Wed | Jun 26, 2019

Walter Molano | Chile: The wonder of good geography

Published:Friday | May 17, 2019 | 2:47 AM
German Chancellor Angela Merkel,right, German Environment Minister Svenja Schulze, left, and Chilean Environment Minister Carolina Schmidt pose for media in front of the Brandenburg Gate prior to a session of the 10th Petersberger Klimadialog climate conference in Berlin, Germany, Tuesday, May 14, 2019. (AP Photo/Markus Schreiber)

OP-ED CONTRIBUTION: EMERGING MARKET ADVISER

 

Chile is an odd construct. A long narrow strip of land, it runs from the Tropic of Capricorn to almost the Antarctic circle.

With a population of 18 million and a territory of 756,000 square kilometres, it has a population density of 23 persons per square kilometre. This ranks it as 187 out of 233 countries, in terms of population density. Of course, about a third of the population resides in Santiago. Therefore, the population density is even less.

This is evident when one travels outside the Santiago-Valparaiso region. One can drive hours without seeing a person. Yet, such a thinly populated and far-flung nation is one of the best managed economies in Latin America. Why?

Latin American countries are often full of melodrama, but Chile is the picture of sound economic governance. The economy is on track to grow 3.5 per cent y/y in 2019. Inflation is under control, with consumer prices expected to rise 2.3 per cent y/y this year. The current account deficit is forecast to decline to 2.8 per cent of GDP in 2019, from 3.2 per cent of GDP in 2018.

Copper prices have been moving higher, despite the softness in the Chinese economy. Beijing’s decision to shift the country into electric transportation has increased the demand for copper. Moreover, there are signs that the Chinese economy is on the mend. The Chinese Purchasing Managers Index, the PMI, expanded in March, suggesting that the slump was coming to an end. Moreover, Chile’s copper industry is undergoing a renaissance.

Last year, the Chilean state copper commission Cochilco announced that a total of US$65.8 billion in fixed investment was projected for the next decade. The massive investment will be spread across 44 projects, mainly in the northern regions. The total mining investment was not limited to copper. It included new lithium and gold mining operations. A recent visit to the city of Calama and a tour of the Chuquicamata operations, which is the largest open pit copper mine in the world, revealed the immense impact that the sector has on the Chilean economy.

 

Comparative advantage

Furthermore, a long drive through the Atacama Desert illustrates why the Chilean economy is so different from most of Latin America.

At its widest point, Chile is only 350 kilometres wide, while the average width is 177 kilometres. At the same time, the country operates 26 major ports along its 4,270 km coastline. Therefore, any exporting operation is only a few hours away from a major embarkation facility, which slashes transportation and operating costs.

This gives Chilean companies an enormous competitive advantage against any other Latin American country. This is particularly the case in countries, such as Argentina, Brazil and Colombia, which tend to channel most of their trade through one or two politically-powerful ports—thus hugely elevating transportation costs. This is another example, where natural endowments, such as geography, play an enormous role in shaping the economic trajectory of a country.

Uruguay is another good example. The country emerged from the depths of an economic crisis at the start of the century, and quickly became an exporting powerhouse. Within a few years, it went from default to investment grade. The Uruguayan government is hailed for its sound management, despite having a leftist bent.

Yet, a look at the Uruguayan map shows that it is surrounded by water on three sides — the Atlantic, River Plate and River Uruguay. It also has a string of eight major ports along its coastline. Hence, like Chile, no point in Uruguay is more than a few hours away from a point of embarkation. Such a natural endowment can make up for an endless series of policy blunders.

This characteristic allows the political pendulum to sway from left to right, without having much of an impact on the country’s economic direction. Many Chileans are currently worried about the resurgence of the political left. The centre-left Concertacion coalition that ruled the country in the aftermath of the Pinochet Dictatorship has fragmented and broken apart. From its ashes, a bevy of smaller political parties have emerged.

However, the strongest factions have been the communists. At the same time, the political right remains fragmented. There are fears that the next election will witness the emergence of a communist front runner, who could take the country in a different direction.

Yet, with such a powerful private sector, that has ready access to the international markets, it is doubtful that a move towards the political left could do much to alter Chile’s economic trajectory.

 

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com