A Rebound Pioneer

Chile has been a pioneer for the last 30 years of great improvements. Mainly, due to four structural reforms: the creation of a retirement system based on private personal accounts (the AFP system), the opening of the private health insurance system (the ISAPRE system), the redesign of the labor code changing the terms of trade union elections, and the constitutional law on mining. All those reforms were led by Pinochet during 1973-1990, establishing free-market norms, reducing the size of the state, and privatizing the pension provision.

When Pinochet left power, his successors retained enough of his policies to ensure that Chile never built up much public spending or foreign debt. Consequently when the downturn arrived in 2008-2009, Chile had a $19 billion trust fund – saved from the proceeds of copper sales – that it was able to spend on social programs.

The bottom line: Even during this period, Chile was better run than most of Latin America.

Since 2000, a stretch during which Chile was governed by the left, economic growth had been somewhat sluggish.

This January, billionaire businessman Sebastián Piñera was elected as the new president of Chile, making him the first right-of-center leader since Pinochet. Piñera has promised to increase the pace of economic growth by freeing up regulation and cutting taxes on business. The February earthquake has slowed the implementation of more free-market policies, but has not halted it.

Chile is a major producer of agricultural products and a number of commodities, particularly copper. That’s an advantage in today’s global economy, where rapid Asian growth has raised the value of commodities worldwide.

With good management, Chile is destined for rapid growth. The current Economist estimate of 5.0% growth in 2010 and 4.7% in 2011 is almost certainly too low – and by a significant degree (especially the 2011 projection).

With a relatively small government and ample foreign-exchange reserves, the Chilean market should be an essential, albeit modest, part of any international investor’s portfolio, even at its current Price/Earnings (P/E) ratio of 19.3.

And Chile no longer stands alone.

If we take another, closer look at Latin America, we discover that Colombia is the newest convert to the school of shrewd government. The country has had a drug-and-terrorist problem for 30 years, and before that it endured a civil war.

The new president Santos was elected on June 20 with 69% of the vote. He has degrees in economics from London and an MBA from Harvard, and has promised to continue improving the security situation – understanding that he has to do so if Colombia’s appalling poverty is to be alleviated. (Poverty problems are best addressed by foreign investment in high-employment manufacturing and service sectors; this can only happen if the security situation is tolerable.)

Colombia is rich in natural resources – with oil production currently increasing rapidly – although the country also has a vibrant agricultural sector.

The Economist’s forecasters are more pessimistic about Colombia, estimating growth of only 2.4% in 2010 and 3.8% in 2011. Once again, however, those projections really appear to be low, especially if a new U.S. Congress in 2011 finally ratifies the U.S./Colombia trade treaty, signed in November 2006, and never ratified.

Colombia is still at an earlier stage than Chile in its economic development, with a per-capita GDP of $9,200 at purchasing power parity, compared with Chile’s $14,700. However, it is geographically better located, closer to major markets, and thus has considerable upside potential. There is not much we can invest in yet, but a modest purchase would seem attractive.

Source: MoneyMorning by Martin Hutchinson
More details here: My Own Portfolio