WE STILL have to travel a long way to become a real developed country,” Chile’s outgoing president Sebastián Piñera told Monocle magazine at the beginning of this year. His warning was to Michelle Bachelet, his socialist successor, who was due to take the reins of power on 11 March following presidential elections. And while many believe Bachelet’s regime poses little risk to Chile’s economic success and its appetite for imported goods, there are those who do worry her reform agenda amounts to a significant threat.
Last year was a good year for business between Chile and Britain. It was the first time UK exports topped £1bn. British business has been sending cars, heavy machinery for mining and power generation, clothes and whiskey to the Latin American country where even Waitrose now has a foothold, supplying its own products to 100 supermarkets. But given Chile’s advantages, it remains an under-exploited market by British business, which still insists on attempting to sell goods mostly to Europe and the Commonwealth.
“Those that look west see the US and Canada as much easier … and Brazil casts a shadow over the rest of South America,” says Karl Royce, deputy director for UK Trade & Investment at the British embassy in Santiago. “For those that look beyond, they’ll find a welcoming export market in Chile.”
Chile’s progress as an economy is often described as a “miracle”. A country of 17.4 million people tucked along the western coast of Latin America, Chile emerged from the dictatorship of the Pinochet years in 1990 and has been building democratic institutions and growing its economy ever since. Last year saw GDP expand by 4%, the previous year by 5.6%.
Since the coming of democracy, the growth rate has averaged 5.3%. Next year, the economy is expected to slow down slightly yet it still posts growth of which the UK can only dream.
But it’s a miracle built on shrewd decisions, the key one being to be the most open economy in the region. Chile has trade agreements with more than 56 countries and, according to some figures, its free trade deals – which include ones with the EU – give it access to 4.2 billion people worldwide. The country is seventh on the Economic Freedom Index (the UK is 14th), 34th in the World Bank’s Doing Business Index (ahead of Belgium and France; the UK is 10th) but first in Latin America where it is also the leader on the Intellectual Property Rights Index (26th in the world). Its approach has been to build zero-rate tariffs, transparency and openness.
“Chile took a long, hard look at itself, decided that it was a small country in an unfashionable neighbourhood a long way from its prime export markets … the only way it was going to compete was to be the easiest country with which to do business,” says Royce. So intent was the country on making its markets easy to enter that it refused membership in the Mercosur free trade agreement with Brazil, Argentina, Uruguay, Paraguay and Venezuela because it would involve raising tariffs – anathema to Chile’s business-savvy policy makers.
This openness doesn’t come without a downside. According to Gabriela Castro-Fontoura, an author on business in Latin America and an export consultant representing British companies across the region, Chile provides an easy doorway to the rest of the continent.
“If you want to test whether your goods or services will work in Latin America, it’s a great market with quite a high purchasing power,” she explains. “The only thing is you’ve got to be very price competitive. And you can’t just do business from the UK; you’ve got to travel and be there.”
Waitrose may have just arrived in Chile, Castro-Fontoura notes, but because of the local kudos attached to buying British goods, Mothercare is already there along with Nissan Qashqais – assembled in Sunderland – Topshop, Clarks Shoes and Whittards of Chelsea, among others.
That price competitiveness has come as the Chilean middle class has expanded and taken a greater interest in buying consumer goods. But if the power to consume has come from anywhere, however, it is from the expansion of Chile’s mining industry, especially copper, which has grown to account for more than 50% of exports and 13% of GDP.
So dependent has the country become on sending copper to China (Chile is the world’s top producer of copper with a 35% global share, while Asia is by far the biggest regional user of refined copper) that it is said even taxi drivers know the commodity’s price on any given day. “In the morning, people look at the paper to check the weather forecast and the copper price,” says Castro-Fontoura.
Mining, which includes not just copper but also gold, silver and iron ore, presents a major opportunity. According to UK Trade and Investment, an estimated $70bn (£42bn) of investment will be ploughed into Chilean mining between 2013 and 2021. Largely as a result of this expansion, the demand for power supply is estimated to double by 2030, adding up to an extra 17,000 megawatts of capacity for the Chilean grid.
This leads to one of the big issues for Chile. Despite its success and the obvious wealth generated by extractive industries, development projects risk delay because of frequent blocks to the construction of power stations. In 2010, six months into his term, president Piñera courted controversy by imposing a veto on a proposed coal-burning power plant, known locally as Barrancones, under development by French energy company Suez, after environmental concerns were raised (largely by fisherman protesting against the risk of pollution to the sea). Similar concerns in 2012 saw the country’s Supreme Court kill off another plant known as Castilla, planned by Brazilian billionaire Eike Batista. Yet another plant, Punta Alcalde, planned by the Spanish energy company Endesa, received permission from the Supreme Court in January after being blocked by lower courts.
