New Political Leadership in Chile Could Help Boost Growth in 2010

On January 17, 2010 Sebastian Piñera, a billionaire Chilean businessman, partial owner of LAN Airlines S.A. (NYSE:LFL), was elected as the country’s new president, the first time that a right-of-centre candidate took the office since the end of the right-wing military Pinochet dictatorship in 1990. Especially for members of the country’s growing middle and upper class, Piñera’s election shows Chile’s electorate is committed to continuing the stellar growth trajectory that was kicked off, in part, by the pro-business policies that were implemented during the Pinochet years. For others, Piñera’s victory is an unwelcome reminder of Chile’s not so distant past, when supporters of a right wing campaign of state-sponsored terror killed more than 3,000 of the country’s citizens and tortured thousands more.

For some members of the country’s political left, Piñera’s victory serves as an uncomfortable reminder of the still simmering class tensions and high levels of economic inequality that continue to exist in this South American nation, Latin America’s sixth largest economy. In 1973, the country’s experiment with democratically implemented socialism came to an abrupt end when, with the help of U.S. intelligence services and prodding from the country’s elite, General Augusto Pinochet and his forces fired rockets at the country’s presidential palace, seizing control of the government.

In the years that followed clashes between left wing groups and government forces happened frequently. Tens of thousands of suspected socialists, revolutionaries, dissidents, and union leaders were detained, interrogated, and tortured. According to the results of an official government inquiry, published in 1993, more than 3,200 political prisoners were executed or “disappeared” in the months following General Pinochet’s coup d’etat. As many as 30,000 people were arrested and tortured.

In the last few weeks of the presidential race, Piñera’s political opponents sought to highlight his ties to the Pinochet regime. Even though in 1988 Piñera voted against the continuation of Pinochet’s rule, Chilean Senator Eduardo Frei, Piñera’s main rival in the election, worked to draw attention to the fact that ten years earlier, as a member of the country’s Senate, Piñera supported legislation that would have granted amnesty and prevented investigations into crimes and human rights violations committed during the dictatorship years.

However, Piñera’s decisive victory over his rival, the leftward leaning Chilean Senator, Eduardo Frei, in ten of the country’s fifteen electoral districts shows that his reputation for business savvy has won him broad support in a country that is considered to be Latin America’s most advanced economy. The election seems to say that while Chileans may still care about their country’s past, they are now more focused on its future. Soledad Antezana, 30, a lifelong resident of Santiago, Chile’s largest city, who did not vote in the election, explained in a telephone interview this week that “a right-wing candidate was able to win, not because he overcame his connections to the [military] dictatorship, but rather because the people have forgotten [the past].”

General Pinochet died in 2005, and Michelle Bachalet, then Chile’s Socialist president, whose father died during interrogation by Pinochet agents, refused him an official state funeral. Five years later, Chile’s citizens are now mostly concerned with the country’s economic health. “Piñera won through marketing, and through playing to the middle class’s concern about the global recession,” Antezana, whose family tends to support left-wing politicians, explained. “People believe that Piñera can solve the country’s economic problems,” she added.

According to data from EmergInvest.com, a Cambridge, Massachusetts based data provider, Chile’s IPSA Index, a measure of the country’s stock market, increased 1.6% in the two days following the election. Bloomberg reported that many market analysts expect Piñera to implement reforms that will help Chile attract the attention of foreign investors. A report published on January 27, 2010 by RBC Capital Markets projected that foreign investors, confident in Chile’s prospects for growth, could help boost the country’s economy in 2010.

Piñera is expected to uphold Chile’s established policy tradition of responsible macro-economic management while also working to boost economic output and stimulate new job growth. In a recent email, Martin Schwerdtfeger, a Senior Analyst at Global Insight, a leading research firm, said that he expects that Chile will resume pre-crisis levels of growth and report a 4.5% increase in economic output in 2010.

