As far as economic indicators go, Chile’s stalled Costanera Center, the unfinished 984 foot tall tower in the heart of Santiago’s gleaming financial district, is harder to ignore than most. Construction of the tower, part of a US$600 million commercial real estate development overseen by Chile’s Cencosud S.A. (Santiago Stock Exchange: CENCO), stopped in January, 2009. However, a sign hanging in front of the empty, half-finished building still announces that the project is an “icon of Latin American development.”
At its inception the vast project was an indication of Chile’s economic strength and solid prospects. As work stopped and the tower has languished, unfinished, it has served as a reminder that Chile’s upward trajectory has been rocked off course by the world-wide financial crisis. As rumors swirl about the country’s future prospects the Costanera tower will continue serve as a highly visible indicator of Chile’s economic health. Any new construction will be seen as evidence that the country’s economy is emerging from recession.
Chile, Latin America’s fifth 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 a visual reminder of Chile’s goal to be classified as a developed country by 2020.
However, as is often the case with countries that are recognized as models of growth and development; some of the awkward details of Chile’s economic health tend to get pushed out of the diagnosis. For all its success, Chile still has a long way to go.
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.”
In 2009 reports of positive economic data have been few and far between. 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.
With weakened world demand for Chilean copper and investments, the exchange rate between Chile’s currency, the peso, and the U.S. dollar fell 31.8% from 638.2 on April 4, 2008 to 435.5 on November 21, 2008.
As long as Chile’s economic indicators remained bleak, it was unlikely that any new work would be completed on the Costanera tower. Contacted by telephone this week, Alfredo Merlet, a market risk analyst at Rabobank Chile, which is located in Santiago’s financial district, next to the Costanera project said, “I walk past there every day and haven't seen anything new.” According to Merlet, even though “recent growth in Chile has been better than elsewhere in Latin America, it’s still slow, and even with low interest rates and low inflation, Chile still suffers from high unemployment.” Still, Merlet believes that as soon as managers at Cencosud think the economy is recovering and there is sufficient demand to justify the investment work will re-start at the Costanera project.
In recent weeks as mixed economic data have coincided with rumors and uncertainty about plans to restart work on the project, the tower continued to serve as an indication of the country’s still uncertain future. Although Chile reported third quarter growth of 1.1%, full year growth for 2009 is likely to fall short of the 5.1% growth rate reported in 2008. Data from EPFR Global, a Cambridge, Massachusetts consultancy shows that after falling sharply in late 2008, portfolio fund flows to Chile have recovered, but have remained flat since the end of the second quarter of 2009, and actually fell by 0.5% in October.
According to data from Chile’s National Statistics Institute, consumer prices fell by 2.3% in November, the worst bout of deflation the country has experienced since 1934.
Soledad Covarrubias, 30, a life-long resident of Santiago, contacted by telephone this week said that she views the Costanera project as being “too ambitious.” She added, “it might also be too ambitious for us to say that Chile should be classified as a developed country.” To some observers, the tower may similar to Transantiago, the city’s new public transportation system which was implemented with great fanfare, but has been plagued by delays, disruptions, and reports of corruption. According to Covarrubias, “this type of project is too ambitious for a country with a low minimum wage, too many low paying jobs, and a high level of unemployment.”
Chile has an unemployment rate of 10.2% and according to data from the World Bank ranks as one of the most unequal countries in the world. Even though the 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 the revenues it earns from exporting copper, its principal export. According to data from J.P. Morgan, the investment bank, exports account for over two fifths of Chile’s GDP. Furthermore, metals and agricultural products still account for over 77% of the country’s total exports.
Alfredo Merlet, the market risk analyst, explained that Chile’s economic troubles this year 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.”
In a recent note Cameron Brandt, Senior Global Markets Analyst at EPFR explained that even though in recent months Chile has experienced net portfolio outflows, recent quarter on quarter GDP growth, a new upswing in copper prices, and signs of new investment activity, are all indications that “Chile’s economy will resume above trend growth during 2010.” In a recent presentation in New York, Luis Oganes, Head of Latin America Research at J.P. Morgan said that he expects that Chile will report annual GDP growth of 5% in 2010. So far for the year, Chile’s IPSA index has jumped 48%. Oganes explained “a year after the worst crisis the region has experienced in decades, it’s nice to see a bounce back in this manner.”
According to Chilean press sources, on December 5, 2009 Horst Paulmann, Cencosud’s chairman, told close associates that he is ready to re-start contstruction on the Costanera tower. The project could employ as many as 3,000 construction workers by March, 2010. Although Cencosud has yet to file any official statements regarding the project’s future, according to statements filed with Chile’s SVS, Paulmann, who together with other members of his family already controls 28% of Cencosud’s shares, is seeking to acquire an additional 2.8% stake, 49.8 million, shares, for an estimated US$200 million, a sign that bodes well for the company’s future, and the future of the Costanera project.
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, 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. In most respects Chile is an icon of Latin American economic development. However, even as construction begins again, the unfinished Costanera tower should serve as a reminder that in some areas the country still has work to do.
