Andre’s Velasco the Chilean Finance minister
picture from wikimedia
There is a great story on Bloomberg about the Chilean Finance Minister Andrés Velasco and the government savings from Copper which he is starting to spend to stimulate the Chilean economy. The article is really well written and there is not one good part to cite. If interested you will have to read it all. The good news is that Chile will manage this economic down turn better than most developed countries and a lot better than other Latin American countries. Read the article here –>
My previous post about the Chilean economy can be found here: Chile’s economy
Article updated on April 20th to include the most frequent news. To see the update scroll right to the end of the article
Whilst the entire world seems to be in huge economic trouble the situation in Chile seems a lot more stable. Here is my view of the current situation with link to sources. First the bad things (The article will turn more positive I promise just read on)
House prices are falling in Chile and the UF (the currency to buy houses and apartments in Chile) is falling against the local currency the Chilean Pesos. See the chart below:
Building Projects from private investors are put on hold. Just one example below:
Chile is the world’s largest copper producer, accounting for around 35% of international output, and copper is by far its most important export. In 2007, export earnings from copper reached $37.6 billion, or 56% of total exports. Moreover, government revenue from copper–in the form of the profits of state copper company Codelco and taxes paid by private mining companies–accounted for almost a third of total fiscal income. Source Forbes The Copper price has been declining rapidly and is now at less than half of its peak.
Now lets focus on the positive news:
Even though the copper price has declined heavily since its peak in August 2008 the government had not relied on these high prices but forecasted with a price of $1.37 a pound less than half last years average. Source
The government did not spend all those extra profits but created a reserve fund in foreign currencies.
Chile has a more advantages compared to other economies in both South America and the rest of the world:
Chile had a high interest rate as the inflation (compared to the first world) was pretty high. The inflation went down and the Government is steadily decreasing its interest rates. See here a quote taken from Bloomberg:
Chile’s peso capped its first quarterly gain in a year, making it the world’s best performer in 2009, as the government tapped its foreign savings and the central bank slashed interest rates to boost growth. The peso advanced 9.5 percent against the U.S. dollar this quarter, more than any other currency tracked by Bloomberg.
The Chilean Central Bank has cut interest rates from 8.25 % at the end of 2008 to 2.25 currently (source)
Chile has US$23 billion in foreign currency reserves some of which it is using to support small businesses and the local economy.
And it is also using part of these currency reserves to stimulate growth. The Chilean President unveiled a new stimulus package at the end of March which should translate to an extra 6 billion USD in additional lending to small businesses and homes. Source
After I finished this article I found another amazing article from my favourite magazine the economist about Chile’s stimulus package. Read it…
So this is why I am more positive about Chiles economy then about most other world economies.
What do you think about the Chilean economy? Are you feeling the decline? Are you positive or negative towards the short term future of the Chilean Economy?
update: by request of Oliver (who is right) I have also added a longer chart to reflect the history of the UF. As I did not find a chart on the net I have created my own using data from 1.Jan.2007 to 1.April.2009
Since Mortgages are also based in the currency UF (a weird thing) the decline helps people who currently have a mortgage.
update April 20th 2009: The Chilean Economy shrank 3,9% in February 2009 the 4th negative month in a row. The Chilean economy is now expected to contract by 0.5 % in 2009 see here the Reuters article from April 17th.
O.k. folks sorry no pictures right now but I will post some pictures of our weekend later. Liz and I have started our house apartment hunt. We are very much interested in buying. The strange thing for a European. The house prices are NOT published in the local currency CLP but in Unidad de Fomento (UF). As a buyer I HATE this. Why? Well the UF is changed on a daily basis. It should reflect the level of Inflation (if I understood correctly). We found some flats which are ready in June of next year. The Estate agent told us we could secure the price now and pay in June. Sounds good? Uhmm / not really / we can secure the price in UF / which means we sign the contract now for lets say 100,000,000 CLP but we probably need to add another 6% by the time of completion in June. There is a good website which lists the historical pricing of UF here.
In the past weeks we have seen about 14 to 16 apartments 80 % of them new with swimming pool. Liz is keeping track in an Excel spreadsheet. The Estate agents are offering us discounts (without even being asked) ranging from 6 % to 20 % (!!!!) We are not ready to buy yet as we are expecting prices to come down. Why? UM* / The amount of newly built empty properties we found was astonishing. Liz developed a good set of questions and the one that I liked most was: “What is the percentage of sold versus unsold?” The answer clearly favours the buyers. One of the really nice Buildings was completed about a month ago and they have only sold 1/3 of the apartments (!?!?!) As far as I know in Austria the projects are only started if about 1/3 has been sold off plan. So you can see that they will be a little desperate in about 6 months. The apartments we have seen were in the Las Condes area and priced between (I will use real money now) CLP 60,000,000 to 120,000,000 in EUR in USD in GBP and in MXN The apartments we saw ranged between 60 m2 to 130 m2 (for the English folks 2 bedrooms to 3 bedrooms although in England you would call it 3 to 4 as the Chileans dont count the small room for the house keeper which also has a bed and a toilet) We are still to look at the second hand market.
Disclaimer: Even though I called the house price crash in the UK (I started reporting in November 2006, April 2007 and April 2008) I do not know a lot about the Chilean Market and anything stated above is personal believe! Prices may go up or down or move sideways 😉