With the second quarter now well under way, Chile continues to outperform, though downside risks loom on the horizon as the outlook for copper prices weakens. Internal demand remains a key growth driver and continues to outpace top-line growth, raising fears that the economy may be on the verge of overheating. In our view, such fears are overblown at present, given that increased consumption has been driven in large part by rising real wages rather than increased borrowing.
Rising labor costs, increased potential for skilled labor shortages, and more restrictive credit conditions do, however, represent supply-side risks for multinationals already hard-hit by rising energy costs and the potential for strike-related supply chain disruptions as the electoral cycle kicks into gear.
Trend #1: Near-term Supply Chain Disruptions Likely as Election Year Politics Take Hold
- In recent weeks, strikes have broken out in a number of different sectors in Chile. Port workers have disrupted copper and fresh fruit exports, miners at the state-owned copper company Codelco demanded higher wages, preschool teachers from Fundación Integra called a 24-hour strike, and LAN airline workers have publicly protested against firings. These strikes are timed to capitalize on the electoral cycle, and while the volume is expected to decline following November’s election, multinationals may experience supply chain disruptions as a bandwagoning effect plays out across various sectors of the economy
Trend #2: A Stronger Peso Will Fuel Capital Investment Over the Near-Term
- The Chilean peso appreciated 7.8% against the US dollar in 2012, and as of mid-April, has appreciated 2.2% in 2013. The sustained real appreciation of the peso has strengthened domestic purchasing power, benefitting companies importing consumer durables and capital goods into the Chilean market, while taking a toll on commodity exporters. Multinationals with local operations and/or production are likely to face rising costs as the prices of non-tradable inputs (i.e. labor, real estate, water, and electricity) rise in USD terms, even against a backdrop of muted inflation.
- While the peso will remain strong against the dollar in historical terms, moderation is anticipated over course of 2013, given a weaker outlook for copper demand and expectations that the Fed will scale back bond purchases.
Trend #3: An Uptick in Immigration Will Offset Chile’s Increasingly Tight Labor Market
- While multinationals are concerned about the potential for shortages of skilled labor and rising labor costs as the Chilean economy approaches full employment, a recent uptick in arrivals of skilled immigrants from the distressed economies of Spain and Argentina may help fill critical capability gaps. Currently, companies with more than 25 employees can only fill 15% of positions with foreign hires. However, our expectation is that reform efforts will aim to raise this cap and streamline the visa process, while increasing inter-agency cooperation to ensure that policy is optimized to meet the country’s labor and technical needs.
FSG clients may click here to access a full report for further reading on FSG’s quarterly market view of Chile.