Worries rise over Chile’s long term growth after disappointing 4Q

Worries rise over Chile’s long term growth after disappointing 4Q

Economy & Policy Corporate & Sovereign Strategy

Poor growth figures posted by Chile this week are adding to concerns about the impact of a sell-off in the copper market, as analysts examine the new government’s economic prospects.

Central bank data released on Monday showed Chile’s economy grew by 2.7% in the fourth quarter of 2013, below market expectations and sharply down on the 4.7% posted in the third quarter, according to Capital Economics in London.

Peru, which is hoping to ramp up investment and become the world’s second biggest copper producer after Chile by 2016, also looks vulnerable.

Francisco Klapp, researcher in the economic program of Chile’s conservative Libertad y Desarollo think-tank, says the government’s plans to scrap a fund which allows companies to set aside profits to reinvest tax-free could further undermine Chile’s economy.

“We are very concerned about this change, which will have a substantial impact,” said Klapp. “The current system has been the catalyst for business sector investment and the new administration is planning nothing to replace this.

“The government has created a tremendous amount of expectations in an uncertain economic climate for Chile and emerging markets in general.”

The concerns, set out in the March/April edition of LatinFinance, come as copper last week fell to its lowest level since 2010. The mineral is Chile’s biggest export and source of more than 10% of its tax revenue. “Copper is one of the world’s most growth-sensitive and China-leveraged assets, and recent signals have been worryingly weak,” said Barclays research.

The dip in the copper price adds to idiosyncratic risks to investment in Chile and Peru including the new Chilean government’s plans for tax reforms to fund an election pledge to introduce universal free higher education.

“Growth looks set to remain weak throughout 2014 and 2015 as the copper boom comes to an end,” said Capital Economics of Chile’s economy. “But rising inflation, a weakening currency and a substantial current account deficit mean there is little scope for interest rate cuts."

The growth figures were Chile’s lowest since the first quarter of 2010, when a major earthquake hit the country, according to Credicorp Capital. A slowdown in investment was the main drag on growth, the investment bank said.

Forecasts on China are not offering much hope, either. A survey by Barclays research showed 84% of investors reckon China’s growth in 2014 will be below the country’s official 7.5% target. Only 1% of investors believe growth in China will exceed 8%, according to Barclays.

“China’s first bond default has triggered fears that the country’s financial sector clampdown will force copper inventories to be liquidated, since imports have been used to be turned into credit,” said separate commodities research from Barclays. LF

See also:

CHILE: Agenda for change Chile’s incoming government plans to introduce a raft of new legislation, including a landmark tax reform. But concern is growing that the proposals will limit investment in an already slowing economy.

PERU: Limits of pragmatism Peru remains an investment hotspot—for now. The government hopes to double copper mining by 2016. But the country remains vulnerable to slowing Chinese demand and domestic political conflicts