Chile: Effects of Global Recession and Future Prospects
In recent postings, I have commented on the difference between the growth prospects of developed and emerging market economies. I have also noted the remarkable recovery in Latin American stock markets relative to the rest of the world. Over the next few weeks, I will be publishing a series of studies written by my students at the Business School at the University of Palermo in Buenos Aires. The articles assess the impact of the global recession on these countries and their future growth prospects.
Last week, I published the Colombian study. The Chilean study is published below.
Chile: Effects of Global Recession and Future Prospects
by Elise Baros, Ceres Corro, and Elliott Morss
EXECUTIVE SUMMARY
The credit freeze had little impact in Chile. While the stock market fell 40% resulting in an asset loss of US$149 billion, that loss has almost been erased with the market down now only 1% from its earlier highs. But the reduction in export demand resulting from the global recession has had a greater impact. In 2009, investment is expected to fall 13% with consumption lower as well. Unemployment in 2009 will approach 10% by the end of the year. 1010 looks better, with most forecasts predicting GDP growth of 4%.
IMPACT OF CREDIT FREEZE
The credit freeze has had a dramatic impact worldwide. As indicated in Table 1, the world lost $36 trillion in stock market losses directly following the credit freeze. Globally, markets have recovered cutting stock losses to $22 trillion. Latin American stock markets have recovered dramatically. And after being down 40% for a loss of $149 billion, the Chilean market is now only down 0.97%.
Table 1. – Global Stock Market Losses (in mil. US$)
|
|
|
|
Index |
|
|
||
| Index |
Index High |
Index Low |
Hi-Lo % Loss |
Hi-Low $ Loss |
Recent High |
Hi-Now % Loss |
Hi-Now $ Loss |
| DJ Eurstoxx 50 |
4.543 |
1.810 |
60,20% |
7.210.000 |
2.763 |
39,20% |
4.700.000 |
| Nikkei 225 (Japan) |
18.239 |
7.569 |
58,50% |
2.590.000 |
9.844 |
46,00% |
2.040.000 |
| S&P 500 (US) |
1.558 |
683 |
56,20% |
10.350.000 |
1.059 |
32,00% |
5.900.000 |
| S&P Asia 200 |
6.749 |
3.145 |
53,40% |
6.850.000 |
4.540 |
32,70% |
4.200.000 |
| TSX (Canada) |
14.984 |
7.591 |
49,30% |
810.000 |
11.173 |
25,40% |
420.000 |
|
|
|
|
|
|
|
|
|
| Argentina (Merval) |
2.339 |
829 |
64,56% |
21.985 |
2333 |
0,26% |
159 |
| Brazil (Bovespar) |
73.516 |
29435 |
59,96% |
641.844 |
67413 |
8,30% |
133.079 |
| Chile (IPSA) |
3.499 |
2.101 |
39,95% |
149.307 |
3465 |
0,97% |
2.416 |
| Colombia (IGBC) |
11.439 |
6461 |
43,52% |
61.599 |
11693 |
-2,22% |
-2.422 |
| Mexico (Mexbol) |
32.721 |
16.869 |
48,45% |
227.146 |
31017 |
5,21% |
22.945 |
| Peru (IGBVL) |
23.790 |
6.054 |
74,55% |
23.970 |
15733 |
33,87% |
31.900 |
| Venezuela (IBVC) |
62.013 |
34172 |
44,90% |
|
54111 |
12,74% |
|
|
|
|
|
|
|
|
|
|
| Total 7 LA Countries |
|
|
|
1.125.851 |
|
|
188.077 |
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
28.660.000 |
|
|
17.550.000 |
| Total Adjusted* |
|
|
|
36.000.000 |
|
|
22.050.000 |
IMPACT OF DECLINING GLOBAL DEMAND
Chilean exports have been adversely hit by the global recession. They are down 30.1% for the last quarter of 2008 combined with the first 3 quarters of 2009 as compared with the same period in 2007-2008.
Table 2. – Chile Export Performance (in bil. US$)
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|
|
|
(4thQtr 2008+1-3 Qtrs2009) |
|
|
|
|
|
vs Same Period 2007-8 |
|
|
2006 |
2007 |
2008 |
% Change |
|
| Total Exports |
56,43 |
65,08 |
63,28 |
-30.1% |
| Copper |
32,71 |
37,58 |
32,80 |
-39.1% |
| Molybdenum oxide |
2,78 |
3,83 |
3,36 |
-57,5% |
| Salmon/Trout |
2,15 |
2,16 |
2,32 |
-6,9% |
Source: http://www.bcentral.cl/estadisticas-economicas/series-indicadores/index_se.htm
THE DOMESTIC ECONOMY
Consumption growth slowed from an average of 5.8% for the last quarter 2007 plus the first two quarters of 2008 to only 0.1% for the same period in 2008-2009. It is expected to be down by only 0.4% for all of 2009. Investment is expected to decline by 13.4% in 2009. It is estimated that the unemployment rate will increase to 9.9% in 2009 from 7.5% in 2008.
