SANTIAGO Aug 25 When Betty Villalta opened her
bakery in a working-class neighborhood of Santiago four years
ago, she thought her business was pretty much recession proof.
But in recent months she has been selling pastries in the
street to keep the money coming in as bread sales have slid and
flour prices have risen. Three businesses on her street have
closed their doors this year.
"They say food, and especially bread, is something people
need, that it has to be eaten. But that's not the reality, now
they are even saving on bread," she said.
Villalta is not alone. When mining investment first began to
cool in top copper exporter Chile last year, consumer sales
remained robust. But now the slowdown is being felt hard in the
wider economy, compounded by a weaker peso currency that means
the cost of imported goods has risen.
Last month, data showed consumer sentiment turned negative
for the first time in two years, sales of new cars have tumbled
and retail sales growth has decelerated from double digits a
year ago to an anemic 2.3 percent.
Most economists now predict overall growth in Chile's
economy of between 2.0 and 2.5 percent this year, down from 4.1
percent in 2013.
"There is evidently a pretty big deceleration," said
Bernadita Silva from Chilean retail business chamber CNC.
"There are two things going on: people are buying less, they
are definitely buying less, that is clear, and in supermarkets
perhaps they are substituting or looking for other channels,
like going to a market."
Many of Latin America's commodities-reliant economies have
struggled this year, hit by worries about Chinese growth and the
withdrawal of U.S. monetary stimulus.
In recent years, bond-buying by the U.S. Federal Reserve and
international low borrowing rates helped fuel gains in
commodities like copper as investors sought alternatives to
low-yielding assets. A more recent recovery of the U.S. economy
and tighter monetary policy is reversing this effect.
Chile, one of the region's most developed and open
economies, is particularly susceptible to these factors.
Its income is heavily dependent on the veins of copper that
snake under its arid, high-altitude Andean north. Of the around
$77 billion of goods Chile exported in 2013, over $40 billion
was in copper, according to central bank figures.
Nearly half of global demand for the metal comes from China.
But as China's housing market has slowed, demand for copper
and the copper price have fallen in tandem, and
investment in mining has dried up. Low ore grades and high
energy costs make Chilean copper particularly expensive to
As investors see Chile as a less attractive prospect and the
central bank has cut the benchmark interest rate to stimulate
the economy, the peso has weakened, falling to a
five-year low against the dollar, making imports more expensive
and driving up inflation.
For Cristina Galindo, who runs a printer supplies store in
an affluent Santiago neighborhood, that means the cost of the
imported printer cartridges she sells has risen sharply, leading
her clients to switch to cheaper refills.
"Honestly, I was about to close my business and had to pay
the expenses with my own money," she said. In order to save
costs, she has dismissed her only employee.
Although Chile's overall unemployment rate, at
6.5 percent, is still near historic lows, BCI economist Antonio
Moncado said the number hides a different story: that
lower-paid, poorer-quality jobs were increasingly replacing
"If that continues in the coming months ... we could find
ourselves with an environment where families have less
disposable income and probably consumer data is going to
continue deteriorating," he said.
Chile's bigger retail companies have so far emerged largely
unscathed from the slowdown, but that may change as lower
consumer spending feeds through to earnings and
heavier-than-usual discounting eats into margins, analysts say.
Larger retailers like market leader Falabella and
supermarket and home improvement group Cencosud have
expanded throughout the region, making them less exposed to a
downturn in one country, although Chile still accounts for
nearly three-quarters of Falabella's earnings and over half of
President Michelle Bachelet's center-left government, which
took power in March, plans to push through a package of
wide-ranging reforms, although business leaders and the
right-wing opposition say now is not the time for new
legislation that could weigh on investment.
In particular, they say a tax reform bill currently going
through Congress creates short-term headwinds due to uncertainty
and increased bills for business in the longer term.
But Bachelet and her ministers insist the bill is needed to
pay for education and health reforms as part of a broader drive
to tackle inequality. Significant changes to the agenda could
cost the government dearly at the polls and in the streets,
where social movements are demanding change.
Still, Chile's economy has not entered recession and the
shopping malls that dot Santiago, filled with well-known U.S.
brands, hum with activity.
"People still continue going because they really like to go
shopping, to visit the mall," said the CNC's Silva. "The point
is, are they buying?"
(Editing by Meredith Mazzilli)