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Can Chile’s Piñera Escape the South American Doldrums?

 6 min read / 

With political turmoil in Venezuela and Brazil, an ongoing economic crunch in Argentina, and fears about potential trade spats with the United States, many South American economies face a poor outlook in 2018. But for Chile, a country long considered one of the more stable in the region, prospects for healthier economic growth may rest in the hands of Sebastian Piñera, a business-friendly billionaire who recently won the presidency on promises to reverse years of stagnation

Piñera is no stranger to Chilean politics. Previously president from 2010 to 2014, his election in November 2017 marks a return to power after a four-year period of government by Chile’s political left. He is also part of a wave of centre-right politicians who have taken the reins in neighbouring countries, such as Argentina’s Mauricio Macri and Peru’s Martín Vizcarra. Like these leaders, Piñera’s prescription for a more robust economy includes hawkish deficit reduction, tax policies that entice foreign and domestic investment, and a diversification strategy lead by the energy and technology sectors.

Unlike its neighbours, however, Chile is exposed to different types of economic problems that pose challenges to Piñera’s vision. To get Chile back on track, the administration must, therefore, take a cautious but innovative approach for out-navigating South America’s economic doldrums.

A Copper Conundrum

As the world’s largest exporter of copper, Chile’s economic fortunes are inherently tied to the commodities trade. This fact is not lost on Piñera, who has pointed to recently rising copper prices as a leading indicator of better economic performance for the second half of this year.

However, increasing copper futures are a double-edged sword. In the long term, Chile stands to benefit from trends such as Asia’ rising demand for metals and the global adoption of copper-dependent renewable energy infrastructure. Short term pricing trends represent an altogether different picture: fears about a potential strike at Chile’s Escondera mine have driven the going rate for copper to a three-month high, meaning that rising mining revenues mask a politically-influenced supply crisis.

Although mining turmoil is common to the region, Piñera’s administration should take note of any negative developments. Any potential industrial action at the Escondera mine will come on the heels of a massive and ultimately successful truckers’ strike in Brazil, which paralyzed South America’s largest economy and demonstrated how highly organised labour can disrupt recently implemented reform agendas. Furthermore, Piñera’s non-alliance with Chilean labour may prove damaging if the president has to contend with a drawn-out crisis threatening domestic unrest and slashed economic output.

A Tech Titan?

Chile’s continued dependence on its traditional mining sector also underscores the need for greater economic diversification, especially in the technology industry. To his credit, Piñera has announced plans to continue an existing government program that has already allocated $18bn to the country’s tech sector in the past decade, with a heavy focus on attracting digital and information services companies from overseas.

The tentpole of the administration’s tech push is an ongoing courtship with Amazon, which intends to expand its cloud computing footprint in South America. Despite promising discussions with the e-commerce giant, Chile is currently locked in a rivalry with Argentina over the location of new offices and data centres, with an Amazon Web Services office opening in Buenos Aires earlier this year. Under this intense competition, Piñera may need to sweeten the pot for Amazon’s long-term investment, including tax benefits or government programs dedicated to IT training for Chilean nationals.

While less splashy than its Amazon outreach, the administration is also making significant inroads into blockchain applications in an effort to modernise Chile’s infrastructure. In March, Chile’s energy regulation agency, the Comisión Nacional de Energía (CNE), announced it would incorporate blockchain technology into the national energy grid, including the agency’s own internal record-keeping. The CNE’s blockchain adoption follows similar government-influenced efforts at the Chilean Stock Exchange and has helped promote explosive interest in the technology. From these test cases, Piñera would do well to foster an accommodating private sector environment that helps his country take the lead in this emerging field.

A Financial Fix

Given his campaign rhetoric, it appears Piñera is most at home applying macroeconomic solutions to Chile’s sluggish economy. Despite Chile’s relatively low public debt at 24 per cent of GDP, the administration has introduced commendable deficit-reduction measures to address a troubling four-year trend that has doubled the country’s debt burden. This type of proactive governance is a welcome development and is likely to boost investor confidence in a region otherwise marked by Argentina’s debt saga.

Piñera’s tax approach also reflects a cautionary, but mature, view of Chile’s economic trends. The president has thus far held back from pushing for cuts to the corporate tax rate, citing the need for revenue to address “the breadth and urgency of the social reforms and public works projects still to be done.” Instead, Finance Minister Felipe Larraín has called for a “fiscally neutral” tax plan to establish a balanced budget in a six to eight-year window. While Chilean corporate taxes almost certainly need to come down, ratings agency Fitch has cited such a proposal as a critical to improving the country’s business climate, Piñera’s surprising political discipline may help him establish a greater mandate for sweeping tax reforms in the near future.

A Continuous Challenge

If the Piñera administration’s success is far from certain, it has at least been granted an early gift: this month, Chile’s central bank announced that the economy grew by 5.9 per cent in April, the best monthly rate since 2012. Whether driven by fluctuating commodities prices, tech investment, or something else, this growth is an encouraging departure from a previous four-year period of expansion at half the global average.

Yet as different factors reveal, this performance could easily be an outlier. As a result, Piñera’s reforms must come with a healthy dose of realism regarding the South American nation’s future. To quote Minister Larraín, an improved economy “is not something that is just a walk in the park. We have to work for it.”

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