World economies

Published February 18, 2013

Chile

CHILE is the fifth-largest economy in South America and has the second highest GDP per capita in the region. It is a liberal, open market economy, with strong macroeconomic stability. Chile has experienced strong economic growth averaging 5.3 per cent per annum since 1990. Growth has fallen below this average in the past decade due to several shocks such as Asian crisis in 1999, global crisis in 2009.

However, it has rebounded strongly, with economic growth of 6.1 per cent in 2010 and six per cent in 2011. Chile has low public debt of US$19billion. Meanwhile, the percentage of Chileans in poverty continues to decline slowly. Chile has a relatively developed economic structure, with 68 per cent of GDP coming from services.

Mining is a key sector for the Chilean economy, especially copper. Chile is world’s largest producer, and copper provides 55 per cent of Chile’s export earnings and 16 per cent of GDP. The economy is heavily consumption-driven, more in line with developed than emerging economies. Investment, at 23 per cent of GDP, is higher than other countries in the region. Infrastructure investment has been high in past years, after the earthquake. The Chilean economy is relatively open; exports and imports are worth 73 per cent of GDP. Chile’s top trading partners are China and the US — trade with Latin American partners is relatively low.

Chile joined the OECD in 2010, becoming only the second Latin American country (after Mexico) to do so. It is ranked the ‘freest’ economy in Latin America and seventh most free in the world and is the easiest country in Latin America with which to do business. The country still faces challenges which could constrain long-term growth. One is the lack of sufficient diversification of the economy, in particular the over-dependence on copper. If copper prices fall, growth will be more difficult to sustain. Energy is another potential bottleneck — demand is set to increase over the next few years and many energy projects are beset by delays. Low productivity acts a growth constraint. The government is aiming to boost productivity through education, labour and by tackling bureaucracy.

According to the latest available data, the economic growth slowed to 5.5 per cent in 2012 from six per cent in 2011. The main growth impetus came from domestic demand, which rose by almost eight per cent. The annual rate of inflation fluctuated between 2.5 per cent and 2.7 per cent at year-end. The unemployment rate fell steadily on the strength of buoyant economic activity. Exports were down as growth faltered in the economies of Chile’s major trading partners. Driven by domestic demand, imports continued to rise, albeit at a slower pace than in 2011. The current account posted a deficit of 2.6 per cent of GDP, almost twice as large as in 2011. Lastly, net financial inflows were down amid international financial market turbulence, although an upturn in foreign direct investment (FDI) made Chile the region’s second largest FDI destination.

The Chilean economy is projected to grow by five per cent in 2013, with inflation remaining within the target range of three per cent, plus/minus one percentage point. Fiscal policy continued to be directed towards achieving a structural balance of zero per cent of GDP at the end of 2014. The budget law for 2013, which is based on a trend GDP growth rate of five per cent, projects a spending rise of 4.8 per cent in real terms; combined with the projected revenues, this would yield a structural deficit of 1.0 per cent of GDP. The government’s budget strategy aimed at raising between US$700 million and US$1billion per year to fund improvements to the education system.

Argentina

ARGENTINA is the second largest country in South America. Its GDP grew by an average nine per cent after 2002, for five years following the worst economic and political crisis in the country’s history. However, the recession of 2008-2009 took a toll on the Argentine economy and the economic growth of 2002-2007 decelerated heavily as government policies held back exports. GDP growth fell to 0.5 per cent in 2009. After growing 8.9 per cent in 2011, the economy slowed abruptly last year due to currency controls, restrictions on imports and soft demand for Argentine goods in Brazil. The country’s economy grew just 1.9 per cent in 2012, according to the national statistics agency, Indec. Argentina's central bank president stated that in 2013, the country's economy will expand 4.6 per cent from an estimated two per cent in 2012.

Drought and slowing economic growth in Brazil, Argentina's main trading partner, affected the country's economic growth during the current year, ending a boom period that began in 2003. Argentina's economy is unlikely to gain much traction during the first three months of 2013, although it is showing some signs of beginning a recovery after stalling in 2012. Argentina’s inflation last January was the highest in 22 months, 2.58 per cent, according to the average of private estimates which are banned from making public their findings, but which are released by the Congressional Freedom of Expression Committee.

Argentines worry most about inflation. The 2.58 per cent is the highest since March 2010 and accumulates in the last 12 months at 26.28 per cent. January in Argentina is traditionally a month with a strong spike in consumer prices. Argentina's Torcuato Di Tella University (UTDT) expects inflation of 30 per cent in 2013. Most private-sector economists think that 12-month inflation in Argentina has been running at or above 20 per cent for the last three years due to lax monetary and fiscal policy. The government says it's trying to hold the next union wage hikes to 20 per cent, a figure that suggests how little anyone believes the official index that pegs annual inflation at just 10 per cent.

