Exodus of wealth ruins Chile’s appeal on Wall Street

Chile, Latin America’s leading economy for most of the past 50 years and a Wall Street darling, is facing an existential dilemma on many counts.

Its Milton Friedman-inspired Constitution is still intact, for now.

But virtually everywhere you look, the pillars of the country’s free-market system — from private pensions and healthcare to the tax burden on big business — are under attack following the election of its most left-leaning president in decades.

This is having a chilling effect on the wealthy class of the country.

From the third floor of a large glass building in the prosperous El Golf neighborhood of Santiago, Juan Ignacio Correa, a partner at the Avante multi-family office, recalls that many of his clients used to keep up to 70% of their wealth in local assets and only 30% abroad, an unprecedented proportion elsewhere in the region and a sign of confidence in the country’s economic model.

“I would say that today, it is precisely the other way around,” said Correa. “Basically because there is a fear of what is happening here in Chile.”

The change in the level of confidence is so abrupt that, if left unchecked, it puts Chile at risk of facing problems as a Latin American investment destination similar to those of Brazil, Mexico or Colombia, if not in a market pariah like Argentina and Venezuela.

Since millions of Chileans took to the streets in 2019 to protest massive inequality—one of the most glaring shortcomings of the current system—and demand changes in free-market policies, investors have moved more than US$50 billion out of the country, according to data from the central bank until September.

That is equivalent to roughly one sixth of Chile’s annual economic output.

While President Gabriel Boric urges a redistribution of the wealth that Chileans produce, money continues to flow out of the country, albeit at a slower pace than before.

With the country facing an unprecedented mix of economic, social and political turmoil, observers say capital flight will significantly limit Chile’s ability to remain the dominant economic force in the region that it once was.

We are in “a new state where the investor or the family or the company sees their new reality, with higher risks, a vulnerable economy and a tangled political scene. That remains permanently,” said Sergio Lehman, chief economist at Banco de Crédito e Inversiones.

“You have a lower investment rate and therefore lower long-term growth.”

A representative of Chile’s finance ministry declined to comment.

Of course, Boric’s ability to advance his progressive agenda has taken a hit in recent months as his approval rating falls to an all-time low and criticism mounts over rising crime and accelerating crime. inflation.

However, that gives Chile’s upper class little comfort. The fear is not that Boric will simply chase his wealth, but that his policies will weigh on an economy that could shrink as much as 1.75% this year, according to central bank predictions.

That is in stark contrast to the so-called “Chile miracle,” coined by Friedman to describe the nation’s rapid economic expansion after it implemented open economic policies, including deregulation and privatization, in the 1970s and 1980s under the Augusto Pinochet dictatorship.

The approach outlived leaders and parties of all political persuasions after the nation returned to democracy in the 1990s.

However, it has also helped generate vast inequality and, more recently, fuel social unrest. Despite years of steady economic growth, the country has one of the largest gaps between rich and poor among the 38 nations in the Organization for Economic Cooperation and Development.

In recent months, many of Chile’s largest companies have also begun to reduce their exposure to the local market.

Last year, Empresa Nacional de Telecomunicaciones sold its fiber optic assets to a group that included KKR & Co., while electricity provider Enel Chile sold its transmission lines to a unit of Canada’s Ontario Teachers’ Pension Plan and Alberta Investment Management Corp. and SM Saam—a unit of the Quiñenco conglomerate owned by the Luksic family—sold US$1 billion in port and logistics assets to Hapag-Lloyd.

As money from asset sales comes in, shareholders and executives have shown little interest in reinvesting.

Companies in the 57-member Chilean IGPA index paid a record US$13.2 million in dividends in 2021 and another US$13 million in 2022, more than double the previous two years, according to Dolphin Markets.

The lack of new investment is holding back the country’s long-term prospects.

The Central Bank of Chile lowered its trend growth forecast for the next decade from 2.8% to 2.1% in December. He also raised his forecast for the nation’s neutral interest rate to 3.75% from 3.5%.

“It is an abysmal loss of competitiveness for Chile,” said Gonzalo Trejos, head of strategy at Quest Capital. “And there what can happen with something that is very cheap is that it can continue to be very cheap for a very long time.”

SLOW RETURN

Still, some say there are reasons for optimism.

In September, Chileans overwhelmingly rejected a new Boric-backed constitution that critics say would have restricted investment and growth, eroded essential checks and balances on power, and led to increased fiscal spending.

“Due to the rejection of the new Constitution and other processes that have been moderated, we have seen the return of money to Chile in an incipient manner and with very little volume, especially for some opportunities in the local fixed income market,” said Gonzalo Córdova, general manager of asset management at LarrainVial.

Others, like Avante’s Correa, argue that there is little to suggest that investors will return to domestic markets in any significant way anytime soon.

“The people who took the money will never bring it back,” Correa said. “How is the local economy recomposed? It is recomposed with new wealth, new people who begin to generate wealth. And that takes time.”

With information from Bloomberg