Alfredo Merlet, a Market Risk Analyst, who lives in Santiago’s exclusive Las Condes district, explained in a recent email that in the run-up to the election many people believed that the Allende / Pinochet framework would continue to define Chilean politics. However, “Piñera asked [the people] to look ahead and more than half of the voters chose to follow him … [because] he represents business creativity,” Merlet said.

However, even Merlet, an ardent opponent of Chile’s previous leftwing government, and a firm believer in Piñera’s cause, chose not to vote in the election. “Like most young people, I didn’t vote because I’m not registered to vote,” he said. In Chile, a country where citizens who choose to vote must accept a mandatory life-long obligation to vote, many young people like Antezana and Merlet choose to avoid this potentially inconvenient civic obligation, and decide to not register to vote at all. The fact that the country’s voting base under-represents Chile’s younger generation may help explain why the country’s national politics have remained mired for so long in a backwards looking outlook.

Chile’s political parties have been slow to draw attention away from the country’s turbulent political history in order to focus on goals for the future. Whatever his election means to people on each side of the political spectrum, Piñera’s victory could spark renovation and renewal in the country’s political process. Chile’s economy is likely to emerge from the previous year’s crisis in 2010. With a little finesse, Chile’s leftist political coalition, the Concertacíon, could do the same. In future elections, politicians might start to try and spend more time talking about the future and highlighting their strengths in economic policy management and less time stoking old political tensions.

New Years 2010: Chile Resolves to Exit Recession

On December 15, 2009 Central Bank directors in Chile, Latin America’s seventh largest economy, voted to keep its benchmark interest rate frozen at a record low of 0.5%, as the country battles its worst bout of inflation since 1934.

The decision to maintain interest rates at historic lows is one part of the Chilean government’s larger program of stimulus measures that should help Chile, a country long regarded as Latin America’s best managed economy, to recover from the 2009 crisis by early 2010.

During the 2009 crisis as during previous downturns in recent decades, Chile’s government is acting to stimulate business activity and increase economic output. According to Marpin Binghim, an economist and independent management consultant who specializes in Latin America, “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.”

Like many other countries in the region, Chile is a major natural resource exporter, and is vulnerable to sudden swings in world trade and commodity markets. According to data from the World Bank, in Latin America natural resources account for about half of all export receipts. In Chile, copper alone accounts for 40% of all exports.

However, as is not the case in other resource exporters in the region, Chile’s history of responsible economic policy making, has left it well situated to implement a range of economic stimulus measures. Thomas Trebat, the Executive Director of the Institute of Latin American Studies at Columbia University in New York, explained in a recent interview that because of prudent policies in the past, in 2009 “Chile has been able to implement effective fiscal and monetary stimulus programs” to help counter the effects that the world-wide financial crisis have had on Chile’s economy.

According to data from the Inter-American Development Bank, in 2006, at the height of a boom in commodity prices, when other governments in the region splurged windfall profits from oil and mineral exports, Chilean policy-makers, even though they were criticized for doing so at the time, resisted pressure to increase government spending. Contacted recently by telephone, Luis Oganes, Head of Latin America Research at J.P. Morgan in New York, explained that “Chile still has a poverty rate of 20 percent” and during the recent boom, felt “a lot of pressure to increase spending, but the government was very responsible and did not give into this pressure.”

Using accounting methods that subtract cyclical revenues 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 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 IHS Global Insight, a leading economic research firm, explained that although Chle 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 unlike Mexico, which sends 80% of its exports to the United States, or Brazil, which is a relatively closed economy, Chile is an open economy that exports goods to a diverse range of markets in Latin America, North America, Europe, and Asia. According to Oganes, “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.

Latin American Lens Now on Twitter!

Latin American Lens analysis and updates are now available on Twitter. In-depth analysis on emerging corporate, political, economic, and financial trends in Mexico, Colombia, Venezuela, Peru, Chile, Argentina and Brazil added daily.

Readers can look at the upper left corner of the Latin American Lens homepage for twitter updates or follow on http://twitter.com/LatAmLens.