Will Sebastian Piñera’s expected victory boost economic growth in Chile?

The upcoming elections in Chile will come as a sigh of relief for many in the business community following an unpopular mandate by Michelle Bachelet and the incumbent Chilean Congress. Markets hope that Sebastian Piñera, Chile’s president from 2010 to 2014, will confirm poll trends and win resoundingly. However, MNCs should see the election as just one variable to Chile’s economic recovery. High copper prices and an acceleration in private consumption will create a solid foundation. However, the key for sustained economic growth will be for Bachelet’s successor to reignite business confidence by implementing pro-growth policies.

Chile will benefit from mining recovery in 2H 2017

Strong global demand, particularly from China, has caused copper prices to rise to their highest levels since 2014. The spot price for the red metal has increased approximately 15% from the beginning of 2017 and about 26% from one year earlier. This has caused a similar increase in Chile’s export revenues, keeping in mind that copper comprises over half of Chile’s export basket.

Source: Bloomberg Terminal

 

Source: Bloomberg Terminal

Multinationals in the B2B space should target industries and companies that are heavily investing in Chile’s copper industry, as it is expected that copper prices will remain stable for the next few months. It is important, however, to monitor Chinese manufacturing. China buys over half of the world’s copper supply, and any major disruption to Chinese manufacturing production would cause a quick reversal of copper’s recent price movement. 

Private consumption will accelerate as purchasing power increases

A second important variable for economic recovery in Chile is private consumption, which will benefit from solid purchasing power conditions. This recovery will have several drivers:

  • Consumer confidence is slowly recovering, approaching optimistic territory. This trend is encouraging following rather pessimistic consumer confidence in 2016.
  • Real hourly wages and consumer credit growth are increasing, while consumer loans rates are going down. Rising real wages will boost purchasing power, while lower lending rates will allow consumers to reduce debt servicing costs and encourage them to finance purchases of higher-ticket items and durable goods they had postponed during Chile’s economic slowdown over the last couple of years.

Source: Bloomberg Terminal

B2C companies can try to accelerate this trend in several ways. The first is to look to assuage fears of customers that might want to wait to finance large purchases by offering potential payment deferrals to make these purchases more attractive. Another is to understand the variance between income groups and act accordingly in terms of differentiated value proposition and pricing as private consumption accelerates.

It is unclear whether election results will boost business confidence, creating a recovery in investment

Boosting business confidence will be key to igniting investment, which has contracted three out of the last four years in Chile. Despite commanding polls by Sebastian Piñera, business confidence remains pessimistic and stagnant. Businesses likely perceive both uncertainty regarding the election outcome and policy proposals that would stimulate the economy. As such, a recovery in business confidence is contingent upon passing the following proposals:

  • A major infrastructure investment program: Sebastian Piñera has proposed a portfolio of infrastructure projects requiring US$ 20 billion of investment by 2026. This project will likely be passed in congress regardless of its composition, considering each candidate has stressed the need of infrastructure improvement.
  • Rollback of labor and tax reforms: Businesses would like to see a return to more flexible labor laws and lower corporate taxes. However, it appears unlikely that a rollback of either reform is likely. Chile faces growing fiscal pressures due to several years of low copper royalty revenues. Additionally, a reversal of the labor reform would be met with social unrest.
  • Mild pension reform: Businesses should view the proposed pension reform of Sebastian Piñera favorably, since it is milder than the versions proposed by opposition candidates Beatriz Sánchez and Alejandro Guillier. Piñera proposes increasing contributions by employers by 4 percentage points. This will likely pass considering the popular movement to revamp the country’s pension system.

Actions to take

MNCs should closely follow the elections in November and potential run-off in December. However, an acceleration in economic growth will happen independently of the result at the ballot box. The key factor for stronger-than-expected growth will be whether Michelle Bachelet’s successor will inspire business confidence, fomenting investment.

In the midterm, multinationals should prepare scenarios to rapidly adjust to an increase in domestic demand. B2B and B2G companies should also focus on the mining industry to take advantage of companies trying to increase spending.

FSG will continue to monitor the evolution of Chile’s economic growth, the general elections in November, and how that affects indicators that will shape market demand.


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