Few countries are benefiting quite as much from the bonanza in raw material prices as Chile, Latin America’s fourth largest economy. Copper, the flagship industrial commodity whose price has more the doubled in the last 12 months, accounts for about half of Chile’s exports and revenues from taxes help shore up the operations of Latin America’s most efficient public sector.
Equally, though, high prices and soaring export revenues from metals have led to a strong appreciation of the peso, undermining the competitiveness of a range of other export products, ranging from wine and grapes to salmon and wood.
Exchange rate appreciation, which recently saw the peso edge up towards the 500 mark against the US dollar compared with 730 pesos three years ago, has aggravated fears that Chile’s successful economic model, built on market-friendly reforms, strong public policies and a broad political consensus, could be running out of steam.
Indeed, the strength of the peso is one of the biggest challenges facing the new centre-left administration of Michelle Bachelet.
Barely a day goes by without fresh complaints in the press from exporters, particularly farmers, alleging that the strength of their currency is undermining their ability to compete. And it is perhaps not surprising that the first big new policy initiative by Andres Velasco, the Harvard economics professor who has the job of administering the boom, is designed to ease the pressure.
Mr Velasco insists that Chile’s economy has proved resilient. Exports outside the copper sector, for example, rose 20 per cent in the 12 months to the end of March. Even so, last week he announced details of two new funds designed to take dollar earnings overseas. The idea is that by saving the dollars to meet future liabilities rather than exchanging them for pesos, the government will ease pressure on the peso.
The funds will be significant. Mr Velasco told the FT that he expects to place an amount equal to half a percentage point of gross domestic product per year for the next decade – making for a total of about $5bn-$6bn (€3.2bn-€4.7bn, £2.7bn-£3.2bn) at current prices – into a pension guarantee fund. At least $1.2bn will be channelled into a stabilisation fund, originally set up under an agreement with the World Bank and now to be given permanent legal status.
Critics will say that much more of the money could be better spent now. Public health and education are deserving of investment, for example, especially if Chile aims to press its ambitions of being fully developed within the next decade or so.
Mr Velasco is increasing spending to meet an ambitious list of commitments, focusing on education. But he is aiming to save the bulk of the copper windfall. “Prices will not be this high for ever. You can’t have much higher spending at home and a competitive peso at the same time.”
Mr Velasco explains the new measures as being part of the same counter-cyclical approach that he says has been conducted successfully since the 1990s. Laws introduced by the previous government mean that governments are obliged to record an average fiscal surplus equal to 1 per cent of gross domestic product.
“We have dealt with the flows but now we are setting up mechanisms to invest the stocks that arise as a result. You have to have a policy towards stocks that is as transparent and as institutionalised as the policy on flows.”
It is an approach that differs from that being advocated by more leftwing leaders elsewhere in resource-rich Latin American countries. Hugo Chávez has raided both the Venezuelan state oil company and the central bank for funds, directing as much as $10bn into funds designed to pay for higher social spending.
Bolivia, which last week nationalised its gas industry, is using increased revenues from gas and minerals to pay for big increases in social spending, and Ecuador last year abandoned a stabilisation fund set up to use most oil revenues to pay down debt.
But Mr Velasco is sticking with fiscal prudence, arguing that Latin American history is littered with cases of badly managed commodity booms. The finance minister also argues that the sensible management of public finances can also help control the inflows of hot money that typically magnify the scale of upswings. Capital controls – which Mr Velasco, then an official in the same ministry, helped administer in the early 1990s – have been dismantled. But he says that the dogged pursuit of firm fiscal and monetary policies has had a similar positive effect.
“If fiscal policy is prudent, interest rates can be low, so you are not encouraging capital inflows,” says Mr Velasco. High rates in Brazil – recently cut but still at 15.75 per cent – have been one of the factors in the strength of the Real, which has performed even more strongly than the peso in recent months.
In addition, by refusing to intervene in order to maintain a targeted level for the exchange rate, Mr Velasco claims that Chile is avoiding the kind of speculative pressures that have brought bursts of currency appreciation in Brazil, for example. “In other markets investors test the ability of central banks to maintain a particular targeted rate. In Chile the central bank has no such target, so there is nothing to speculate against. Investors know that the risk of speculating is much higher.”