Investing in a Latin American country demandsattention to the host 's country risk rating. IMO, it should bean important part of any investor's DD. In the international bankingworld, a Country Risk rating reflects a country's economic, social,political conditions and events that may adversely affect a financialinstitution's operations. A number of rating services exist such asMoody's, Fitch,S&P, and DBRS. Still, at times the rating is a laggingindicator.
For my own DD I have access toDBRS. It typically assigns a Foreign Currency Issuer Rating and aLocal Currency Issuer Rating for sovereigns and any other ratedentities in a debt restructuring.In the case of Argentina, this isimportant because over the years Argentina has defaulted on itsobligations. Argentina's latest rating is “Stable” or (B). Still,I believe Argentina is a better risk mid term than Chile despiteChile enjoying a better “Positive” or (A) DBRS rating.
Why is Argentina rather than Chile a better bet? IMO, Chile presently faces a number of substantial country risks that couldaffect foreign investors. Specifically, they are: 1) the gutting ofthe Private Pension system, 2) the Constitutional assembly and 3) theforthcoming National election. For this reason, I invested in AGY aswell as LKE and stayed away from an interesting Lithium opportunityin Chile.
Chile’s economic “miracle”practically eliminated the abject, extreme poverty of the 1970's andreduced its hyper inflation (369% in 1974). Starting under Pinochet,the country undertook a series of tough economic reforms includingintroducing a 20% VAT, the liberalization of interest rates and theprivatization of banks. Also, the 1981 creation of the private pensionsystem provided a solid base for long-term investment in the country. Chile’s GDP increased by an average 5.4% a year from1986 to 2013, leading to the rise of a middle class eventuallyreaching (pre-COVID) 2/3 of the population.Under any measurement, this was a true miracle.
Reacting to the severe COVID-induced economicdownturn, Congress chose for the first time ever a short-sighted solution by approving apension withdrawal authorization to up to 40% of each individual'ssaved balances. This defy any type of scrutiny because it runscounter to the Chilean pension system's foundation which is based onlong-term savings as a strategy for investment and growth. To date,the 3 approved withdrawals ( a fourth was just approved) have reducethe pension balances by an estimated $50 billion or the equivalent of14% of the GDP. This decision has created a future social time bombamong 11 million pensioners (1/3 of the total) which will be forcedto depend on a minimum government pension of $240/month or about half the minimum wage.
The second factor is the ongoing constitutional reform convention.No one can predict what the outcome of the new constitution convention will be.At this time it is a moving target. It seems likely it will give thegovernment a greater say in the economy.This represents a hugepotential political risk to local and foreign investment and thenational pension system that has been the engine of the country’sdevelopment.
The third factor will be the Presidential and the election of the155 members of the National assembly. There is a very highprobability that the leftist candidate will be elected and that hewill have a full majority including a very large number of Communistmembers. If this is the case, this represents another significantcountry risk. We must only remember that Chavez in Venezuela waselected democratically. Presently, Venezuela does no longer conductsfair elections and the country's economy is a mess despite its largeoil fields and vast iron ore mines.
In closing, if it can happen in Chile, it can happenanyplace....including Argentina. Thus, DD (initial and ongoing) isKing.