EXTERNAL SECTOR
Chile had been receiving a significant amount of foreign direct investment, and this is projected to fall in 2009. Foreign remittances are not significant for Chile.
Table 3. – External Trade (in millions US$)
| Item |
2006 |
2007 |
2008 |
2009 est. |
| Exports of Goods and Services |
56.430,30 |
65.081,60 |
63.281,70 |
35.438,70 |
| Imports of Goods and Services |
35.899,8 |
44030,7 |
57609,6 |
28344,8 |
| Trade Balance |
20.530,5 |
21.050,90 |
5.672,10 |
7.093,90 |
Source: http://www.bcentral.cl/estadisticas-economicas/series-indicadores/index_se.htm
GOVERNMENT POLICIES
In the spring of 2008, the Chilean peso was getting strengthening relative to the US dollar. In response, the Central Bank started buying US dollars with pesos. Its goal was to purchase $8 billion and thereby end the peso appreciation. This program was stopped in September after the Bank had purchased $6 billion. As the credit freeze took hold and the demand for liquidity increased the Bank launched a program in which it would use pesos and US dollars to buy various financial contracts (swaps and repos). http://www.bcentral.cl/eng/studies/economic-policy-papers/pdf/dpe30eng.pdf
The Bank also reduced its interest rate from 8.25% to 2.25%.
Partially as a result of the global recession, the government overall balance as a percent of GDP is expected to go from surplus of 5.4% in 2008 to a deficit of 4.2%.
LOOKING AHEAD
The World Bank estimates World GDP will fall 2.9% in 2009 before recovering 2.0% in 2010. That means Global GDP will not get back to 2008 levels until 2011. Latin America overall will fall somewhat less in 2009 before increasing 2% in 2010.
Table 4. – World Bank Global GDP Growth Estimates
| Region |
2007 |
2008 |
2009 |
2010 |
| World |
3,8 |
1,9 |
-2,9 |
2,0 |
| High Income |
2,6 |
0,7 |
-4,2 |
1,3 |
| Developing Countries |
8,1 |
5,9 |
1,2 |
4,4 |
| South Asia |
8,4 |
6,1 |
4,6 |
7,0 |
| India |
9,0 |
6,1 |
5,1 |
8,0 |
| East Asia and Pacific |
11,4 |
8,0 |
5,0 |
6,6 |
| China |
13,0 |
9,0 |
6,5 |
7,5 |
| Middle East and North Africa |
5,4 |
6,0 |
3,1 |
3,8 |
| Sub-Saharan Africa |
6,2 |
4,8 |
1,0 |
3,7 |
| Latin America and Caribbean |
5,8 |
4,2 |
-2,2 |
2,0 |
| Europe and Central Asia |
6,9 |
4,0 |
-4,7 |
1,6 |
Chile’s GDP is projected to drop only 0.4% in 2009 before growing by 2.7% in 2010.
Table 5. – World Bank Latin American GDP Growth Estimates
| Country, Region | 1995-2005 | 2006 |
2007 |
2008 |
2009 |
2010 |
| Brazil |
2,4 |
3,7 |
5,7 |
5,1 |
-1,1 |
2,5 |
| Mexico |
3,6 |
4,8 |
3,3 |
1,4 |
-5,8 |
1,7 |
| Argentina |
2,3 |
8,5 |
8,7 |
6,8 |
-1,5 |
1,9 |
| Venezuela |
1,6 |
10,3 |
8,4 |
4,8 |
-2,2 |
-1,4 |
| Colombia |
0,7 |
6,8 |
7,5 |
2,5 |
-0,7 |
1,8 |
| Chile |
4,2 |
4,3 |
4,7 |
3,2 |
-0,4 |
2,7 |
| Peru |
3,3 |
7,6 |
9,0 |
9,8 |
3,0 |
4,3 |
LatinFocus (http://www.latin-focus.com/) collects projections from a wide variety of organizations. Its Consensus GDP Percent Change Forecast for Chile is 1.5% for 2009 and 4.0% for 2010.
Part of the reason for projected the strong rebound is attributable to the fact Copper prices have recovered 57% of their losses from previous highs. This is important inasmuch as copper constitutes approximately 50% of Chile’s exports.
Table 6. – Copper Price Index
|
Index |
Index |
Index |
Hi-Low |
Hi-Now |
Percent |
|
| Index |
High |
Low |
Now |
% Loss |
% Loss |
Recovery |
| Copper |
8,71 |
3,1 |
6,3 |
-64,4% |
-27,7% |
57,0% |
As a result, the LatinFocus consensus is that exports will grow 12.8% in 2010 after falling 25.3% in 2009. The LatinFocus Consensus Unemployment Rate Forecast for Chile is 9.9% in 2009 and 9.3% in 2010.
Chile’s external debt is 38.6% of its GDP which is high by Latin American standards. But the Sovereign Spread it has to pay on borrowings is extremely low by Latin American standards which reflect international trust in its government policies.