Capital flight spurred by galloping inflation is one of the reasons the Argentine government adopted increasingly strict currency controls in late 2011. Private sector measures of inflation have differed widely from the government's consumer price index. However to cool expectations, the government announced that it had reached with the large- and medium-sized supermarkets a two-month freeze of prices for a basic basket. The commerce ministry wants consumers to keep receipts and complain to a hotline about any price hikes they see before April 1. Inflation is thought to have been at or above 20 per cent the last three years.

Meanwhile, the International Monetary Fund's executive board censured Argentina for failing to meet its reporting standards for economic data, the first such official warning in the organisation's history. The Fund's declaration of censure — essentially a public reprimand — lays the grounds for possible sanctions against Argentina if it doesn't improve the quality of its inflation and economic growth data. Sanctions may include the loss of borrowing and voting rights, and even expulsion from the IMF. Argentina's official economic statistics have been viewed with skepticism since early 2007. Most economists say Indec significantly understates inflation, which reduces the government's payments on inflation-linked bonds and artificially boosts economic growth by as much as two or three percentage points.

Indec's consumer price index put 12-month inflation at 10.8 per cent in January, while a survey of private sector economists published by opposition members of Congress produced an average estimate of 25.6 per cent. The IMF started using estimates from the private sector and provincial governments to measure Argentina's inflation and GDP growth in 2011. Argentina's Economy Ministry said it will challenge the measure. However, Argentina may find it increasingly difficult to secure approval for financing from other multilateral institutions such as the World Bank and Inter-American Development Bank. Argentina has been blocked from borrowing from international markets since its 2001 default on $95 billion of debt.

Peru

Peru is a top producer of gold, silver, copper, zinc and tin. While mining has traditionally powered Peru's economy, growth is now driven by domestic demand. The country is a top exporter of minerals, which drive some 60 per cent of its international shipments. Exports have slumped in recent months, and domestic lending, consumption and construction are now fueling the country's economic expansion.

The country is in the best shape in Latin America to withstand an economic meltdown. Fast-growing Peru emerged as the most shock-proof economy in the region, with a budget surplus and debt worth only about 20 per cent of GDP. Peru's booming economy is adding to the pressures.

With GDP growing at about six per cent each year, more and more rural migrants are making it rich in the cities and then returning to their home villages with enough money. The government expects the economy to have expanded 6.3 per cent in all of 2012, likely the fastest rate in the region. According to the Central Bank, Peru posted a $4.5 billion 2012 trade surplus — half of what it posted in 2011 — as the struggling global economy hurt prices for its mineral exports and strong domestic demand boosted imports. While imports rose 11.2 per cent over 2011, traditional mining exports fell 4.4 per cent in 2012. December's trade surplus was 45 per cent less than the same month in 2011.Peru's economy probably expanded 6.3 per cent in all of 2012. A similar pace is expected this year. In 2013, Peru will see a 6.2 per cent growth in consumption, and a 10.3 per cent growth in investment. Moreover, strong performance in the country’s construction industry, would lead to 8.2 per cent growth in this sector, while the country’s trade would increase by 6.7 per cent. Mining would also see increased growth, with a 7.5 per cent increase, driven by new and continuing projects. While Peru’s economy is posting the fastest growth in South America, inflation remains within policy makers’ one per cent to three per cent target range.

Annual inflation for the 12 months through January was 2.87 per cent, within the 1-3 per cent target range of the central bank. Seasonal price spikes for locally grown foods and external shocks had pushed inflation up to 3.74 per cent in the 12 months through September, but consumer prices dropped in November and October and have ticked up only slightly since then. The central bank expects inflation to merge toward two per cent this year, and it now seems more worried about the effect of the wobbly global economy on Peru's swift expansion than about rapidly rising prices. The central bank has no significant pressure to tighten monetary policy as inflation shows no evidence of demand-driven pressure on prices.

The IMF has noted mild risks of overheating in Peru's domestic growth, though the central bank has reported that the expansion appeared to be within the long-term potential expansion rate of 6-6.5 per cent — the pace at which growth can occur without generating bouts of high inflation. The central bank has described its current monetary stance as slightly tighter than neutral. It has raised bank reserve requirements six times since May to soften the impact of heavy capital inflows on the local currency and to steady a quick credit expansion. Economists are predicting 2013 will be Peru’s best year yet. But then, the last 10 years haven’t been too bad at all.

The World Bank expects Peru to achieve one of the highest economic growth rates in South America by climbing 5.8 per cent this year. The government has also taken some steps, raising reserve requirements on local and foreign currency bank deposits and selectively intervening in currency markets, citing high international liquidity and exceptionally low international interest rates. However, capital controls and sustained interventions to prevent currency appreciation could involve significant risks for the economy over the medium term. If annual inflation cools to two per cent as expected in coming months, the conditions would be created for lowering the interest rate, which the bank has held steady for 21 straight months.

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