Nov. 1, 2010 -
PRLog -- In our Q310 Chile Business Forecast Report we focus on the likely impact the devastating earthquake of February 27 will have on Latin America's fifth-largest economy. With the reconstruction effort in the central areas of the country most affected by the disaster set to dominate the political and economic agenda for the time being, we examine the extent of the tremor's effect on Chile's economic prospects over the medium term. A key theme across the report is that, while growth will undoubtedly slow in the middle part of 2010, the earthquake will not divert the country from its positive economic trajectory, and the solid macroeconomic fundamentals that have been the hallmark of its recent economic growth story will remain in place. Rather, strengthening domestic demand coupled with a centre-
right, market-friendly government will see the country continue to be a regional outperformer. With the peaceful handover of power in March 2010 to Sebastián Piñera as Chile's first democratically elected rightist president since 1958 marking a further major step forward in the country's transition to becoming a fully fledged liberal democracy, we outline potential scenarios for political change over the coming decade. While Piñera's victory was a powerful indication that Chile has emerged from the long shadow cast by its authoritarian past, it also constitutes a major shift in the political landscape. Combined with ongoing problems associated with entrenched inequality, and an external economic climate that is likely to prove challenging for some time to come, these dynamics could threaten the stability of the country's political risk profile over the long term. That said, our core view remains that the political sphere's success in fending off challenges will persist, ensuring that Chile continues along a moderate political course over the coming decade. With rebuilding at the forefront of the political and economic agenda, Chile's medium-term economic outlook will be largely determined by the timing and extent of the reconstruction effort. While we expect an immediate slump in economic activity in Q210 to bring a temporary halt to the post-crisis recovery cycle, we believe that this will be followed by a major uptick in activity as reconstruction efforts get into full swing, and are revising up our 2010 real GDP growth forecast to 5.2%, from 5.0% previously. Although the government will play a crucial role in funding reconstruction we believe that the Piñera administration will be keen to divert the rebuilding burden away from the state, offering considerable opportunity for foreign investment. Looking further ahead, we examine the potential consequences of a double-dip downturn in China for Chile's vital export sector, and suggest that having been a major blessing, Chile's trade relationship with China could become something of a curse as growth rates in the world's third-largest economy slow heading into 2011. While the devastation wrought by February's massive earthquake will certainly undermine Chile's impressive business environment for the time being, we believe that the huge reconstruction efforts about to get under way offer the potential for significant longer-term benefits for businesses operating in the country. Indeed, near-term inconveniences caused by disrupted transport links and concerns over electricity supplies could soon be outweighed by upgrades to Chile's infrastructure sectors, as reconstruction projects raise standards and improve facilities across the physical operating environment. Furthermore, with Piñera's free market convictions likely to see him seek out private sector involvement in the reconstruction wherever possible, the post-earthquake period will see scope for significant foreign investment in the country, which, if managed well, could boost the country's longer-term economic prospects.
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