During our Skype call with Courtney Kingston, Managing Partner of the Kingston Family Vineyards, it was mentioned that consumer and business confidence in the government was fairly low. We did not touch upon the underlying reasons for this, leaving me curious to learn more about it, and so I decided to do some of my own research.
First I needed to know how Chile actually measured consumer and business confidence. To measure consumer confidence, Chile uses IPEC (Índice de Percepción de la Economía), an index that inputs answers from five questions that aims to evaluate “perception of current personal financial situation, current economic situation in the country, the country's future economic situation in the short / long term and expectations regarding the purchase of consumption items for the households.” [1] The index survey uses a sample group of approximately 1100 people that live in major cities in Chile and measures consumer confidence on a scale of 0 to 100, where 50 is neutral and higher values correspond to higher confidence levels.
So where does Chile lie on this scale? Turns out consumer confidence in Chile dropped below 50 in May 2014 and has fallen continuously until it hit a seven-year low, 33.9, in August 2015, the lowest reading since the recession in 2009. [2] Copper export had slowed down due to a fall in mining activity, cost of imports rose as peso grew weaker and drove up inflation. [3] Since then Chile had been experiencing a continued economic slowdown.
In November 2015 consumer confidence went up to 36.40. from a 35.20 in October. Experts believe that, although gross domestic product (GDP) is expected to rise in the next 2 years, Chile's growth potential for 2016 has been compromised by the decline in consumer confidence and spending resulting from the continued currency depreciation and stubborn inflation. [4] Chile's central bank raised its key interest rate to 3.50%. Further rate hikes will likely influence disposable income and ability of consumers and businesses to repay loans. Further decline in copper prices and the damage El Nino caused the infrastructure in Chile may result in a disruption of energy supply and an increase in consumer goods and transportation prices.
First I needed to know how Chile actually measured consumer and business confidence. To measure consumer confidence, Chile uses IPEC (Índice de Percepción de la Economía), an index that inputs answers from five questions that aims to evaluate “perception of current personal financial situation, current economic situation in the country, the country's future economic situation in the short / long term and expectations regarding the purchase of consumption items for the households.” [1] The index survey uses a sample group of approximately 1100 people that live in major cities in Chile and measures consumer confidence on a scale of 0 to 100, where 50 is neutral and higher values correspond to higher confidence levels.
So where does Chile lie on this scale? Turns out consumer confidence in Chile dropped below 50 in May 2014 and has fallen continuously until it hit a seven-year low, 33.9, in August 2015, the lowest reading since the recession in 2009. [2] Copper export had slowed down due to a fall in mining activity, cost of imports rose as peso grew weaker and drove up inflation. [3] Since then Chile had been experiencing a continued economic slowdown.
In November 2015 consumer confidence went up to 36.40. from a 35.20 in October. Experts believe that, although gross domestic product (GDP) is expected to rise in the next 2 years, Chile's growth potential for 2016 has been compromised by the decline in consumer confidence and spending resulting from the continued currency depreciation and stubborn inflation. [4] Chile's central bank raised its key interest rate to 3.50%. Further rate hikes will likely influence disposable income and ability of consumers and businesses to repay loans. Further decline in copper prices and the damage El Nino caused the infrastructure in Chile may result in a disruption of energy supply and an increase in consumer goods and transportation prices.
Several recent high-profile public-sector corruption cases have also been detrimental to business confidence. In an effort to increase investment, Chile negotiated a US$ 130 million loan from the IADB that will go towards fighting corruption and increasing transparency in procurement processes.
The good news is business confidence is expected to recover in 2016 as President Bachelet seeks to implement business-friendly reforms to boost private investment. As commodity prices in Chile continue to suffer, the government is trying to incentivize private investment in “non-traditional sectors”, such as renewable energy, diversifying away from copper exports. [5] I am looking very forward to our trip to Santiago and getting first hand input on business confidence from entrepreneurs, their responses to the reforms the government seeks to implement and how these may influence their investment decisions.
My next blog will focus more on the three main aspects of the reforms the government will be pursuing, which are a more flexible labor market, more effective public-private partnerships for infrastructure development and a more transparent financial system.
So, stay tuned!
The good news is business confidence is expected to recover in 2016 as President Bachelet seeks to implement business-friendly reforms to boost private investment. As commodity prices in Chile continue to suffer, the government is trying to incentivize private investment in “non-traditional sectors”, such as renewable energy, diversifying away from copper exports. [5] I am looking very forward to our trip to Santiago and getting first hand input on business confidence from entrepreneurs, their responses to the reforms the government seeks to implement and how these may influence their investment decisions.
My next blog will focus more on the three main aspects of the reforms the government will be pursuing, which are a more flexible labor market, more effective public-private partnerships for infrastructure development and a more transparent financial system.
So, stay tuned!