I haven’t written a market or economic-related post is awhile. It’s definitely not because nothing has been happening. Since my last post about the Vietnamese economy, we’ve visited China, the US, Korea, and Japan while the oil/commodities bubble has popped, the credit crisis has intensified, the currency markets have crashed, stock markets have been taken down substantially, and governments and the IMF have been rolling out aid/bailout packages daily. As a student of economics and finance, its been an unbelievably interesting past few months (of course, that’s ignoring the extreme pain I’m experiencing in my portfolio). Perhaps, at some point, I’ll have to write a post chronicling our journey during the credit crisis (this trip and the credit crisis began in July 2007) and the impact its had/having in the places we’ve visited. I’m not sure if anyone even reads these posts, but at least it would be interesting for me to record.
For now, I’ll just refresh my financial writing with a little tidbit on the Chilean economy. Developmentally speaking, Chile is the most developed South American country. It’s a small country, measured both by area and population (only 18 million), which was ruled by a dictator for 20 of the last 30 years (I feel that they know how to get things done). It has enjoyed a huge economic boom for the past few years, with both the Chilean peso and the IPSA (Chilean benchmark index) outperforming. This is due to the fact that 70% of Chile’s GDP is commodities-related (mostly mining, agriculture, and fishing). Chile’s mineral exports have supplied the rapidly growing economies of Asia and, thus, helped fuel the huge bull market of the past few years. Everything was good until the commodities bubble popped in July 2008. Everything from oil to wheat has crashed from their historic highs, while the current deleveraging of all assets around the world has added increased pressure. The Chilean peso has crashed in the past few months, which has made traveling here substantially cheaper for us (locals say this is the first time in years that Chile is cheaper than Argentina).
So things are bad in Chile. But things are bad around the world right now, so what’s the outlook for Chile? Well, the good news is that the country is not strung out on credit like Iceland, the Ukraine, or Pakistan (or any of the other countries that need massive IMF loans to function) and probably won’t default. The bad news is, of course, that Chile is dependent of commodities. And with a worldwide slowdown/recession/depression looming, demand for Chile’s (and all commodity exporters) commodities have fallen off a cliff. From the copper mines in the north to hydrocarbon reserves in the south, the whole of Chile is entering a tough period. The problem with commodities is that their value is determined solely by supply and demand. Thus, Chile is dependent upon world growth for its own growth. It doesn’t have enough domestic industry to pull it out of this global downturn. The bottom line? Chile is better prepared than most other commodity-centric economies in SA, but it still is reliant on global demand/growth. Chile is not in control of its fate: Chilean GDP growth is directly correlated to global GDP growth and that does not bode well for Chile, for the foreseeable future.