Since the financial crisis, emerging markets have often been presented as the last bastions of high returns. But the stars that shine the brightest can also burn the most, as many investors in China, India and Brazil have realised.
With its population of only 17.5 million people, Chile might not have the same appeal as the BRIC emerging markets of Brazil, Russia, India and China, but in 2012 alone it attracted more than $7bn-worth of greenfield investments, putting it in second position in Latin America behind Brazil, according to crossborder investment monitor fDi Markets.
“Investors want an opportunity, but they also want some certainty. And we provide the beacon of stability and we have proved it over time, with many different governments,” says Felipe Larraín, Chile’s minister of finance. He adds that the main principles of the legal framework for investors in Chile have not changed since they were drafted 40 years ago.
Stability and transparency seem to be paying off for Chile. In 34th position worldwide, Chile’s business climate is the best in Latin America according to the most recent World Bank Doing Business ranking (Brazil is ranked 116th).
That does not mean, however, that Mr Larraín’s job is trouble free. The price of copper, Chile’s main export, is 30% lower than its 2011 peak. Moreover, the pace of growth in China, the country that buys most of Chile’s copper and almost one-quarter of its exports, has decelerated. That, combined with the rising cost of copper extraction, has decreased the government’s share of mining revenues threefold, to about 10%, according to Mr Larraín.
Faced with this shortfall in revenues, the government could have levied a tax on existing investors, as is common in developing countries, especially in the mining sector. But Chile went ahead with structural reforms instead. “We had to come up with new sources of revenues, so we [conducted] a tax reform, reduced tax evasion and stimulated growth,” says Mr Larraín.
Chile is also in the process of diversifying its economy. “We are still heavily reliant on copper, I do not want to deny it, but we are on the verge of developing a broad export basket,” says Mr Larraín, who adds that apart from copper, fruit and wine, Chile is increasingly exporting its services.
The country’s growing competence in providing non-mining-related services is also reflected in FDI inflows. More than 36% of all new crossborder projects launched in Chile between 2008 and 2012 were connected with business services, software and IT, and financial services, according to fDi Markets. And as the Chilean economy diversifies, it will also expand at a decent 4% to 5% a year, according to central bank forecasts for 2013 and 2014. This gives hope that Chile will remain an emerging market star that can keep on shining for investors.