The Chilean economy is one of the most successful in the southern hemisphere. But if that success story is to continue, Chile will need to deal with a key growth constraint - energy supply.
Chile saw economic growth of 6.1 per cent in 2004, the strongest in seven years, as the country has been riding the global economic upswing and the corresponding boom in commodity markets. Although global economic growth is forecast to moderate during 2005, bringing modest declines in many resource prices, the Chilean economy is forecast to have another good year in 2005 with growth of 5.3 per cent, according to EDC's latest Global Export Forecast.
While it may seem an odd time to fret over Chile's growth prospects, the country has bumped into an important energy constraint for the second year in a row. About 30 per cent of Chile's electricity needs are generated through thermal plants using natural gas imported from Argentina, the sole supplier. But investment in Argentina's energy sector has declined in the wake of the December 2001 financial crisis and the subsequent three years of creditor negotiations and uncertainty.
The end result is that Argentina is short of gas and has therefore been consistently cutting its exports to Chile since May 2004. A year ago, Chile was importing approximately 22 million cu. m of gas daily from Argentina. Recently that number has been as low as six million.
Some of Chile's power generators have been forced to go offline, while others have been able to switch to alternative thermal sources, including diesel, coal and oil. These alternatives are more costly and some generators that operate on fixed fees are facing a major revenue squeeze.
Meanwhile, the hydro system is being asked to cover the energy shortfall, even though that system only operates fully during the rainy season. At this point, Chile's ability to grow this year may hinge critically on how much rainfall is received during the next six months.
The situation is clearly not sustainable. The government has already passed a new law that will boost electricity prices in June. There is the possibility of importing gas from Bolivia, although the two countries have been engaged in a long-running bilateral dispute that is hampering progress on that front. There is also the possibility of a gas pipeline from Peru to Chile, which could replace as much as five to six million cu, m per day, but that could take up to four years to complete.
A third possibility is to import liquefied natural gas, a development that promises to transform the gas market from one handcuffed by geography to a truly global system. But that, too, would require a major investment in Chile and would take time. Meanwhile, Chile will almost certainly increase investment in domestic supply, whether thermal, nuclear or hydro.
The bottom line? The energy shortfall could shave as little as 0.3 per cent from Chile's growth this year, provided the rains are good. But continued good growth will require big energy investments in the region - investments that are traditional sweet spots for Canadian exporting companies.
(Stephen Poloz is senior vice-president and chief economist for Export Development Canada. He can be reached at spoloz@edc.ca)
