Tuesday, December 22, 2009

Chile: Stellar Financial Performance That Teaches How To Survive a Severe Recession

Chile and Brazil are the best performing economies in Latin-America (some may even say the Americas). A relatively small country hidden between mountains, sea, desert, and ice, but well known for its wines, fruits, and copper, Chile is often overlooked as a financially solid powerhouse.

There is a great article on Chile at topgunfp that explains why and how a small country manages to escape the worst of the global recession, by simply using their brains and planning for the worst case scenarios.

With an economy substantially dependent on copper prices, Chile in the past rode the boom and bust commodity cycles. Its current finance minister made a point of avoiding such cycles, by preparing for bad times and setting up a rainy day fund which would allow the government to keep investing.

We track chilean ADRs here:

The average ROI YTD is 88.65%. Top performer is a financial, PVD, a private pension fund administrator.

SQM is a great chemical and fertilizer company one we have written about before.

The ECH ETF tracks Chilean stocks.

Here are excerpts from the topgunfp article.

"While the US economy stagnates, an economic miracle continues in the unlikeliest of places: Chile. Now ranked as the 6th most free economy in the world (the US is tied for 8th), Chile has quietly experienced steady economic growth for the last 30 years. [....]

As the Minister of Labor and Social Security from 1978-1980 and the Minister of Mining from 1980 to 1981, Pinera and his team of Chicago Boys undertook a radical restructuring of the Chilean economy. They privatized the nation’s social security system, created a private health insurance program, reestablished democratic trade unions and established constitutional property rights in the mining industry. Chile’s privatized Social Security system is the envy of the world, fully funded in private accounts and amounting to more than $120 billion, about 80% of Chile’s GDP. As a result, after a 0.9% annualized per capita growth rate from 1810 to 1983, Chile’s growth rate has surged to 4.3% for the last 20 years. [...]

In 2006, [Andres] Velasco returned to a booming Chilean economy, the result of surging copper prices. Chile is the world’s leading copper producer and state owned Codelco, the world’s largest copper producer, was raking in profits. Government coffers were fat and the people demanded social programs and other goodies.

Velasco, however, insisted that the annual budget be set based on a more conservative estimate of the price of copper, not the current price. The resulting surpluses would be invested in a rainy day fund. Tens of thousands of students protested in the streets in mid-2006, seeking free school transportation and education reforms. In August 2007, Chile’s top union leader called a national strike, accusing Mr. Velasco of “declaring war” on workers by resisting wage demands. The protests ended in street fights and the arrest of hundreds. In September of last year, protestors broke into a presentation by Velasco carrying an effigy of him and shouting “The copper money is for the poor people.”

But Velasco had experienced at first hand the economic catastrophe of the 1970s and prior boom and bust cycles based on commodity prices. “This is a movie that may be novel to some Americans, but this is a movie that people in other places of the world, Chile included, know we have seen. This is a cycle that needs to be ended. We have been out to show that a Latin American country can manage properly, and not mismanage, a commodity cycle. You save in times of abundance, and you invest in lean times.” Velasco was steadfast in his principles.

Last year, the copper market started to crash along with the global economy. The Chilean economy ground to a halt. But because of the rainy day fund accumulated during the fat years, the Chilean government has been able to invest in the economy and stimulate it. As a result, Chile’s economy is expected to experience only the mildest of recessions. Velasco, who set out as a youth on a quest “to understand how did this happen [to Chile] and how do we make sure it will not happen again”, was vindicated. After being much maligned, Velasco and Chilean President Michelle Bachelet have seen their popularity surge in the last year.

If only California and The United States were more like….. Chile. Who ever thought anybody would say that? The principles of sound economics have been around for hundreds of years now. The logic is rigorous and the historical evidence convincing. Really, it’s nothing more than common sense. At least we can be encouraged by Chile’s example".

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