Index trend
Previous quarterly editions
Expropriation risk: 51 51 51 51 ► Political violence risk:48 48 48 48 ►Terrorism risk:28 27 25 25 ▼Exchange transfer and trade sanction risk: 35 35 35 35 ►Sovereign default risk:37 37 37 37 ►
Overall Risk Temperature: 43 (Medium low) TREND ►
Special topic: Gray zone aggression
Degree to which the country relies on outbound gray zone action to achieve its strategic objectives1 = Not at all5 = Gray zone action is a core tactic
1
Impact of inbound gray zone attacks on the country1 = Negligible impact5 = Significant impact on economic growth and/or political stability
It is sometimes argued that Chile has a trade policy, rather than a foreign policy. Certainly, in its interactions with other countries, trading relations are key for the small, export-driven economy. This is clear, for example, in its so-called active neutrality approach to relations with its two main trading partners, China and the United States.
As a result, Chile generally takes a pragmatic approach that seeks to avoid adversarial relationships with other countries and, in the case of conflicts, prefers recourse to rules-based mechanisms. In line with this, it has used the International Court of Justice to address border disputes with Peru and Bolivia that date back to the 19th century War of the Pacific. In other words, gray zone aggression is very much at odds with the foreign policy that Chile has pursued across governments of different colors since the restoration of democracy in 1990.
However, like other South American countries, Chile is grappling with the impact of the political situation in Venezuela and the resulting migratory flows. This can be considered gray zone aggression insofar as it has negative implications in the form of the country’s penetration by organized criminal gangs, such as the Tren de Aragua. This is further aggravated by difficulties in returning illegal immigrants to Venezuela and Bolivia. The latter accepts the return of illegal immigrants only when they have Bolivian nationality.
Tensions with Venezuela were also exacerbated in February when Ronald Ojeda, a former member of the Venezuelan army and an opponent of Venezuela’s President Nicolás Maduro, was assassinated in Chile where he had been granted political asylum. The evidence disclosed so far suggests that the assassination was ordered from Venezuela.
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Following the defeat in a referendum in 2022 of a proposed left-wing constitution, which implied serious expropriation risks, these risks have receded significantly. This also reflects a shift to the center by the left-wing government of President Gabriel Boric. However, there are a number of cases that the affected parties consider tantamount to expropriation.
During his election campaign, Boric proposed the elimination of Chile’s private pension fund administrators (AFPs) in favor of a state social security system and, in 2022, presented a bill to Congress that would have given the state a preponderant role in the pension system. Despite repeated negotiations with the right-wing opposition and concessions to it, the government has so far failed to obtain approval of the bill, which is currently before the Senate. Although now far less radical in its terms, it would still structurally change the business of the AFPs by separating administrative aspects, such as the collection of contributions and payment of pensions, from administration of the funds’ assets under management. The former would be transferred to a single pension administrator, selected through a tender, while, for the latter, new private pension investors would be created (which the existing AFPs could opt to establish).
Private health insurers (ISAPREs), used by richer Chileans instead of the National Health Service, have faced a number of adverse Supreme Court rulings, limiting the prices they can charge affiliates and posing a threat to their financial survival. Although the government would prefer all Chileans to use the National Health Service, eliminating the ISAPREs, their collapse would have important political costs. The government, therefore, offered them a temporary life raft in the form of a law giving them 13 years to repay affiliates some $1.5 billion in charges judged excessive by the Supreme Court. A second bill, presented to Congress by the government on October 1, would further change the industry by, for example, preventing the ISAPREs from considering preexisting conditions in decisions on the coverage they offer. As a result, their longer-term future or, at least, the nature of their business remains in doubt. U.S.-based UnitedHealth Group, the owner of one of the larger ISAPREs, has put its assets in Chile, which also include clinics, up for sale.
In a case in the electricity sector, the government has proposed a modification of the regulation applicable to small distributed generation plants. According to the owners, this would imply the loss of up to 40% of their earnings. By changing the terms of the “stabilized” price for the energy produced, to which they have been entitled since 2019, the government hopes to obtain $150 million toward electricity subsidies for poorer households to cushion them against a sharp rise in energy prices. Although there is some consensus that the “stabilized” price has become a distortion in the electricity sector, the proposed sharp change in the rules is also regarded as “regulatory expropriation.”
Five years after violent social protests broke out in Chile in October 2019, public opinion has changed radically. A recent survey by CEP Chile, a Santiago-based think tank, found that 50% now consider that the protests were bad or very bad for the country, compared with the 55% who, in the same survey in December 2019, indicated support for them.
Progress in addressing the dissatisfaction with socioeconomic inequalities that fueled the protests has been scant, partly because the Boric administration, which took office in March 2022 and initially espoused many of the protests’ demands, has been constrained by its lack of a working majority in Congress. However, these demands have been superseded by public concern about public order and safety, affected by the increasing reach of organized crime, particularly in peripheral neighborhoods of Santiago and other major cities.
In the CEP Chile survey, 57% identified crime as Chile’s main problem, followed by drug trafficking (33%). Moreover, 73%, up from 29% in December 2019, indicated a preference for public order and security as opposed to public/private freedoms. Control of crime will be a key issue in the next presidential election in November 2025, for which a moderate right-wing candidate, Evelyn Matthei, is currently the front-runner.
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A risk of terrorism exists in the parts of southern Chile that were the traditional homeland of the indigenous Mapuche people (Araucania Region, the south of the Biobio Region, and to a lesser extent parts of the Los Rios and Los Lagos Regions) where it is related to claims for the restitution of land. Confined mainly to rural areas, this risk involves principally arson attacks by armed radical groups on the premises and vehicles of non-Mapuche landowners and forestry companies.
Incidents of this type have, however, been declining. In the first half of this year, arson attacks were down by 57% on the same period in 2023, while incidents involving firearms were down by 54%. This reflects measures that include a state of emergency, in force since May 2022, which permits the use of the armed forces to support police work, as well as investments in improved police equipment and intelligence capabilities.
TREND ► There is no current risk of capital or exchange controls or trade sanctions. However, exchange-rate risk is high due to the peso’s volatility against the U.S. dollar in response to both domestic and international factors.
TREND ►Sovereign default risk is very low. The three main credit rating agencies place Chile in the “A” category: Standard and Poor’s, A with a stable outlook (October 2023); Moody’s, A2 with a stable outlook (June 2024); and Fitch Ratings, A– with a stable outlook (July 2024).
Under the fiscal budget for 2025, currently before Congress, spending would rise by 2.7% on the budget for this year in line with the government’s forecast of 2.7% GDP growth next year (ahead of the independent central bank’s forecast of 1.5% to 2.5% GDP growth). According to the Finance Ministry, this would give a budget deficit of 1.0% of GDP, down from an estimated 2.0% this year. However, this will depend crucially on whether an anti-tax evasion law, passed by Congress in late September, delivers the forecast 1.5% of GDP ($4.5 billion) in additional revenues. Assuming this is the case, gross government debt would remain virtually unchanged at 41.3% of GDP in 2025, compared with an estimated 41.2% this year. For the longer term, the Autonomous Fiscal Council, an advisory body, maintains a base scenario in which the debt remains below a “prudent” level of 45% of GDP but has warned that it would significantly exceed this level if revenues fail to match forecasts or, for example, in the case of important exchange-rate depreciation.
