Sebastian Pinera was sworn in as Chile’s new president Sunday with one major task ahead of him -- converting the euphoria in the business community surrounding his election into investment.
If Pinera can do that, it will be a big step towards achieving his pledges of cutting taxes, boosting pensions and narrowing the fiscal deficit, said Andres Abadia, senior economist at Pantheon Macroeconomics. His first act in office was to promise more funds to the child protection agency.
“Growth is fundamental, not only to create good jobs, improve salaries and create opportunities for small companies, but also to generate the resources needed to finance public spending,” Pinera said after assuming office.
The billionaire has the economic winds in his favor. The price of copper, Chile’s leading export, has jumped more than 50 percent in the past two years, and output of the red metal is rising again. The outlook for other exports such as lithium and fruit is also improving on soaring demand from China. As the global environment improved and Pinera prepared to take office, business sentiment leaped to a near five-year high last month.
“Sebastian Pinera’s election has generated a boost to investor and business confidence,” Abadia said. “I’m sure that will translate into a gradual increase in investment.”
Pinera is taking over from Michelle Bachelet, who raised corporate taxes in order to finance the introduction of free higher education and increased health spending, just as copper prices tumbled. As growth slumped across Latin America, Chile suffered its slowest four years of expansion since the early 1980s. During his first term from 2010 to 2014, Pinera oversaw growth averaging 5.4 percent.
The outlook for the economy started to pick up before Pinera even won the second round of Chile’s presidential election with a larger-than-expected majority. Rising copper prices had already led analysts to start raising their growth forecasts.
As copper prices rally, companies could pull the trigger on five or six projects larger than $1 billion over the next four years, according to Diego Hernandez, president of Chilean mining association Sonami.
“This time a year ago, no one was ready to invest billions in a mining project,” Hernandez told Bloomberg earlier this year. “But we will start seeing that now. Once we see one or two large investments, there will be a chain reaction and others will follow.”
It isn’t just the mining industry that is picking up though. The Imacec index, a proxy for gross domestic product, expanded at the second-fastest pace in four years in January, rising 3.9 percent from the year earlier. Excluding the mining industry, it gained 3.5 percent.
“In the external environment, conditions are favorable, especially due to the expanding Chinese economy,” Abadia said. “Still, investors shouldn’t expect miracles. There are a lot of risks on the horizon.”
Those risks include a potential slowdown in the Chinese economy, a trade war triggered by U.S. protectionism and rising U.S. interest rates.
To sustain the rebound in growth, Pinera needs to boost productivity and diversify the economy, Abadia said.
Pinera may have an extended honeymoon period ahead of him as copper rallies, but ultimately he must face a series of challenges.
“Growth needs to be encouraged with reforms and the reaching of agreements,” Bernardo Larrain, president of the business group Sofofa, said on his Twitter account last week. “Having the wind in our favor is not enough.”
(Updates chart to show results of latest analyst survey.)
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