I have been negligent in posting much recently as I have been moving in with my girlfriend and traveling through South America, Chile currently and off to Uruguay tomorrow.
I think it is quite possible that Chile’s best days are behind it. While visiting Santiago the students were protesting the private pension system claiming that it does not pay the elderly enough.
This article in the Economist discusses the pension system.
“Men who chipped in (10% of your annual wage) for 30 years or more earned an average pension of 77% of their final salary. But most workers contributed far less. Women took time off to raise children (and retire earlier than men). Many Chileans spent time in informal jobs or unemployed. On average, they contribute for only 40% of their prime working years”
As a North American that sounds reasonable. Contribute 10% per annum and receive 75% of my wage in retirement.
This has created a deep and vibrant financial system in Chile. Sanhatten, the Chilean financial district in Santiago is large compared to GDP with stock market capitalization averaging about 98% of GDP, 1991-2015, according to the World Bank. There is a bank on almost every corner.
The Economist also notes
“Annual GDP growth from 1981 to 2001 was 0.5 percentage points higher than it would have been without the investment, according to one study. This helped lift millions of people out of poverty”
Yet the students want the government to take on a bigger burden for those who did not save.
The other issue the students are protesting is that university is no longer free. You often get what you pay for an item and some of the universities seem to be run out of old decripid buildings. This will further hurt government finances.
It is quite apparent Chile requires further investment to repair or remodel or upgrade the metros and older dilapidated buildings, yet with the recent tax reform in 2015
“Chile…will actually have one of the highest corporate income tax rates in the developed world and will have a less attractive business tax environment”
“The Escondida labor action ended without workers and management coming to a new agreement on pay. Instead, workers used a loophole in Chilean law — which gives unions the option to continue under their previous contract terms for an additional 18 months.
That means workers get to push off wage negotiations until late 2018. And that may be a major problem for Escondida’s owners.
The issue is changes coming in Chile’s labor laws. As of April, it will become illegal to reduce previous benefits for workers — meaning that the current contract will become a floor for Escondida’s workers in any future negotiations.
The new labor laws will also make it illegal to replace striking workers.”
Stratfor has also chimed in on Chile recently with articles discussing the security threat posed by the Mapuche Tribe (here and here) and that the economic issues go beyond politics. With global copper production rising, while Chilean production is flat, Chile is losing market share and competitiveness (as seen by the change in labour laws).
It seems that the mood in Chile is that others should pay. I also get the impression that with grafitti on everything, museums, churches, government buildings and every bus (I am not talking about the beautiful and political murals from the 1980s, but stuff referenced here) the idea of private property is not well established. It is quite possible Chile moves well to the left as in other South American countries causing capital to flee.
Even with the recent advance the iShares MSCI Chile ETF and the Dow Jones Chile Index remain below their 5 year highs.
Chart courtesy of www.stockcharts.com
Chart courtesy of www.stockcharts.com
Without another commodity boom leading to a much higher price of copper or an increase in regional trade opening up new markets coupled with a reduction in regional tariffs or preferably both, economic growth in Chile should slow and living standards will likely decline. Quite possibly for an extended period.
However, the country is beautiful, the food is fantastic and the people are kind. Even with my terrible Spanish the country is easy to negotiate
The country is definitely worth a visit, but probably not your investment dollars.
I am curious if my gut feeling about Uruguay is different and whether Argentina has bottomed. I will try to share that in a few days.
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