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Chile
- Venezuela: The Hidden Weakness of a Strong Economy
Reuters/Paulo
Whitaker
Venezuela's President Hugo Chavez (L) shakes hands with his
Chilean
counterpart Michelle Bachelet during the XVII Ibero-American
Summit
in Santiago November 9, 2007.
By Mark
Turner
Tzu-kung
said, ‘If you had a piece of beautiful jade
here, would you put it away safely in a box, or would you try
to sell it for a good price?’ The Master said, ‘Of
course I would sell it. Of course I would sell it. All I am
waiting for is the right offer.’ Confucius, Analects,
Book IX, 13.
Here is a quiz for you: Which South American nation:
a) depends on one single product for the majority of its exports?
b) derives 35% of its total GDP from said product?
c) has relied on the sharp rise in world market prices for
its product to fuel growth?
d) has not added significantly to its international currency
reserves in the period?
e) is often lauded as the LatAm model economy by world peers?
f) may possibly be worried about forward macro effects of the
recent drop of over 20% in world market prices for its main
product?
If you guessed Venezuela then began to doubt your choice,
this analyst would not be at all surprised. The answer is Chile,
and the major product in question is copper.
Most people with interest in hard commodities
know that Chile is the world’s number one copper producing nation, and
it is also owner of the world’s biggest copper producer
in state-run Codelco. What most people do not realize is the
growing dependence Chile has on commodity growth due to the
rise in price of copper in this decade. Copper has always been
central to Chile’s economy of course, but in recent times
this dependence seems to have become a veritable addiction.
While revisiting the Chilean macroeconomic situation recently,
we were immediately struck by the similarity between the positions
of Chile and Venezuela, and began to wonder why Venezuela was
the recipient of such bad press for its virtual petroleum monoculture
economy while the growing dependence Chile has on copper was
all but ignored by otherwise astute economists.
Firstly,
some basic parameters. With a population of 15 million, Chile
has a little over half the citizens
of Venezuela. Therefore
when we see the 2006 GDP figures for Chile at U$205Bn and Venezuela
at U$176Bn (both purchasing power parity figures from the respective
central banks) and GDP per capita at around U$9000 for Chile
and U$6100 for Venezuela, it makes sense that Chile is classed
the “richer” of the two countries. The general
perception is that growth in Chile is of the “steady
and sustainable” type, which is based on exports, direct
foreign investment and demand from a developed internal economy.
As the above chart shows, GDP growth has been
fluctuating per quarter around this 5% level, but has been
far below that
of Venezuela. Venezuela’s well-publicized growth has
come almost entirely from the rise in oil prices, of course.
But Chile’s growth has been largely dependent on copper
in the same period, as the following chart begins to demonstrate.
Since 2004, the export mix from Chile has changed substantially.
Previously, copper made up between 35% and 40% of total exports
by revenue, but this figure has ballooned to 60% in recent
months. The correlation between this rise and the spot price
of copper is fairly straightforward.
And as the next graph further illustrates, copper is the clear
driving force behind the rise in export revenues.
According to central bank figures, Chile obtains 35% of GDP
from copper and copper alone, revenue coming from the state
run Codelco and from tax revenues from private mining companies.
Taxes on mining are comparatively low in Chile, with the base
rate set at 17%. Added to this is a 35% repatriation tax on
earnings for foreign mining companies as well as royalty payments
that range between 0.5% and 5% of gross revenues depending
on amount of production per company, tax regime and spot commodity
prices. However the state also offers significant tax breaks
to foreign companies in the form of asset depreciation credits.
In recent times, Chile has also tightened up tax loopholes
that previously allowed foreign miners to avoid the full burdens
via transfer pricing to parent companies abroad.
Coincidentally, according to the Banco Central
de Venezuela (BCV), 35% of Venezuela’s GDP also comes via its main
export, that of oil. In the case of Venezuela, around 80% of
revenues come via its state-run oil company, PdVSA, with around
20% currently made by private (and mostly foreign) oil companies.
In the next chart we see the total percentage of export revenues
that come via oil in Venezuela and copper in Chile, and although
Venezuela’s dependence is clearly stronger, copper in
Chile is playing catch-up. To recap, 35% of Chile’s GDP
and 67% of its exports currently come from copper. 35% of Venezuela’s
GDP and 88% of its exports come from oil. But despite this,
the perception is that Chile has a far more diversified economy.
Exports alone do not tell the full macro story,
of course. We shall therefore take a look at some other macro
indicators
to measure the two countries. When it comes to inflation, Chile
runs headline figures that beat Venezuela easily. Although
Chile’s inflation rate has recently crept up from under
3% to the present 3.7%, it is still well below the Venezuelan
rate that has fluctuated between 15% and 20% this year. However
the following chart demonstrates that, surprisingly, the real
world effects of inflation have been more severe in Chile than
in Venezuela. The chart compares salary growth of the two nations
with inflation via the consumer price indices. As we can see,
Salaries have kept up with and in fact beaten the price rises
in Venezuela, but in Chile’s case the reverse is true.
