Abstract
With the Latin American economy set to contract by 2.6% this year, Chile' s
sound macro fundamentals
and prudent policies are placing the country in a
league of its own to deal with global recessionary forces.
It is our view
that Chile will avoid a recession this year. We base our outlook on increased
public
spending, positive net exports and a relatively lower drag from
falling gross fixed capital formation this
time around than during the
last recession in 1999.
Though Latin America' s fifth largest economy has
long set itself apart from its regional peers on matters
of political
stability, market openness and established financial markets, prudent and
well-timed
economic policies in recent years have placed Chile in a league
of its own to deal with the global
recession. Expanding at a less robust
pace and competing from a relatively higher foreign investment base
than
most of its neighbours, Chile' s strong macro fundamentals have once again
become one of the top
picks for investors since the start of this
year.
We believe that Chile continues to be recognised as a regional safe
haven. This has been reflected in the
performance of Chilean assets, which
has been more positive than in the wider region. We note that the
Chilean
peso leads the region' s benchmark currencies, up 9.3% since the beginning of
the year against the
US dollar (well ahead of the next top performer, the
Brazilian real, up 3.0%), during which time the
Banco Central de Chile
(BCC) cut the policy rate by a total of 700 basis points (bps) to a record low
of
1.25%, wiping out what little was left of the peso' s carry appeal.
The smoothness and velocity with which Latin America' s monetary authorities
have been able to engage
in countercyclical policy this time around has
been remarkable, and far removed from previous crises.
Armed with floating
exchange rates, reasonably sound banking sectors and lower external debt
piles,
policymakers have been able to react more decisively to global
headwinds in a concerted effort to temper
widening output gaps.
Admittedly, the jury is still out as to the effectiveness of monetary stimuli
in
generating domestic demand, with the transmission to local lending
rates slow to take root. Nevertheless,
we have been impressed by the
aggression shown in monetary easing programmes across the region this
year. Going forward, however, we believe that the end of monetary easing is
coming increasingly into
focus.
Having taken a beating in Q109,
incoming data in recent months appears to indicate that the intensity of
Latin America' s economic contraction is starting to relent. While we are
sticking to the view that secondquarter
figures will be pretty dismal,
there is scope for optimism for a gradual recovery in H209.
Generally
speaking, the market for commercial real estate is healthy, mirroring the low
vacancy rates of
the real estate market over all. That said, both CB
Richard Ellis (CBRE) and Knight Frank report that
demand for office space
has dropped, and a significant amount of new space will become available
in
Latin American cities in the near term. Lower demand and greater
availability of office space suggest
more competitive conditions in coming
times.
According to our best and latest figures, office space in Santiago
is rented at US$21.00 to US$24.00 per
square metre per month – a
little down on 2008. Meanwhile, our latest research suggests that a slight
contraction in the housing market was registered.
Over the coming months,
the key issues to watch will likely be the coming online of a significant
amount
of new space, which will have the effect of driving up vacancy
rates. This will be observed across all of
Latin America, not just Chile.
Knight Frank predicts that this will lift vacancy rates across Latin
America
to about 15% over the next two years from the 2008 figure of 6%.
Second, the efficacy of government
stimulus measures will be watched
eagerly over coming months. The third issue to watch is whether the
broader economic conditions cause developers to delay projects across the
region, as is currently
expected.
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