Replacing Brazil as a potential regional leader and as a viable destination for successful businesses, the Andean country has become the go-to-market of Latin America. However, with recent political scandals many investors are questioning their vested interests in the country.
As one of the most competitive economies and financial market in the region and worldwide, Chile projected itself as a strategic destination for foreign investments over the past two decades. Emerging from the disastrous Pinochet dictatorship in 1990, the Andean country established strict political and legislative safeguards to lower corruption levels and protect judicial processes, democratic values, and investments.
The new government's efforts successfully created strong confidence in the new political system, improving transparency and corruption indexes, and solid financial and legal institutions. From these reforms, high inflows of FDI followed and Chile became the world's 11th largest recipient of FDI in 2012.
Thus, over the past 10 years, it became clear that Chile had the potential to become a powerful player in the region, as its GDP grew at an average annual rate of 4.6% from 2005 to 2012. Chile's flexibility to face international conditions was also proven during the European debt crisis in 2012, when its GDP growth expanded to 5.6%.
Influential institutions like the World Economic Forum recognized Chile as one of the top countries with the best macroeconomic environment. This ranking, among others, has reinforced the country's economic stability and dynamic business climate hallmarks to investors.
Investors have benefited from Chile's strongly legislated guarantees, such as protection on copyrights, and from its strategic trade agreements with 59 countries, including Free Trade Agreements.
With no restrictions on capital flows, promotion of private investment incited by tax exemptions, and a flat tariff of 6% on imports from other countries, Chile became the Golden Boy of Latin America for investments.
Trouble in Paradise
While the country proved its resilience in facing international crisis, its flexibility to address domestic problems has been challenged over the past year. Corruption and finance-related scandals in the public sector erupted, shaking Chile's image as a regional role model.
As former government officials and top executives from Penta Group - one of the major holding companies in Chile - were arrested on the accounts of bribery and money laundering, President Bachelet's direct family members were also involved in recent financial probes.
"Pentagate" and President Bachelet's family scandal became a test for the 20-year-old judicial and democratic system in Chile. A recent article even stated "Chile is going through its worst crisis since the end of military rule."
Incoming accusations involving influential politicians in illegal campaign financing were the cherry on top. The Chilean Miracle became a mirage.
Thus, entering her second term, Chilean President Bachelet saw her approval ratings plunge to their lowest level ever this past month. Along with the political scandals and a harsh month of natural disasters, the President was sidetracked from implementing her reform agenda and addressing the economic slowdown.
Golden Boy has copper problems
As its main export is copper, Chile's energy sector's and economy's health depends heavily upon commodities' global development and the growth of its major consumer, China. Along with changing global energy policies, China's demand for copper and commodities has slowed down, deeply affecting Chile.
Moreover, sharp declines in the price of copper weakened investments in the mining sector and GDP growth over the past two years. Economists have also accounted falling employment rates and limited monetary tools for driving the economy and currency value down.
Consequently, major manufacturing and mining companies have expressed their concerns regarding Chile's current economic environment. In particular, Louisiana-Pacific, a manufacturing company with a $70 million investment project in Chile, stated that it may delay its plans due to the economic decline.
