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When planning to venture into international business, it is important to consider the economic and financial situation of the country to venture in. The company and in this case New Belgium Brewery should conduct research in Chile to avoid risking its investments. It is important to understand the economic situation of Chile regarding currency value and inflation rate (DiPiazza 16). It is also important to study its market and barriers that may affect the daily operations of the company. By doing so, the company can evaluate the benefits and risks involved when moving to Chile and develop a market plan that would facilitate its existence in Chile.
Demographics of Chile
Chile is a country in Latin America with a population of approximately 17.6 million people and considered to be among the fastest growing economies in this region (DiPiazza 56). The GDP of Chile is estimated to be $334.8 billion with a growth rate of 4.2% (IMF 88). Over the past five years, Chile experienced an annual growth of 4.0%. This has been attributed to successful fiscal policies and being in control of the budget deficits (IMF 88). Chile protects property rights and this has seen many investors moving into the country. This has increased revenue to the country and the unemployment rate has reduced to about 5.9%.
In October, Chile changed its interest rates to 3.25 percent to curb inflation. There are chances that the interest rates may rise more since Chile is still suffering from inflation. The GDP per capita in Chile was $9847.86 in 2014 and it averages about 78% of the Average in the world (DiPiazza 58). The income tax rate is 40% with the corporate tax being at 20%. There are other taxes such as property tax and VAT in its tax system. Starting business in Chile costs less as compared to other countries. There are rigid labor regulations and employees are allowed to join unions. Chile has a vibrant and well-capitalized banking sector making it very open to foreign investments (OECD 25).
Foreign Exchange in Comparison with the US dollar
The Central Bank of Chile regulates the foreign exchange market. The market environment maintains the value of currency as Chile uses the exchange rate system. Currently, the Chilean Peso exchanges for 694 for one dollar i.e. $1= 695.20 Chilean Pesos. When we compare the US dollar to the Chilean Peso, it is evident that the dollar is extremely strong when compared to the Chilean Peso (Carriere-Swallow 67).
The strength of the Chilean Peso, when compared to the dollar, has been fluctuating. In September, the Chilean Peso was volatile but it became weak at the beginning of October (IMF 88). On September 29th, the peso was trading at 704.1 Chilean Pesos per US dollar. This was very weak but at the beginning of October the currency gained value and it traded at 680.8 against the US dollar. Nonetheless, the Chilean currency has weakened against the dollar by a margin of 12.2% in the last six months (IMF 88).
The weakness of the Chilean Peso can be attributed to the fact that the mining sector in Chile has lost momentum because of the depressed prices (Usa 30). This depreciation of the Chilean Peso is also an indicator that the US dollar has gained strength due to improved US economy (International Monetary Fund 82). There is uncertainty in the Chilean economy since the prices of copper have continued to fluctuate. The Peso gained strength in early October because the prices of copper had recovered slightly after the major producers decided to cut down on production. The economy of Chile mainly relies on mining and any depression in the mining sector depresses the economy (Carriere-Swallow 67).
Considering the information gathered from the research, the new Belgium Brewery planning to venture into Chile should consider the high inflation rate in Chile as well as its GDP. Chile is a good country to do business but the company has to consider its fluctuating interest rates and exchange rates. It has a very weak economy when compared to the US and thus it is important to consider the risks associated with the factors.
Carriere-Swallow, Yan. Capital Account Policies in Chile Macro-financial considerations along the path to liberalization. Washington, DC: International Monetary Fund. 2013. Print.
DiPiazza, Francesca, Davis. Chile in Pictures. New York: Twenty-First Century Books. 2007. Print.
IMF. International Financial Statistics, October 2015. Washington, DC: International Monetary Fund. 2015. Print
International Monetary Fund. Chile: Selected Issues. Washington, DC: International Monetary Fund. 2004. Print
OECD. OECD Economic Surveys: Chile 2007. New York: OECD Publishing. 2007. Print
Usa Ibp Usa. Chile Mineral & Mining Sector Investment and Business Guide Volume 1 Strategic Information and Regulations. Boca Raton: Int’l Business Publications. 2009. Print