Alicia Chevy writes: As one of the most competitive economies and financial market in the region and worldwide, Chile projected itself as a strategic destination for foreign investments over the past two decades. Emerging from the disastrous Pinochet dictatorship in 1990, the Andean country established strict political and legislative safeguards to lower corruption levels and protect judicial processes, democratic values, and investments.
The new government’s efforts successfully created strong confidence in the new political system, improving transparency and corruption indexes, and solid financial and legal institutions. From these reforms, high inflows of FDI followed and Chile became the world’s 11th largest recipient of FDI in 2012.
Thus, over the past 10 years, it became clear that Chile had the potential to become a powerful player in the region, as its GDP grew at an average annual rate of 4.6% from 2005 to 2012.
Influential institutions like the World Economic Forum recognized Chile as one of the top countries with the best macroeconomic environment. Investors have benefited from Chile’s strongly legislated guarantees, such as protection on copyrights, and from its strategic trade agreements with 59 countries, including Free Trade Agreements.
With no restrictions on capital flows, promotion of private investment incited by tax exemptions, and a flat tariff of 6% on imports from other countries, Chile became the Golden Boy of Latin America for investments.
While the country proved its resilience in facing international crisis, its flexibility to address domestic problems has been challenged over the past year. Corruption and finance-related scandals in the public sector erupted, shaking Chile’s image as a regional role model.
Incoming accusations involving influential politicians in illegal campaign financing were the cherry on top. The Chilean Miracle became a mirage.
Along with the political scandals and a harsh month of natural disasters, President Bachelet was sidetracked from implementing her reform agenda and addressing the economic slowdown.
As its main export is copper, Chile’s energy sector’s and economy’s health depends heavily upon commodities’ global development and the growth of its major consumer, China. Along with changing global energy policies, China’s demand for copper and commodities has slowed down, deeply affecting Chile.
Moreover, sharp declines in the price of copper weakened investments in the mining sector and GDP growth over the past two years. Economists have also accounted falling employment rates and limited monetary tools for driving the economy and currency value down.
Consequently, major manufacturing and mining companies have expressed their concerns regarding Chile’s current economic environment.
To tackle the recent political and economic crises, Bachelet’s administration proposed several reforms. For instance, tougher regulations on government and public sector officials aim to reduce pervasive corruption in the public sector and help the president regain her popularity.
Overall, Bachelet and her administration have sought to reassure investors in health, energy and other major sectors in recent months. Energy Minister Maximo Pacheco devised a plan to boost energy investment and stopping the nefarious impact that drastic change in copper prices have on the economy.
Through early signs of economic recovery in January, Chile showed its aptitude in facing challenging domestic and international conditions.
Chile’s reputation as an ideal business destination and its institutional strengths remain largely spotless.
Despite the recent corruption scandals and financial problems, Chile remains an attractive investment destination.
