10% and according to data from the World Bank, ranks as one of the most unequal countries in the world. Even though Chile has been acclaimed for its region-leading efforts to improve social indicators, according to official estimates, more than one fifth of the country's residents still live below the poverty line. Furthermore, even though Chile has been more successful than other countries in the region at diversifying its export base, its economy is still vulnerable to disruptions to the revenues it earns from exporting copper, its principal export.

Alfredo Merlet, a market risk analyst, explained that Chile's economic troubles in 2009 should serve as a reminder that despite the country's advancements in many areas, its "economic health still depends greatly on the price of copper."

Still, a recent uptick in the price of copper and signs of new investment activity bode well for Chile's future. In 2009, Chile's IPSA index jumped 48%. Luis Oganes, Head of Latin America Research at J.P. Morgan explained "a year after the worst crisis the region has
experienced in decades, it's nice to see a bounce back in this manner."

Thomas Trebat, the former head of Latin America research at Citigroup, explained even though "like all Latin American countries Chile was hit hard by the deterioration in commodity prices and decline in trade in late 2008, but the country's economy is ready to emerge from the crisis."

Chile has come a long way in recent decades. More or less, the country has successfully weathered the storm of the 2008 financial crisis. As Chile's economic growth picks up it is becoming clear that Chile has laid a solid foundation for itself, and is now crafting a model framework of development for the rest of Latin America.

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