According to a recent Focus Atradius, the Chilean economy continues to depend heavily on copper exports (over 40% of total exports and 10% of GDP) and the related Chinese demand. However, the dependence of government revenues on copper revenues has decreased from over 25% to around 10%, and the diversification of trade destinations has mitigated the risks. In this context, the service sector now accounts for more than 60% of GDP. Moreover, since the second half of 2017, economic growth has recovered from the low prices of raw materials, from strikes in the mining sector and from the weakening of domestic demand. Thus, during the two-year period 2018-19, GDP growth should accelerate (+3,1%) thanks to a more favorable external context (increase in copper prices and in the demand for raw materials), the impact of the easing last year's monetary policy and improved business and consumer confidence. But while the Chilean commodity sector could benefit from large infrastructure projects in the US, the economy could be affected by any protectionist trade policies, either directly from the current US administration or indirectly, as a result of a potential slowdown in trade with Asian markets, Brazil and Mexico.
Nonetheless, the economy's resilience to shocks remains strong, given prudent macroeconomic and financial policies: the flexible exchange rate has proven to be an effective shock absorber, helping to mitigate the impact of tight copper and weak external demand on Chilean current account. External debt is sustainable (estimated at around 60% of GDP in 2018-19) and liquidity remains sufficient with more than six months of import coverage, also supported by a sovereign wealth fund which currently stands at $24 billion, equal to the 9% of GDP. Chile has fiscal legislation that sets a structural surplus target, yet leaves room for short-term stimulus policies. And although public debt has increased in recent years, its structure remains low-risk: a large part is denominated in pesos (82%) and held nationally (80%, i.e. pension funds), which reduces currency risks and refinancing. According to analysts, the Chilean business environment is one of the best in the region and the local government continues to stimulate foreign investment. Furthermore, the good accessibility of foreign and domestic capital for local businesses reduces refinancing risks. The Chilean banking sector is solid, well regulated and sufficiently capitalized, characterized by a low rate of non-performing loans (about 2% on average). The level of liquidity is good, however a relatively high loan-to-deposit ratio, above 115%, makes the banking sector vulnerable to changes in market sentiment.
At the same time, in Colombia, starting from the second half of 2017, economic growth started to accelerate again (+1,8%), thanks to a more favorable external context (increase in oil and raw material prices) and to the effects of monetary policy stimulus. Private consumption, investment and industrial production have started to grow again and analysts expect a GDP increase of around 2,5% in 2018. In addition, inflation has been declining since last year and is expected to fall further in the course of this year, giving the central bank more leeway to lower interest rates further to support the economic expansion.
Il Focus Atradius dedicated to the South American country shows how in recent years sound economic policies have contributed to an increase in income capacity and economic resilience: the 2016 tax reforms, with an increase in VAT from 16% to 19% and a simplification of the tax system, increasingly show their effects. Most public debt is internally financed over the long term, at fixed rates. In turn, Colombia's external economic position remains solid: the government accounts for about 60% of external debt, and although external debt-to-debt-service ratios have increased since 2014 due to currency depreciation and lower export revenues, both are expected to decline again in 2018. Risks are mitigated by hedging; furthermore, thanks to stable investment grade ratings and an excellent payment record, Colombia is able to easily access the international capital markets. The international liquidity position is solid, characterized by international reserves equal to about 10 months of import coverage and able to meet the external financing requirement. Official reserves are backed by an IMF precautionary flexible credit line, which provides greater insurance against heightened external risks, as Colombia remains vulnerable to investor pessimism due to a relatively large stock of incoming portfolio investment ( equal to 180% of official reserves). Furthermore, the flexible exchange rate acts as a shock absorber, supported by limited dollarization of the economy and low external debt.
A gradual devaluation of the peso is expected in 2018, depending on the timing and speed of US interest rate hikes. In this scenario, the peace agreement with the FARC could increase growth rates in the medium term thanks to investments in previously conflict-affected areas and increased consumer confidence. However, despite significant economic progress in recent years, Colombia still has high rates of poverty and inequality, especially in rural areas. Hence, in order to achieve long-term sustainable economic growth, the implementation of measures to promote employment, implement social reforms and improve infrastructures cannot be disregarded.
