Previous Quarterly Editions
Expropriation Risk: 51 51 51 51 ►Political Violence Risk:48 48 48 48 ►Terrorism Risk:28 28 28 28 ►Exchange Transfer and Trade Sanction Risk: 35 44 44 35 ▼Sovereign Default Risk:37 37 37 37 ►
TREND ▼
Protest intensity to date* 2022 2023 Very-High Very-HighUnrest risk in 2024**Cost of living: MediumAnti-austerity: High
At the beginning of the 1990s, after the restoration of democracy, Chile had a gross central government debt approaching 40% of GDP. This was gradually reduced to a low of 3.9% in 2007 (when the country was a net creditor) but has since risen to an estimated 38.2% this year. This reflects lower fiscal income from copper (the country’s main export), slower economic growth and higher fiscal spending in response to greater social demands, particularly regarding pensions, healthcare and education.
According to the Finance Ministry, COVID-19 pandemic-related fiscal spending in 2020 to 2021 totaled almost US$40 billion (some 13% of GDP). As a result, the gross debt increased from 27.9% of GDP at year-end 2019 to 36.3% at year-end 2021. As well as borrowing, the government also drew on the country’s sovereign wealth funds, implying that, in net terms, the debt increased from 7.9% to 20.1% of GDP.
Under the draft fiscal budget for 2024, the gross debt would increase to 41.1% of GDP and, according to the government, will remain at around this level through to the end of its term in 2026. A study carried out by the International Monetary Fund earlier this year at the government’s request concluded that a gross debt of up to 45% of GDP, with a cushion of 5% to 7% of GDP in the main sovereign fund, is sustainable for Chile in the medium term while permitting the flexibility to respond to unforeseen events (natural disasters as well as economic and financial shocks). The 45% limit has been included in a draft Fiscal Responsibility Law currently before Congress.
Growth of the debt is contained by Chile’s traditional fiscal responsibility. After a budget deficit of 7.7% of GDP in 2021, a surplus of 1.1% was achieved in 2022, while small deficits are anticipated this year and in 2024 (2.3% and 1.9%, respectively). The debt’s sustainability is also strengthened by an average maturity-to-term that, at 11.4 years (9.5 years for local debt and 15.5 years for overseas
debt), is high and, indeed, one of the highest in the Organization forEconomic Co-operation and Development. Exposure to exchange-rate risk has, however, increased due to a shift in the debt’s composition to 35% in foreign currency, compared with the government’s target of 80% in local currency and 20% in foreign currency to which it has indicated plans to return.
A larger risk is posed by slow economic growth because this both limits the growth of fiscal revenues and intensifies pressure for social spending. After stagnating this year, activity is forecast to pick up only slowly to 2% to 3% in 2025, and the central bank has reduced its estimate of Chile’s capacity for annual GDP growth over the next decade to 2.1%, down from earlier estimates of 2.8% (June 2021) and 3.5% (June 2019). This, moreover, occurs in a context in which the government’s lack of a majority in Congress has prevented it from implementing a planned tax reform to increase fiscal revenues.
A further concern is the situation of Codelco, the state copper company, whose credit rating Moody’s recently downgraded from A3 to Baa1 with a negative outlook. Through its earnings, the company, one of the world’s largest copper producers, contributes to fiscal revenues (US$2.3 billion or 0.7% of GDP in 2022) but, with aging mines, is facing a decline in production that it is seeking to reverse through debt-financed investment projects. The company currently has a debt of some US$18 billion (approximately 6% of GDP), which, according to industry estimates, could reach US$30 billion by the end of the decade. The firm can raise financing with some ease, largely because the market views its debt as guaranteed by the state.
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
TREND ►
Chile is currently engaged in a second attempt to write a new constitution, after the rejection of a first proposal in a national referendum in September 2022. Although the new process will not conclude until early November 2023, ahead of a referendum on December 17, it is clear that the draft, produced by a predominantly right-wing Constitutional Council, will not pose the expropriation risks inherent in the first proposal, which would have affected matters ranging from ownership of water rights to mining concessions.
If it is again rejected — as polls currently suggest — the existing constitution, written by the Pinochet dictatorship but significantly reformed since, would remain in place in the absence of a plan for a third attempt. In this case, Congress would probably seek to introduce further reforms to the existing constitution.
Negotiations between the left-wing government and the right-wing opposition in the hung Congress have failed to produce agreement on reform of the country’s private pension system, despite concessions on the part of the government, whose initial program included the elimination of the private pension administrators (known as AFPs). However, the government still aims to reorganize the industry, creating a state administrator to compete with the AFPs and possibly dividing the collection of mandatory pension contributions and management of the resulting assets, currently both carried out by the AFPs, into separate activities. For the AFPs, this would be tantamount to expropriation insofar as it would reduce the area of business in which they are entitled to participate.
Following a number of Supreme Court rulings limiting the prices that the country’s private health insurers (known as ISAPREs) are allowed to charge affiliates, their financial viability is at risk. This could again be interpreted as expropriation, particularly in a context of criticism of the Supreme Court as having exceeded its constitutional powers by, in practice, setting public policy and acting as legislator.
On August 30, 2023, Congress approved an opposition bill that strengthens protection of private property by increasing the penalties for “usurpation” of land, from fines to prison sentences. The bill also provides more effective means of obtaining its restitution. This initiative seeks to address not only land seizures by indigenous Mapuche communities in southern Chile but also the appearance of mafias that, in the context of a housing shortage, occupy private land, install basic services and fraudulently sell plots for residential purposes.
The 50th anniversary of the 1973 military coup on September 11 prompted some violent demonstrations and disturbances, particularly in Santiago. They were, however, more isolated and smaller in scale than had been feared. Following the social uprising of 2019, there is now widespread public rejection of violence as a form of political expression and impatience with the damage and disruption it causes. The overriding demand is for stability and public safety in the face of an increase in (non-political) violent crime.
The risk of terrorism is confined almost exclusively to the parts of southern Chile that were the traditional homeland of the Mapuche people (Araucania Region, the south of the Biobio Region, and to a lesser extent parts of the Los Rios and Los Lagos regions).
Against the background of Mapuche communities’ claims for the restitution of land (and its illegal occupation), armed groups carry out arson attacks, principally on the property of non-Mapuche landowners and forestry companies as well as schools and churches, and terrorize local communities to ensure their silence and protection.
A state of emergency, permitting the use of the armed forces, has had a limited effect in reducing attacks, and significant parts of the area remain outside the control of the state.
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 ►Chile’s sovereign ratings remain unchanged on the previous iteration of this index: Moody’s A2 with a stable outlook (September 2022), Standard & Poor’s A with a stable outlook (October 2022) and Fitch’s A– with a stable outlook (July 2023).
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