Chile has showed decades of modernization and economic growth, with a strong commitment to democracy, transparency and economic freedom.
Opening to free trade in the 80’s, the democratic changes of the 90’s and a record of stable and predictable economic policies and regulation have distinguished the country and encouraged stable long term growth. During the 90’s Chile enjoyed an average annual growth rate of 6.3% and, although in the recent years the economy suffered from a loss of momentum, in the 2000’s it still shows a respectable growth path. In 2009 Chile was not isolated from the financial crisis that impacted the world economy, with a decrease in its economic activity similar to the average of the entire world, but a solid financial system and a group of contra-cycle economic policies implemented by the government has permitted the country to recover. The Central Bank is now projecting a 4.25-5.25% annual growth rate for both 2010 and 2011.
Alongside its promising economic activity, Chile has been able to maintain a moderate inflation, averaging approximately 4.0% during the years 2005-2008. An independent and respected Central Bank defines the monetary policy of the country and it has projected an inflation rate of 3% for the year 2010.
Chile is distinguished worldwide for its macroeconomic and political stability, its transparent and stable public finance management, its strong protection of property rights and its openness to free trade and investment. Its impressive record of economic reforms consistently applied over time moved the Heritage Foundation to rank the country 11th in the 2009 World Index of Economic Freedoms, enjoying the highest degree of economic freedom in the South and Central American region. Likewise, based on its commitment to a stronger, cleaner, fairer world economy, Chile was admitted this year as the 31 permanent member of the OECD.
Other highlights for foreign investors thinking about doing businesses in Chile are the equal treatment received by foreign and domestic investment, the absence of restrictions on the inflow and repatriation of funds, extremely low tariff on international commerce (average tariff rate was 2.1% in 2006) and minimal non-tariff barriers and an adequate protection to private property and enforcement of contracts.
Corruption is not a major problem in Chile. Pursuant to Transparency International’s Corruption Perceptions Index for 2009, Chile ranks 25th out of 180 countries. Government has instituted new rules looking for more transparency in public services, funding of political campaigns and awarding of government contracts. In 2009, following a recommendation from the OECD, new laws were enacted to establish the criminal liability of legal entities who participate in money laundering, bribery or financing of terrorism, and to allow tax authorities to unveil secrecy on banking activities.
The landmark reputation of Chile explains the large and long term investments made by foreign and domestic investors in all relevant sectors of our economy. It explains why Canadian pension funds, like Ontario Teachers Pension Fund and CPP, have invested in the last 2 years large amounts in water utilities, toll roads, energy distribution companies and energy networks. Foreign investor can find in the country’s infrastructure assets long term revenues, protected against inflation and in context of stable and transparent regulation.
Notwithstanding the above, there are still important challenges for the government and the private sector. The unemployment rate is currently above 10%, and it is going to be difficult to see substantial changes in the short term within a labor market that has become more rigid as regulation increased cost and difficulties for dismissing redundant employees. The public education system is under total crisis and it represents a serious threat to maintain the competitiveness of the country. The banking industry is strong and stable but there is an overconcentration with three banks controlling about 60% of the assets and more than 80% of the commercial loans going to just only 1.6% of the population. We have been observing an increasing interference from decentralized and multiple governmental agencies and authorities in the approval of new projects.
Three cases illustrate how burdensome and lengthy has become obtaining permits or licenses for major new projects:
(i) Hydroaysén, an Endesa/Colbún 2,750 MW hydro-electrical project located in the south of Chile, after more than 2 years of serious work and efforts has not been able to obtain a green light from the administrative authorities to start construction of its project. In October of 2009, Hydroaysén submitted its responses to the more than 3,000 questions made by the environmental regulator and, considering the volume of the questionnaire, the filing of the company was more 5,000 pages long, plus annexes, packed in 45 boxes and delivered in a truck specially hired to transport such massive, mostly useless, paperwork.
(ii) In June 2009, the Supreme Court ordered AES Gener to interrupt indefinitively the construction of Project Campiche, a 270 MW thermo-electrical power plant located close to Valparaíso, because the existing permit granted by the environmental authority had failed to consider appropriately an ambiguous zoning restriction.
(iii) Praderas, Urnanya and Enea, real estate developers of more than 1,800 hectares in the northern cone of Santiago, have suffered more than 5 years of comments from municipal, environmental and administrative authorities before obtaining definitive permits to start the constructions of housing solutions for middle and low income families.
Last February 27, Central and Southern Chile were affected by an 8.8 earthquake, the fifth strongest ever measured in the World. In spite of the earthquake, the Government plans to reach a GDP growth of 6% for the next four years. The reconstruction plan includes the emission of a sovereign bond during 2010 for app. US$1.5 billion (US$ indenture for US$1 billion and CLP indenture for US$500 million); a temporary tax increase from 17% to 20%; budget reallocations for US$730 million; a new donation law; and the sale of state-owned expendable assets.