Chile: A new age

Jamaica Gleaner - - FINANCIAL GLEANER - Wal­ter Molano GUEST COLUM­NIST Dr Wal­ter T. Molano is a manag­ing part­ner and the head of re­search at BCP Se­cu­ri­ties LLC. wmolano@bcpse­cu­ri­

EN­SCONCED ON the western edge of the An­des, Chile is a coun­try that is of­ten for­got­ten.

This ne­glect is not due to any mis­man­age­ment or fault. On the con­trary, the coun­try is so well run that its as­sets do not pro­vide the yields and returns that are com­men­su­rate with the rest of the as­set class.

Nev­er­the­less, Chile is a bell­wether econ­omy that of­ten holds clues of what is to come in the rest of the re­gion.

One of the trends that have been trans­form­ing the coun­try over the last few years has been the dra­matic shift to­wards re­new­able en­ergy. Chile is blessed with a cor­nu­copia of nat­u­ral re­sources, from a trea­sure trove of met­als to end­less ex­panses of hard­wood forests to ver­dant val­leys that are per­fectly suited for agri­cul­tural pro­duc­tion, but the coun­try is bereft of hy­dro­car­bon de­posits.

Ex­cept for a few fields in Patag­o­nia, the coun­try is short on oil and gas re­sources. At first, the govern­ment turned to hy­dropower, build­ing a se­ries of ma­jor dams and string­ing transmission lines to im­prove in­ter­con­nec­tion.

How­ever, Chile’s grow­ing pros­per­ity, en­vi­ron­men­tal op­po­si­tion to the projects and its heavy reliance on en­er­gy­in­ten­sive sec­tors such as cop­per smelt­ing, al­ways left the author­i­ties scram­bling for other sources of elec­tric­ity.

The prob­lem was thought to have been solved dur­ing the 1990s, when a new pipe­line was built con­nect­ing Ar­gentina and Chile. As a re­sult, Ar­gentina could ex­port gas to Chile. How­ever, the pro­gramme crum­bled un­der the Kirch­ner ad­min­is­tra­tion when high gas sub­si­dies sent de­mand soar­ing in Ar­gentina. More­over, a col­lapse in Ar­gen­tine in­vest­ment, or cap­i­tal ex­pen­di­ture, af­ter the cri­sis of 2001 led to a grad­ual de­cline in gas out­put.

By 2004, Ar­gentina ab­ro­gated its sup­ply con­tracts and turned off the taps. This left Chile, which de­pended on Ar­gentina for 90 per cent of its nat­u­ral gas sup­ply, scram­bling for new

sources of en­ergy. The most im­me­di­ate re­sponse was to im­port liqui­fied nat­u­ral gas (LNG) and to move to re­new­able en­ergy re­sources. In 2013, the Chilean congress passed a set of leg­is­la­tion, known as 20/25, which would con­vert

20 per cent of the coun­try’s pro­duc­tion non-hy­dro en­ergy into re­new­able for­mats by 2025. At the time, Chile was highly de­pen­dent on diesel and gas tur­bine fa­cil­i­ties, which pro­duced a third of the coun­try’s elec­tric­ity.

Hy­dro pro­duced an­other third, while coalpow­ered ther­mo­elec­tric fa­cil­i­ties gen­er­ated 22 per cent. The rest was a com­bi­na­tion of so­lar (six per cent), wind (five per cent) and biomass (two per cent). Chile has an abun­dance of geo­ther­mal po­ten­tial, but the lack of in­ter­con­nec­tion and en­vi­ron­men­tal op­po­si­tion made it dif­fi­cult to ex­ploit. The 20/25 pro­gramme pro­vided a set of in­cen­tives for the en­ergy com­pa­nies to re­place one for­mat with the other, and it was such a suc­cess that it is about to reach the 20 per cent target. Chile has one of the most op­ti­mal sets of con­di­tions for so­lar and wind gen­er­a­tion. The Ata­cama Desert in the north­ern part of the coun­try is the dri­est lo­ca­tion on the planet. This im­plies that it also has the least cloud cover, pro­vid­ing the per­fect amount of sun­light to pro­duce pho­to­elec­tric power.

At the same time, the south­ern stretches of the coun­try in­clude the Straits of the Mag­el­lan, one of the windi­est lo­ca­tions on the planet. The out­posts of Tierra del Fuego and Patag­o­nia are per­fect for wind gen­er­a­tion.

Some en­ergy ex­perts fore­cast that re­new­ables will gen­er­ate more than 90 per cent of the coun­try’s elec­tric­ity needs by 2050.

Chile, a county that was once threat­ened by black­outs, is now wit­ness­ing a plunge in elec­tric­ity prices. This could be a para­ble for Ar­gentina, which shares many of the same geo­graph­i­cal fea­tures as its trans-Andino neigh­bour. Yet, not all of the trends in Chile are pos­i­tive. The sec­ond ad­min­is­tra­tion of Pres­i­dent Michelle Bachelet wit­nessed the grow­ing power of the po­lit­i­cal left. The Con­certa­cion once rep­re­sented a rain­bow coali­tion of cen­tre and left­ist par­ties, but it dis­in­te­grated into a small uni­verse of mainly left­ist fac­tions.

As a re­sult, the po­lit­i­cal spec­trum has po­larised. Dur­ing Bachelet’s last term, the po­lar­i­sa­tion man­i­fested it­self into the in­tro­duc­tion of sev­eral het­ero­dox re­forms.

There are good rea­sons for the frus­tra­tion among the lower classes. In­come inequal­ity has grown. So­cial mo­bil­ity has be­come more dif­fi­cult, as the cost of ed­u­ca­tion in­creased. At the same time, some ortho­dox re­forms, such as the pri­vati­sa­tion of the pen­sion fund sys­tem, have failed to de­liver on their prom­ises.

Although Chile is con­sid­ered to be the par­a­digm of macroe­co­nomic or­tho­doxy, for­mer Pres­i­dent Bachelet has agreed to at­tend an up­com­ing sum­mit of for­mer Latin Amer­i­can left­ist lead­ers that will in­clude, among oth­ers, Cristina Fernan­dez de Kirch­ner, Dilma Rouss­eff and Rafael Cor­rea.

This is not ex­actly the type of com­pany that is nor­mally as­so­ci­ated with Chile. There­fore, in­ter­est­ing things are oc­cur­ring in the far-flung coun­try, but so­cioe­co­nomic trends are also push­ing Chile in an un­ex­pected di­rec­tion.

Pres­i­dent of Chile, Se­bas­tian Piñera.

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