About this time last year, when Chileans were feeling flush and the local economy was hotter than perhaps any other on Earth, Norberto Araya marveled at the way money was being thrown around.
A salesman at an eyeglass shop in downtown Santiago, Araya had grown accustomed to watching cash-strapped customers bring in old frames for repair work again and again. Suddenly, they were walking in, plunking down stacks of pesos and walking out with brand-new glasses. His sales soared 40 percent.
A couple of blocks down the street, at House Tattoo Rock, the phone was ringing off the hook. So many people wanted tattoos, says Johan Vicentelli, that he was booked solid for two months.
And now? Vicentelli sometimes goes a day without a single customer. Ditto for Araya: “It’s bad,” he says.
This is the bust that follows the boom. Perhaps it’s not entirely unexpected. But what’s shocking to many in Chile, a country that’s long prided itself on having the most stable economy in all of Latin America, is the sudden nature of the turn toward stagflation. It’s happening far more quickly and violently here than across the rest of the globe.
Inflation has skyrocketed to 13 percent. Only perennially crisis-stricken Argentina and Venezuela post higher rates in the region. The price of many goods is now out of the reach of everyday Chileans. Retail sales in the Santiago metropolitan area tumbled 18 percent in July. Just a few months earlier, they were still soaring by double-digits. The consensus now is that the economy will slide into recession in the second half of the year. It grew 11.7 percent in 2021.
“This is kind of a hangover from the spending party we had,” said Felipe Alarcón, chief economist at EuroAmerica, a Santiago-based financial firm. As painful as a recession will be, he said, it’s almost desirable right now to “bring spending back to sustainable levels.”
That all this comes just as Gabriel Boric, Chile’s most leftist president since Salvador Allende, settles in to his first year in office, fraying nerves in Santiago’s country clubs and C-suites. The fact that a referendum will be held this weekend on a proposed overhaul of the constitution isn’t helping sentiment any either.
Investors have been yanking so much money out of the country, despite interest rates that are at a 24-year high, that the central bank had to pump billions of dollars into the foreign-exchange market to stabilise the peso. On Monday, the International Monetary Fund said it approved an US$18.5-billion credit line to help Chile weather an increase in global risks.
The spending binge also played a big role in sinking the peso. All that shopping sparked a doubling in the country’s import tab in the past two years that drained dollars from the country. The current account deficit swelled to the equivalent of 8.5 percent of GDP in the second quarter, the biggest in at least two decades.
The boom began in a somewhat similar fashion to the consumption-led rebounds that took place in countries like the US and Canada in the wake of the pandemic. But whereas the governments there handed piles of cash to workers to help them get through lockdowns, Chileans were given the option to tap their own retirement savings. Many of them did again and again.
As of July, holders of individual pension accounts had withdrawn 41.5 trillion pesos (US$47 billion at today’s exchange rate) in three separate rounds. Additionally, Chile rolled out one of the biggest fiscal stimulus programs in the region with about US$35 billion in direct transfers.
In a US$300-billion economy, those kinds of cash injections supercharged domestic demand, giving Chile an additional local driver to the wave of inflation that washed through economies around the world. Adding fuel to the fire is Chile’s heavy dependence on imported hydrocarbons, with pump prices rising for 52 straight weeks.
Now, as inflation-fighting measures put a brake on the global economy, Chile is once again standing out -- this time for how quickly it’s slowing.
With funds in individual checking accounts falling to levels last seen in the darkest days of the pandemic, domestic demand is in the process of a necessary slowdown, says Finance Minister Mario Marcel, a former central bank boss who warned that early pension withdrawals would pressure inflation.
“The economy needs to leave behind the current situation of excess spending, and it has started,” Central Bank President Rosanna Costa told a business event last week.
Economic turbulence is playing out as Chileans prepare to head to the polls on Sunday to decide whether to adopt a new constitution that would replace a charter that dates back to the dictatorship of Augusto Pinochet.
The new document was drafted by a left-leaning convention, and analysts warn that its approval would spur capital flight. To be sure, polls indicate it will be rejected. But that wouldn’t spell the end of the uncertainty as President Boric has indicated he would kick off a new constitutional process.
At the same time, his government is moving forward with proposed tax hikes that the copper industry warns would curb investments. The tax debate is playing out as the economy is expected to grow just 0.3% next year, the slowest in the region.
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“Chile has a fairly high level of political risk compared to other countries in the region,” said Andrés Abadia, an economist at Pantheon. “And this is long term until we know what is going to happen with this constitutional process.”
It’s no surprise then that the Chilean peso is one of the worst performers in the region in the past year, losing about 12 percent. A weak currency is good news for giant exporters of copper, lithium and forestry products. But it’s painful for those relying on imports.
Vanesa Palacios came to Chile seven years ago from Peru looking for job opportunities. With her family, she now manages two electronic accessory stores in Santiago.
“When I came here we could buy the dollars to send back to Peru,” Palacios said. “Now sales barely cover our costs and the dollars are just too expensive to send back home.”
– with assistance from Matthew Malinowski and Sam Hall.
by Eduardo Thomson & Valentina Fuentes, Bloomberg