Mobius on Chile

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The following comments about Chile have just been received from Mark Mobius, Templeton Asset Management’s emerging markets guru:

If anyone talks about Chile these days, it would probably be about the late February earthquake which measure 8.8 on the Richter scale, the strongest in more than 100 years. The country has had a history of large earthquakes and since 1973, there have been 13 of 7.0 magnitude or greater.

There were major problems with electricity lines down, security challenges with looting of supermarkets and shops by people desperate for food. It is estimated that the earthquake impacted 13% of Chile’s GDP, which means that 87% of the GDP was not impacted.

I was in Chile two weeks before the earthquake and was shocked and saddened to hear of the impact of the powerful earthquake. I have an apartment in Chile and although the building was not destroyed and is structurally sound, cracks formed in various parts of the apartment. Since copper and other minerals are Chile’s major exports, it was important to learn that the mining industry in the north of the country was not impacted by the earthquake.

The Chilean government generally gets high marks for their handling of the crisis but, of course, the repair work will take time. Fortunately in times of high copper prices, the government sets aside money in an emergency fund for economic and social stabilization. We must accept that earthquakes, volcanic eruptions and other natural phenomena have been with us in the past and will continue in the future. Chile, too, has experienced such events and has been able to recover and prosper. We believe this will be the case this time as well.

It is impossible to give an accurate assessment of the amount of money required to make all the repairs but one estimate is that it could potentially reach US$20 billion. The Social Stabilization Fund totals US$11.3 billion or about 7% of GDP. The central government debt is low with a debt to GDP ratio of only 6% at end of 2009 and the country is a net creditor. So it will be relatively easy for the government to raise finance for reconstruction by issuing Peso debt in the local market, sale of its foreign currency savings and finance from the World Bank or Inter-American bank. The government will probably try to limit foreign currency financing in order to prevent an appreciation of the Peso against the US Dollar so as to keep exports competitive.

Chile is now undergoing peaceful political change. In mid-January, Harvard University-educated, Sebastian Piñera, who has a PhD in economics, was elected President of Chile. He is the first democratically-elected conservative president in over 50 years. We don’t expect a dramatic shift in the conservative fiscal policies that have been pursued by the government but Mr. Piñera is expected to pursue more aggressive policies to move Chile towards greater dynamic growth. We expect the country to continue to be a Latin American leader in terms of its management of the economy, encouragement of investment both local and foreign, and its stable policies.

During our recent visit, we called on the management of the company that has one of the lowest cost copper mines in the world, located in the Los Pelambres area, 200 km northeast of Santiago de Chile. It is now expanding into another region in Chile as well as embarking on a copper project in Pakistan and a copper-nickel-platinum project in the state of Minnesota in the U.S. Copper demand continues to rise globally. The major use (over 70%) for copper is of course, for electricity transmission. Some competition comes from aluminum for high-tension lines because of its lighter weight but energy losses are higher than for copper.

Turning to the consumer market, we met with management at the bottler for Coca-Cola products and other drinks. The company is not only operating in Chile but also in Argentina and Brazil. Their big worry is the cost of sugar. In Brazil, they are looking forward to the Soccer World Cup and the Olympic Games in Rio, which will have a positive impact on their volumes. International prices for sugar have risen to US$750/ton vs. only US$250/ton two years ago. The higher sugar costs are partly offset by stronger local currencies and the decrease in PET resin prices. In Chile, they are expanding with a new facility outside of Santiago valued at US$70 million.

Click here for the full article.

Source: Mark Mobius, Franklin Templeton Investments – Emerging Markets Overview, March 2010.

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