Breakingviews - Chile protests give investors a rude awakening

Demonstrators clash with security forces during a protest against Chile's state economic model in Valparaiso, Chile, October 21, 2019. REUTERS/Rodrigo Garrido

NEW YORK (Reuters Breakingviews) - Chile is supposed to be the golden child of Latin America, enjoying both political stability and a relatively sound economy, unlike most of its neighbors. So when deadly protests erupted this past weekend, it caught many by surprise – including investors in Chilean debt.

What sparked the unrest, in which at least eight people have died, was a decision by President Sebastian Pinera’s administration earlier this month to hike subway prices by 4%. That’s twice the rate of inflation, but by itself would not seem sufficient to prompt such violent mass demonstrations and scenes of military tanks rolling down the streets of the capital city of Santiago.

On the surface, Chile’s economy seems relatively strong. Its debt-to-GDP ratio is below 30%, compared with, say, the 105% ratio in the United States. Its fiscal deficit is less than 2% and inflation is fairly low.

But the explanation for the unrest stems from the cause of the increase in the cost of hopping on the metro. It was to help the government offset higher energy prices and the weakness of the Chilean peso. That belies how many of the country’s economic trends are moving in the wrong direction. Debt to GDP may be low, but it rose by almost 20 percentage points between 2007 and 2017. GDP growth may have hit 4% in 2018, but JPMorgan reckons it’ll be almost half that this year and next. And the currency declined by 23% against the dollar since the high in February 2018.

One of the driving factors behind this is the 20% fall in the price of copper since the beginning of 2018, which has weakened the country’s finances. Chile is the world’s top copper producer, with the base metal representing almost 50% of its exports. JPMorgan thinks the price could decline another 15% by the third quarter of 2020.

Despite all this, bondholders are demanding an interest-rate premium to U.S. treasuries of just 1.23 percentage points for Chilean government debt, a level that is well below its 2019 high despite the rising tensions. That may seem enormous in a world where Greece pays negative 0.45 percentage points. But Mexico and Brazil have to fork over around four times as much as Chile, with Colombia and Peru priced at 4.1 and 2.2 percentage points, respectively.

Investors were already looking too generous with Chile before the protests broke out. Now it seems they were asleep on the job.


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