Chile's Economic Chill

From Asia and Africa to Europe and the Americas, economic pessimism is running rampant. Chile has not been immune.

As the world’s largest producer of copper, the Latin American country has been hit hard by the dramatic slump in prices. It’s not just that Chile is a big player in the copper market; the copper industry is a big player in the Chilean economy. As noted by Stratfor, “49 percent of the country's exports are related to the copper industry, and mining activities account for about 14 percent of Chile's gross domestic product.” 

The outlook for copper prices is not rosy: supply is expanding while demand slows. Analysts are warning that robust supply growth is likely to keep prices low for some time to come. Meanwhile, China, the world's largest consumer of copper, is enduring a rapid economic deceleration that has dampened its appetite for the metal. 

Despite this slowdown, thanks to decades of economic progress, there is a large and growing middle class of emerging markets consumers demanding more and more protein. Chile is well positioned to capture some of this demand: it’s the world’s second largest producer of salmon, behind Norway. Unfortunately, an algal bloom has devastated the country’s salmon farms, killing 20 percent of their fish. Salmon exports were also hit by currency fluctuations and concerns about the use of antibiotics in fish farming.  

If plunging copper prices and dead fish weren’t enough, a corruption scandal has hit the country’s political class. The public prosecutor has charged that SQM, a fertilizer and lithium producer, bribed politicians from all major parties. Amidst this political and economic turmoil, business confidence has dipped below levels seen in the global financial crisis, and unemployment is rising. 

Despite the gloom, Chile has fundamental strengths.  For one, Chile is endowed with world-class institutions. Despite the ongoing corruption scandal, the country ranks 23rd on Transparency International’s Corruption Perceptions Index, tied with France and close behind places like Ireland, Hong Kong, and the United States.  Moreover, the Heritage Foundation ranks Chile’s economy the 7th freest in the world, ahead of Ireland, the United Kingdom, and the United States.  The country’s central bank is a model for similar economies.  A fiscal surplus rule has limited what it can spend from resource windfalls.  

The Heritage Foundation ranks Chile’s economy as the 7th freest in the world, ahead of Ireland, the United Kingdom, and the United States.

And despite the short-term difficulties in major Chilean industries, its economic potential inspires hope. The country’s copper mines may have a cloudy future, but the country has other commodities. Chile contains over half of the world’s lithium reserves and is the world's lowest-cost producer. And because lithium is a key ingredient in batteries used in everything from smartphones to electric cars, demand is slated to explode—potentially tripling by 2025. Although the exploitation of these resources has seen significant hiccups in Chile, they could be a source of prosperity in the coming years.

Chile also has abundant renewable energy, with solar capacity quadrupling since 2013.  The country has 29 solar farms, with 15 more on the way. According to Bloomberg, solar was so abundant that the price of energy fell to zero on 113 days this year through April.

And while the salmon industry may be suffering today, it would be imprudent to think it won’t rebound. The industry has resolved to reduce its reliance on antibiotics, a move that could stoke demand from consumers conscious of the risks associated with the drugs.  

Another bright spot in the nation’s culinary offerings is wine.  Chile’s geography is almost ideal for vineyards, whose cultivation area has grown 25 percent in the last five years.  The country supplies more wine to Japan than France, and its sales to China rose by 53 percent in 2015. 

Chile has also made an admirable effort to spark a startup tech sector. In 2010, the government launched Start-Up Chile, a program that incentivizes entrepreneurs to run their young businesses in the country for at least six months. To date, the initiative has taken on over 1,000 companies, and some locals now even speak of a “Chilecon Valley.” While most firms leave after the short required period, proponents say the program could be priming the pump for future dynamism, “[changing] Chileans’ attitudes and [providing] them with a global network of business contacts.”

Also promising is Chile’s membership in the Pacific Alliance, a trade bloc that includes Colombia, Mexico, and Peru and represents 38 percent of the region's GDP.  Labeled “the most important alliance you've never heard of” by The Atlantic, the group of countries is coordinating a set of economic reforms, including slashing tariffs and easing travel between the countries.  The alliance might serve as a gateway for Asia to do business with Latin America.

So while the country’s economic mood is bleak, we shouldn’t miss the big picture: Chile is a stable, free country with promising opportunities for growth…and it’s only a matter of time before Chile’s economic chill thaws.

Vikram Mansharamani is the President of Kelan Advisors, LLC and the author of Boombustology: Spotting Financial Bubbles Before They Burst (Wiley, 2011). To learn more about him or to subscribe to his free mailing list, visit his website. He can also be followed on Twitter @mansharamani or by liking his Facebook page.