Despite Shining Economic Results, Chilean Peso Declines Against USD

Chile is on its way to achieve the cult status of developed country, as stated by Felipe Larrain, the Finance Minister of the country. Larrain stated that the country has exceeded the expected growth and may become the first country ever in South America to reach the landmark if the growth sustain throughout the year. To meet the target, the per-capital gross domestic product should reach at least to $22000 a year as well. Incidentally, Chile’s GDP increased by 6% in 2011 and probably will enhance by 5% more in 2012. This increase in GDP is more than double of the average growth of the world and Chile was already featured as one of the top 10 fastest-growing countries in the world in first half of 2012. Chile is also the lone country in Latin American region to be a net creditor. Incidentally, the Latin American region, on a whole has shown growth of 2.9% in its economy in 2012.

The largest copper producing country in the world is consolidating on the growth in such a situation when Euro regions are not showing enough growth and US is under risk of another recession due to the so-called fiscal cliff. Larrain accepted the fact that Chile’s economic development is not full proof and they can still get affected by what’s happening all over the world. He mentioned that the prices of Copper are already seeing effects of the modest worldwide economy. However, he added that the strength of Chile’s economy doesn’t only depend on a few sources and there are other factors which should keep it going.

The Government also released reports related to investment growth as the same increased by 8% in the 2nd quarter of 2012. Cesar Perez-Novoa, the Co-Head of Research Department of BTG Pactual, rightfully stated that the basis of growth for Chilean economy is its strength on labor and finance market. At the same time, he mentioned that education and health care need special care as well and if the infrastructure can be improved, the pace of Chile’s economic growth will flourish further.

When it comes to income inequality, Chile, however, still needs to show improvement. It currently has the highest level of income inequality among Organization for Economic Cooperation and Development’s 34 members. Gini Coefficient, which is used to gauge the income gap of a country, measures at 0.497 for Chile. The same is 0.378 for US and 0.476 for Mexico. Incidentally, if the coefficient has 1 value, it denotes complete inequality.

The Chilean Government believes that the price of copper may decrease by 12%, but, it is not going to get back to the $2-$2.5 region any time in near future. As Larrain stated, the worldwide spread Copper market has seen a structural change. Incidentally, Copper accounts for more than half of the country’s exports currently. Larrain also clarified that the Government is thinking of putting a contingency plan in place. According to this plan, if Chile is hit hard due to the worldwide economy, the Government will still keep $15 billion worth sovereign wealth fund to stimulate investment.

Amidst all the positivity, the major currency of Chile, Chilean Peso, however has seen decline. It is 0.2% down and is currently valued at 484.78 per USD. IPSA Index, the benchmark stock index of the country, on the other hand has gained 2% and closed at 4187.73.

Central Bank of Chile has already declared that it will allow banks to pawn Chilean Peso bonds in exchange of cash, once in a week, only till 18th December, 2012. As Larrain confirmed, the Government has no problem in providing the Central Bank with extra liquidity and it may even repeat the auctions of dollar deposits, just like 2011. Incidentally, due to several factors such as: companies with Chilean Pesos taking money out of short-term debt funds or seeking cash to bolster balance sheets – during the last 2-3 months of the year, Chile’s liquidity often falls down.

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