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Economic analysis 13 Jul 2016

The Pacific Alliance, a great opportunity for Chile

Since it was formally established in 2012, the Pacific Alliance (PA) has become a global power. With 220 million people, it is the eighth largest economy in the world in terms of GDP and the eighth largest exporter.

The four countries that form part of the PA – Mexico, Colombia, Peru and Chile – together represent 38% of Latin America and the Caribbean’s total GDP, approximately 50% of the region’s foreign trade and 44% of the total foreign direct investment in the region.  All of this is supported by the clear and predictable institutional framework in these economies, together with responsible fiscal management, giving the group a distinct advantage in attracting foreign capital and facing adverse external scenarios.

The group’s strengths and enormous potential were evident at the 11th Pacific Alliance Summit recently held in Puerto Varas in southern Chile.

Presidents of the Pacific Alliance

Mexico's President Peña Nieto, Peru's President Humala, Chile's President Bachelet, Colombia's President Santos and Peru's President-elect Kuczynski pose for an official picture during the XI Summit of the Pacific Alliance in Frutillar.

Foreign Relations Minister Heraldo Muñoz declared at the Summit that: “At a time that seems dominated by the discord and disintegration brought by Brexit, what we are doing is constructing realistic, flexible and pragmatic integration and we will continue to do so.”

“We are convinced that the Pacific Alliance has great potential. The economies with the strongest growth today are looking towards the Pacific.

Similarly, at the opening dinner of the group’s 3rd Corporate Summit Country Manager of the BBVA Chile Group Manuel Olivares stated that: “We are convinced that the Pacific Alliance has great potential. The economies with the strongest growth today are looking towards the Pacific.”

BBVA’s top executive in Chile reported that the PA countries share the same challenges: the need to continue diversifying their economies, investing in the education of their human capital, expanding financial systems and improving infrastructure to boost productivity and competitiveness.

And he believes BBVA has a prominent role to this process: “We want to be the main bank in the Alliance. We have the knowledge, resources and solvency needed to finance and advise on the growth of new businesses.”

 The four PA countries continue growing in spite of the complex international economic scenario, unlike other emerging countries with weaker institutional frameworks.

While other Latin America and the Caribbean economies’ GDP grew an average of 1.8% in 2015, the AP countries grew an average of 2.7% during the same period.

Accomplishments and challenges

Five years after the creation of the PA, several important accomplishments stand out, such as the tariff liberalization of 92% of the goods traded among member states, or the support for the Latin American Integrated Market (MILA in Spanish), which promotes the financial integration of the countries’ stock markets. However, work remains in standardizing rules and facilitating commerce, especially in terms of professional, financial and e-commerce services – areas where great opportunities exist in Chile from a financial and commercial perspective.

Even though Chile has more than 50 free trade agreements with nearly 80% of the world’s GDP, trade between our country and the other three AP economies remains very low, with just 6.3% of all trade in 2015. A BBVA Research study identified the sectors with the greatest potential to take advantage of the PA. Of the 97 possible sectors, the study found that each country has four to eight sectors related to intermediate goods and capital, and six to eight sectors related to consumer goods, with enormous potential to take advantage of the Pacific Alliance’s integration.[1] This potential can be channeled by establishing value chains, expanding exports or cross-border mergers, all of which require greater integration among AP countries.

In terms of financial matters, where portfolio investment represents the greatest setback, the authorities’ and the private sector’s support to promote the MILA are very important. The MILA is a great opportunity to develop a regional stock market that is still very small at the global level.

The AP is facing many challenges to continue positioning itself as a global economic power. However, taking advantage of the commercial and financial integration this alliance provides is incredibly important for our country, not only as a tool to improve the economy’s current cyclical condition, but as a strategy to increase potential growth in the long-term.

[1]: In Chile, these sectors included: (1) Intermediate goods and capital: fertilizers; paper, cardboard and articles thereof; wood and articles thereof; machines and mechanical devices; grain mil products, inulin, malt, cereals and plastic and articles thereof. (2) Consumer goods: Cereals, pasta, pastries, flour; prepared foods, including coffee, sauces; Detonators, explosives, pyrotechnic articles; plastic and articles thereof; and machinery and electrical materials, including telephone, radio, and television.

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