SWOT Analysis of Chile: Business and economic trends

Country Profile – Chile 2014

2014 LATIN AMERICAN BUSINESS ENVIRONMENT REPORT

INTRODUCTION

In 2014 the business environment in Latin America did not live up to expectations, and seems that it will not deliver significant results for 2014.Growth rate dropped again, down in 13 of the 18 countries covered in the LABER analysis. Lower commodity prices and financial market volatility in Latin America Governments struggled to cope with growing economic imbalances and rising social discontent.

The 14 countries adhering to the centrist social-market paradigm, in spite of these pressures, did not deviate from its more business-friendly policies. Should the economic slump deepen in 2014, it was not unreasonable to expect pressures for change to deepen.

Country Profile –Chile

Political Factors:

SWOT Analysis of Chile:

Strengths

• Chile experiences open economy and the bilateral, regional and multilateral trade agreements led to a increase in foreign trade
• International competitiveness has faced an increased growth rate due to the trade agreements
• Chile offers foreign investors some of the world’s most competitive business costs
• Privatization and deregulation have created public utility and telecommunications industries
• Corporate taxes and labor costs are relatively low
• No evidence of active terrorism in Chile
• Occurrence of serious offences remains relatively low, despite reports of increased crime levels
• Chile capital, Santiago is considered one of the safest countries in Latin America
• Enjoys a stable democratic political system, with strong institutions
• Comprehensive legal framework and independent judiciary

Weaknesses

• Binomial electoral system is ripe for reform
• Chile is vulnerable to external shocks due to overdependence on primary export industries
• Supply shortages and potential power stoppages due to heavy dependence on imported sources of energy
• Reforms of Chile’s institutions and labor market remain unlikely.
• Absence of reform exacerbate structural imbalances in the economy
• Absence drags on economic growth

Opportunities

• Foreign investors are supported by the Government through three investment mechanisms
• The mechanisms offer the rights of both the state and the investor throughout the implementation of project
• Significant opportunities for inbound investment in areas of power generation and transportation, as well as copper production
• Since 1990, Chile has enjoyed an uninterrupted period of stable democracy
• Voting is compulsory for all voters older than 18.
• Government took important measures to increase efficiency of public administration by 2003 and ensuring a transparent government
• Congress also approved a law to regulate the financing of political parties and election campaigns

Threats

• Growing public protests among the poorer sections of society
• High levels of income inequality and discontent with the cost of education
• Weakening government’s popularity
• Chile’s major ports and industrial mines suffer growing labour unrest

Business environment in the country:

BMI Business Environment Risk Ratings

Chile ranks 28th out of 191 countries in business environment rankings and scoring around 64.0. This makes Chile the outperformer of the neighboring countries by some distance and places it higher than several developed industrial economies. In terms of ‘market orientation’, it ranks well ahead of many developed states including the US and the UK. Nonetheless, causes for concern remain. The country has a sizeable infrastructure deficit, reflected in our relatively weak score for Chile’s business infrastructure, a category in which Chile ranks just 55th globally.

Chile is an open economy and practices bilateral, regional and multilateral trade agreements. This has led to a steady increase in foreign trade and the country’s international competitiveness. Chile offers foreign investors some of the world’s most competitive business costs. Privatization and deregulation have created sophisticated telecommunications, healthcare and public utility industries. Chile at the same time has maintained a moderately low corporate taxes and labor costs.

Environmental factors:

Chile is a highly Election dominated environment. It possesses the following features with regard to the environment:

• Solid economic performance

Throughout the region of Latin America growth softened, but the drop was not steep in Chile and the outlook was encouraging with average annual growth rates for the period 2004-12. The causes of slower economic growth were lower export earnings, weaker investment and slower growth in the domestic demand. The local stock market has downgraded by 15% in dollar terms for the year, making it the worst performing of the major exchanges. This fall in the exchange rates made the economic scenario quite unfavorable for the foreign investment. The depreciating peso was accounted for the major fall in the economic performance. (upto 521 to the dollar)

• Exports softened but FDI surged

Chile is the world’s largest producers of copper. Being in its maximum height of production, the decline in world copper prices affected Chile’s market negatively. Copper accounts for 60% of exports and 20% of GDP. Chile drew its attention away from copper due to the long-term need to diversify the economy and such heavy dependence on a single commodity. As the Chinese economy relaxed, copper prices fell down by 12% in November affecting Chile’s trade and exports, resulting in a fall in 2012. The CAD (current account deficit) and debt increased due to the exports slump. Chile has favorable access to bond markets and foreign investors due to its best managed economy and the highest credit rating in Latin America, and hence its environment remains very investor friendly. Resulting in a Net FDI tripled in 2012.

• Public protests broke out again

Chile was recognized as a world leader in the implementation of the market reforms that was responsible for the generation of growth and rising standards of living. Chile has proven unemployment rate that fell to a historical low of 5.7% in October. Despite the growth, Chile was the first country to face rising citizen discontent in the form of the street demonstrations, which are now common throughout Latin America. Chile experienced for the first time in 2013 students, unions and Mapuche Indians all conducted disruptive demonstrations.