Venezuela has also made the best progress in combating unemployment.
The next chart shows the seasonally unadjusted rates for both
countries, and Venezuela has managed to cut unemployment in
half since the dog days of the PdVSA strike in 2003. Chile
has also made progress on this score, but the progress has
been more moderate.
But on the subject of international reserves,
there is no contest. Venezuela has managed to grow its safety
cushion of
international reserves significantly in this period, and even
allowing for the U$5Bn withdrawn from the system by President
Hugo Chávez in early 2007 to fund social programs, Venezuelan
reserves have more than doubled since January 2003. On the
other hand, Chilean reserves have stayed stubbornly at the
same level in all this time, despite the boom in copper prices
that has been every bit as impressive as oil prices. However,
for whatever reason Chilean international reserves never seem
to command the column inches of the Venezuelan figures. This
analyst remembers the shock and gloom stories from publications
a reputable as the London Financial Times in May 2007, bemoaning
the drop in Venezuelan reserves to U$24Bn and predicting all
sorts of problems in the near future. Since then reserves have
risen to the current U$30Bn level, and the press has been strangely
quiet on the subject. One wonders why.......
So which country is more prepared for any downturn
in international commodities prices? The above figures seem
to suggest that
Venezuela is better placed than many imagine to ride out any
forward weakness, but Chile’s more diversified economy
should also be taken into account. Although Chile is obviously
dependent on copper, it is worth noting that exports of other
products have increased in the period in question. As the next
chart shows, exports in absolute terms of non-metallic goods
have risen in the course of this decade as Chile is also a
major exporter of products such as fish, fish meal, fruits,
wines etc. Chilean exporters though are fighting an uphill
struggle against a perpetually rising currency.
Notwithstanding, the progress made by Venezuela in accumulation
of international reserves far outstrips that of Chile, even
though the more southerly nation runs a type of current account
with the IMF that allows it to deposit and withdraw funds at
any given moment in an attempt to allow smoother expenditure
over the irregular period of income from commodities.
As for that future, recent price action suggests
that Chile’s
main export is looking weaker than that of Venezuela’s.
LME spot copper has fallen over 20% in recent weeks, but the
rise of oil on world markets to near U$100/bbl levels hardly
needs much further comment here. Present copper weakness has
been fuelled by the 18% YoY production rise inside China, with
many analysts predicting that the world’s largest consumer
will not be buying so much at the world market in 2008. ICSG
figures currently point to world supply and demand at an equilibrium,
which differs sharply from the supply constraints in petroleum
products that come more from limited capacity growth in refineries
more than the supply of crude from the ground or geopolitical
pressures.
It should be stressed that direct employment in Chilean mining
and Venezuelan oil makes up around 1% of the total workforce
of each country, so the effects of a downturn would not show
themselves in any layoff measures from either sector. However,
in the same way that PdVSA is the main wealth producer in Venezuela,
the copper mining industry in Chile plays the same role. In
a 2006 survey by Ecoconsult, 92% of wealth creation in Chile
was confined to Codelco and two other major copper miners.
Politically, Chile has been coming under greater pressure
from its populace to spend more of its copper windfall. Polls
suggest that two out of three Chileans want its government
to relax the saving rules with the IMF and spend more of the
windfall on social projects. This makes sense in a country
that is ostensibly prosperous, but in fact runs the second
highest level of social inequality in the LatAm region.
Conclusion
We chose Venezuela as the mirror to reflect
on the state of play in today’s Chile for two main reasons, namely the
dependence on one single export for the ongoing well-being
in the countries and the vast difference in perception amongst
other nations towards the countries. The administrations of
both countries profess to be socialist, but the government
of Hugo Chávez in Venezuela has, rightly or wrongly
and for various reasons, a polemic position amongst fellow
nations, with many seemingly desperate for the time that its
president is toppled due to a sudden drop in oil prices. However
the sound reputation and good standing of today’s Chile
is to a very great extent also highly economically dependent
on a single export, but for whatever reason it does not grab
the limelight in the same way as Hugo’s black gold.
We therefore wonder how much the ‘A’ rating S&P
has on Chilean sovereign bonds has to do with purely economic
concerns and how much political stability seeps into the equation.
We are sure the stability (or the lack thereof) will be front
and center in both countries if the price of copper and oil
take a sudden and drastic turn for the worse in the next few
years.
Mark
Turner is a cognitive scientist, linguist, and author. Petroleumworld
not necessarily share these views.
Editor's
note: This
commentary was originally published by Latin
America EconoMonitor, RGE Monitor, on 26
November 2007. Petroleumworld reprint
this article in the interest of our readers.
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