President elect: Sebastián Piñera swept to power in Chile in January

Chile's new right-wing government has promised to sustain the country's growth trajectory with a series of reforms, aimed at diversifying its economy, which is highly dependent on the copper industry, and improving conditions for SMEs. Writer Jason Mitchell

Sebastián Piñera, Chile's right-wing, billionaire president-elect wants to implement significant 'supply-side' reforms and propel forward the capital markets of Latin America's best-rated sovereign.

Mr Piñera, aged 61, who represents the Alliance for Change coalition and will be Chile's first right-wing president for almost 20 years, beat Eduardo Frei, who stood for the incumbent centre-left alliance Concertación, by a narrow margin during the run-off presidential election on January 17 (51.6% to 48.4%). He assumes office on March 11 and has already appointed his cabinet, half of whom have been educated at top US universities.

Felipe Larrain, who is currently economics professor at the prestigious Pontificia Universidad Católica de Chile (as well as Mr Piñera's key economics advisor), will be the finance minister and Juan Andrés Fontaine, currently director of the local financial consultancy Fontaine y Paúl Consultores and a former economics professor at Universidad Católica de Chile, steps up as economy minister.

Major reserves

In December, Jim O'Neill, chief economist at Goldman Sachs, published research showing that Chile has the best mix of macroeconomic policy of any Latin American country. It is rated A+ by Standard & Poor's (S&P), the highest rating of any Latin American sovereign (it is followed by Mexico at BBB and Brazil and Peru at BBB-). Chile has one of the most open economies in the world and its recovery was slow to take off last year, as it is so tied to world trade. But this year Goldman Sachs expects the economy to grow above trend at 5% or higher.

In January, Chile became the first South American nation to be a full member of the Organisation for Economic Co-operation and Development (OECD). The country has huge fiscal reserves (mostly built up from profits from Codelco, the state-owned copper giant and the world's biggest copper producer) and was able to implement one of the best countercyclical policies globally during the international financial crisis, significantly boosting the popularity of outgoing president Michelle Bachelet, who leaves office with approval ratings of 80%.

Far-reaching reforms

Mr Piñera campaigned on a platform of generating 1 million jobs during his four-year term and creating a nation of entrepreneurs. He plans to make the labour laws more flexible and is investigating ways in which the state can make loans or give subsidies to small to medium-sized enterprises (SMEs).

"The Concertación coalition did a pretty good job in Chile during the past two decades," says Raimundo Monge, director of strategic planning at Banco Santander in Chile. "However, I think most people felt that in the end it had run out of ideas and stamina. At a macro level, the economy has been doing very well. There is an autonomous central bank which has successfully targeted inflation.

"Nonetheless, there is a lot to be done at the micro level in the country and this is what Mr Piñera wants to focus on. It involves creating more jobs, changing the taxation regime and stripping away regulations. He will bring a sense of urgency and his government will be made up of smart people and well-known entrepreneurs."

Mr Monge says that it takes too long for a new business to be set up in the country and the government must introduce a fast-track method for SMEs if they are to succeed. He adds that often the environmental standards that have to be met are too great and too many government agencies are involved in the approval of a new firm. He believes that banks will grant more loans to small companies if the state can provide some sort of guarantee. One possibility is the minimum wage being set at an hourly level rather than on a monthly basis, in order to encourage more part-time employment, especially among women. Such reforms, says Mr Monge, could boost economic growth in Chile by up to 1% annually.

It seems that empowering SMEs will be at the heart of the new government's strategy, as Mr Fontaine told a press conference that these companies "represent the ideal society that the new government wants to create, characterised by the opportunity to make concrete the entrepreneurial ideas of small firms and by the creation of employment."

Jerome Booth, head of research at private equity giant Ashmore Investment, says: "Chile has reached the point where the administration of the day will continue with the same economic policies. National creditworthiness will not change depending on the government. This is true of other Latin American countries too, including Colombia, Brazil and Uruguay. I think the supply-side reforms suggested by Mr Piñera would be good for the country - it will encourage investment."

However, Mr Booth believes Chile is far too dependent on copper and that it runs the risk of the 'Dutch disease' - a booming commodity sector that distorts the economy. "Copper's dominance is overwhelming," he says. "Maybe not as much as before, as the agricultural side of the economy has picked up considerably, especially in wine production. Nonetheless, it is a very, very slow process for a country to move away from the industries that it has been tied to for so long. Only the private sector can really do this but the state can create the right incentives."

Credit ratings

Joydeep Mukerji, head of the sovereign ratings group at S&P, says that Chile's sovereign credit rating is even higher than that of South Korea (rated A). He adds that the South American country has virtually no public debt and that has helped to shore up its ratings. However, the average income per head in Chile - still relatively low by advanced world standards - is a constraining factor on the country attaining a higher credit rating.

"Chile is largely dependent on natural resources," says Mr Mukerji. "That means it's tied to global commodity cycles. If, over time, it becomes a more mature economy, with a broader industrial base and becomes less vulnerable to rapid swings in commodity prices or global trade, it should be in a position to see its credit ratings rise to even higher levels."

An example of the sort of change that S&P would like to see in Chile is a more professional civil service. He says that in advanced countries, such as the UK or France, the civil service is neutral and manages the transition from one political party in power to another in a smooth way. In Chile's case it has had the same coalition in power for almost two decades and many senior civil service posts have been filled by Concertación supporters.

However, one of Mr Piñera's first moves on being elected president was to meet up with outgoing president Ms Bachelet and agree with her a structured and co-ordinated way in which her administration could hand over all the details of public policy to the incoming government. He said this would set a precedent for transferring power in the future. Chilean presidents are limited to a four-year term and cannot stand for a second consecutive election (although they are able to be candidates again four years after their term has ended).

During the election campaign, Mr Piñera said he would like to privatise up to 20% of Codelco (analysts estimate the market value of the entire group at between $38bn and $66bn, depending on the widely shifting copper price). However, its employees have one of the strongest trade unions in Chile and his party will not have an overall majority in Congress (Mr Piñera's supporters will control the Lower House while the now-opposition Concertación will have a slight majority in the Senate).

"Mr Piñera is very pragmatic," says Armen Kouyoumdjian, an independent Chile economics consultant. "I think his priority will be to try to ensure that the right-wing wins future elections in the country. People are sensitive about a right-wing government because the last one was a military dictatorship. He wants to try to lead by consensus and not rock the boat too much."

Daniel Kerner, Chile analyst at research group Eurasia, agrees: "Mr Piñera almost campaigned as a centre-left candidate. Supposedly, he is right-wing but I think one can argue that there is no real right in Chile nowadays. He will find it very hard to privatise even a small proportion of Codelco and, in the end, I believe it will not happen."

Mr Monge disagrees and believes that Mr Piñera will privatise 10% of the company. He says that this will lead to more independent entrepreneurs being part of Codelco's management structure and it should help to make the business more efficient.

Even Marco Enríquez-Ominami, the independent third candidate during the presidential elections who has a strong following from the left, suggested that Codelco needed partial privatisation, which could help to ease such a move.

Mr Piñera will inherit one of the strongest economies in the Western Hemisphere. However, his challenge lies in implementing a series of microeconomic reforms to improve productivity and boost small businesses. Lessening Chile's dependence on copper by diversifying the country's knowledge economy will also be crucial to the new regime if it is to fulfil Mr Piñera's ambitions of further victories for the right in subsequent elections.

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