• Election returned center-left coalition to power

As expected, former President Michelle Bachelet easily defeated Alianza por Chile, the candidate of the governing party, and her New Majority coalition won a majority in Congress. In many respects, the outcome was disappointing for Bachelet and her supporters. The disappointing fact was the low turnout , with voting was no longer mandatory, especially among first-time voters who were expected to deliver an easy first-round victory.

• Central Bank lowered interest rates to stimulate growth

In order to stimulate the growth in the face of weak domestic demand, the Central Bank cut interest rates. This will further enhance the growth of the economy and productivity.

National strategies and public policies:

Chile follows the strategies to raise taxes, reform education and providing free tuition for university students. These reforms were mainly targeted in reducing inequality, thereby reducing the protests.

Keys: Progress on reform agenda; price of copper

Industry structure and competitive dynamics in terms of Infrastructure & Labor:

Infrastructure:

Chile has a well developed and efficient infrastructure network, which contributes to the government’s export-driven development strategy. Since the adoption of build-operate transfer concessions the country’s physical infrastructure has improved substantially.

Though considerable damage was done to the existing country’s infrastructure network by the devastating 2010 earthquake, the ongoing focus of government attention ensure the rebuilding of Chile’s infrastructure. The Pan-American Highway is considered to be high international standards and backbone of Chile’s road system. Chile also has world-class airport and seaport infrastructure.

Chile is working to develop a network of transport corridors across the region, using rail and road infrastructure. This will uplift the Chile’s exports to Argentina and Brazil, and also facilitate the use of Chilean ports for exports to Asia.

Energy:

Energy supply in Chile is considered the Achilles’ heel. With its limited domestic energy supply, the country heavily relies on the bulk of its energy resources on Imports. It has to maintain sound relations with its neighbors to realize the valuable energy supply. The reliance on energy imports, particularly on natural gas from Argentina (where 80% of gas imports originate), is a growing problem.

The Chilean government has prioritized addressing the electricity issue.

Intellectual Property Rights

In the International Property Rights Index of 2013, Chile comes in 28th place out of 130 countries. This places Chile the highest ranked of all emerging markets. Chile approved legislation to bring the country into compliance with the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) signatory obligations .As per the TRIPS signatory, Chile must meet the agreed standards pertaining to copyrights, including producer rights, industrial designs, patents and trademarks.

The area in which Chile was most scrutinized is IPR in pharmaceutical products. This is due to the fact that Chile lacks a transparent system for protecting pharmaceutical patents. In 2005, the MOP established a system in protecting data related to pharmaceutical products.

Business-government relations:

Chile is positioned with a stable political outlook and sound economic fundamentals for steady, albeit slower, economic progress. Due to its high reliance on copper exports and oil imports, Chile is posed to a high risk to economic progress. Diversification of the country’s economic drivers will be essential to ensuring sustainable growth to remove the high dependence on the copper exports and oil imports. But this diversification may drag the GDP of the country leading to a more consumer-driven economy.

Moreover, the GDP per capita is envisioned to nearly double between 2013 and 2022, in line with President Sebastián Piñera’s goal of at least US$25,000 GDP per capita by 2020. This would give Chile de facto developed country status.

Nevertheless, we will face two obstacles that would hamper Chile’s economic growth over the upcoming years: Despite the country’s vast reserves of hydroelectric power, periods of drought have exposed Chile’s dependence on energy imports; modernizing power generation and transmission will be highly essential to continued growth.

Potentials Risks and bottlenecks faced by Chile Government:

Chile faces few terrorist activity and regional security threats in comparison with neighboring countries. Other Potential risks are in the field of labor, education, healthcare, communication and transportation facilities.

Strikes and public protests present a significant risk to business in Chile. In recent years these events have been concentrated in the areas of health, education, transportation, communication and civil service sectors. The real wages are slowly increasing in a less alarming way and high corporate profits have led to greater worker resentment. Strike action is becoming more widespread. It is not totally uncommon for labor tensions to develop into full-blown conflict. These labor conflicts largely affect the copper mines functioning. This leads to a significant amount of delays in certain large mining and energy projects.

Mapuche political activists pose a growing threat to the foreign investments due to hindrances in the domestic security and the country’s business climate. These conflicts lead to a significant drag on the Chilean business environment if left unresolved. According to government statistics, crime rates are falling.

Chile OUTLOOK in the face of Attractive Business Environments

In the business environment analysis conducted by Business Monitor, only 9 nine countries emerged with the most business attractive environments in the Latin America region. Although there are differences among them, they all share significant positive strengths:

• Sustained growth with moderate inflation
• Favorable external profiles
• Declining poverty and growing middle classes;
• Stable, multiparty, centrist politics;
• Social-market economic policies;
• Slowly improving legal systems

Seven of the nine ranked highest of the 18 LABER environments on the 2013 World Economic Forum’s global competitiveness score as given below.

Chile government supports business and related investments with its strong and efficient legal framework

• Most accommodative in the region
• Government continues to place attracting foreign investment high on its priority list
• Infrastructure network is a major asset to the Chilean business climate
• Open foreign trade regime, helps to maintain the country’s reputation as an attractive foreign direct investment (FDI) destination
• Corruption and criminal activity remains a nuisance
• Piñera government has struggled to produce results on these fronts