Emerging Markets | LATAM | Politics & Geopolitics
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We are yet to escape the aftermath of the global financial crisis. Technological developments, globalisation, and ample liquidity (initially intended to avoid the collapse of capitalism) have characterised the past decade, bringing with them the unintended consequences of increased inequality, socio-political unrest, and a bipolarisation of the electorate.
Social Unrest Wave Hits Chile
This widening socio-economic inequality is particularly evident in Chile, where it has triggered civil protests that over the past fortnight have become increasingly severe – sadly now resulting in loss of life. Yet the Chilean uprising is just the latest of many we have witnessed around the world in the past year. It was exactly twelve months ago that the gilets jaunes movement began in Paris, paralysing the country and nearly toppling the newly appointed President Macron; and it was not that long ago that we saw similar scenes of social unrest play out across our screens from Athens.
Chile Is Not Greece
When compared with Greece, however, the Chilean economy is in a far better position to deal with this crisis. Their economy may have been hit by the slowdown in China and trade tensions, with unemployment inching gradually higher over the past few years to 7.2%, but the underlying fundamentals remain strong enough to provide support.
With inflation stable at just above 2% and the budget deficit at -1.7%, the government has the power to act. The widening current account deficit will, we believe, improve as tensions between the US and China ease, and the growing levels of government debt are still relatively modest at 25% of GDP (although they are rising at a significant rate, this is not a battle for now).
Furthermore, we should remember the Central Bank of Chile, which was ahead of the curve, taking pre-emptive action and cutting interest rates even before the Fed’s dovish turn in early summer. The three cuts in June, September, and October have lowered rates by 125bps to 1.75%.
On the political side, President Sebastián Pinera has replaced finance minister Felipe Larrain with Ignacio Briones – a liberal professor of economics who represented Chile at the OECD with experience on the Financial Stability Council, Sovereign Wealth Funds and Public Debt from his tenure at the Ministry of Finance. Briones was also responsible for the permanent relationship with the IMF, World Bank, and IDB.
Chile Protests to Follow France’s Gilets Jaunes Template
Given Pinera’s 14% approval ratings, it is still uncertain whether these political shifts will buy the president enough time to implement changes. But we believe that policy makers and politicians from both sides of the political spectrum will be able to avoid a social crisis which could derail the economy the way it did with Greece. Instead, we hope for a path similar to that of France, which has seen citizen consultations, clear communication, and adjustment of social and economic policies.
Chile has for many years been the ‘Switzerland’ of Latin America – a bastion of stability and economic rectitude since its return to democracy in 1990. With Argentina’s president-elect Alberto Fernandez on the left and Brazil’s president Jair Bolsonaro on the right, we believe that Chile will once again find a balance in the centre. We therefore would fade any weakness on the Chilean peso and maintain a positive outlook.
Thanos Papasavvas, CFA, is the Founder and CIO at ABP Invest.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)