“The strategic results are most obviously seen in the mining sector. You need power, water and human resource for a mining project. If you don’t have power, you don’t have mining,” says Karl Royce.
While mining grapples with its power needs, there are those who see the greater risk for Chile in the transfer of power from Piñera to Michelle Bachelet and her coalition. Bachelet has been in power before, president from 2006 to 2010, when she was considered moderate. Indeed, it was Piñera who came in and raised taxes. This time around, Bachelet’s reform proposals and her political partners – The Communist Party of Chile – have attracted gloomy predictions that they intend to reconstruct a huge welfare state.
Bachelet has certainly included plans to reform the structure of Chile’s pensions with the creation of a new state-owned pension fund and raise corporation tax from 20 to 25%. But what concerns some observers more is proposed reforms that could affect business. In a 200-page document released in October, Bachelet revealed her government programme included a controversial plan to remove what Chileans call the FUT (Fondo de Utilidades), an income tax exemption on non-distributed earnings designed to encourage investment. A repeal would see business owners have to declare all their income for tax purposes, even if some of it is undistributed.
Another point of contention is Bachelet’s aim to remove what is known as Decree Law 600, which creates a special tax regime for inward investment. This could be problematic for Chile. The vast majority of foreign direct investment in the country is made under the DL600 legal apparatus, according to the OECD.
The law allows companies to sign contracts with the Chilean state that protect their rights to repatriate capital after one year and send profits back home at any time. But it also offers comforting insurance against changes in the tax regime by locking companies into rates current at the time of signing their deals, creating what the OECD calls a “stable tax horizon”. Large projects, those in excess of $50m, also enable investors to use accounting in foreign currencies and lock into current practices on asset depreciation and the tax treatment of start-up expenses.
Axel Kaiser, a columnist at Chile’s El Mercurio newspaper and director of the Santiago think-tank Fundación para el Progreso, caused a stir in the capital last year when he wrote in Forbes magazine, comparing Bachelet to Venezuela’s Hugo Chavez and insisting her reform agenda would mean “Chile’s economic miracle will face an unprecedented challenge which might seriously endanger its survival”.
Kaiser’s concern is due to what he sees as an internal threat from Bachelet as well as concerns about the external economic environment – the slowing demand for copper in China and the tapering of quantitative easing in the US, which has prompted investors to move capital out of emerging markets.
Kaiser told Financial Director: “I don’t want to be pessimistic but I don’t see why Chile will perform as well in the coming years as it has done in the last five years. The country will still work and there will be consuming and buying … but overall I would be cautious. Dollar prices are going up so imports are getting more expensive – this is a reason for thinking that imports will fall. It’s not the case that Chile is not facing serious trouble. The international situation is important. If China gets in trouble, this will have an effect on us.”
Not everyone is as pessimistic as Kaiser and many commentators in Chile struck back, insisting he had given a simplistic analysis. Some financial institutions remain bullish in the face of Bachelet’s election. JP Morgan issued a note in October saying her programme was reason for a “positive view” of Chile’s future. Indeed, Bachelet’s proposals for growing the economy drew praise from the investment bank whose analysts described themselves as “positively surprised with the 46 pages dedicated to the economic programme”.
JP Morgan adds: “The economic programme is based on the idea that ‘economic growth is key to defeat poverty, improve inequality, enhance quality of living and become a developed country.’ This basic statement in our view summarises a programme that presents a lot of pro-market ideas.” ?
Key facts: Chile
Population: 17.4 million
GDP: $268bn (£161bn)
Considerations: The Chilean market is very competitive and highly price-sensitive. Therefore, companies must develop an aggressive marketing campaign and a pricing strategy that is appropriate for the local market.
Market entry: The common mode of entry into the Chilean market is through an agent or franchise. Agent/representative commissions normally range from 5% to 10%, depending on the product. Chile has low levels of corruption and bureaucracy.
Market strengths: Macroeconomic and political stability; open economy; regularly ranked 1st in the region for competitiveness; has relatively low levels of bureaucracy and very low levels of corruption; a comprehensive network of trade agreements, including an economic association agreement with the EU – 91% of EU products can be imported tariff free.