Previous Quarterly Editions
Expropriation Risk: 38 39 39 40 ▲ Political Violence Risk: 48 48 57 57 ► Terrorism Risk: 25 25 25 27 ▲ Exchange Transfer and Trade Sanction Risk: 45 35 35 35 ► Sovereign Default Risk: 27 27 37 37 ▼
TREND ▼
Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
In his election campaign, President Gabriel Boric, in office since March 11, emphasised the need for mitigation and adaptation to climate change, of which the most apparent sign is a longstanding drought across much of the country. Boric promised government efforts to foster a “green” recovery from the COVID-19 pandemic’s economic effects; weak growth is forecast for 2022. His plans include the design of a medium and long-term Strategy of Transformative Adaptation to Climate Change, accompanied by a Sovereign Climate Change Adaptation Fund.
The new left-wing government is committed to reaching carbon neutrality by 2050, announced in 2019 by the previous centre-right government. Reinforcing this, the government has indicated plans to present legislation to Congress to require the incorporation of estimates of greenhouse gas (GHG) emissions and mitigation plans consistent with this carbon neutrality target in the environmental impact studies that are mandatory for large new investment projects.
The 2050 target is also enshrined in a Climate Change Law, approved by Congress on March 9, along with the interim targets established in the Nationally Determined Contributions (NDCs) presented by Chile in 2020, under which GHG emissions in 2020-30 will not totalmore than 1,100,000 kilotonnes of CO2 equivalent, peaking in 2025 and dropping to an annual 95,000 by 2030.
Other measures include an Energy Efficiency Law, in force since February 2021. Covering matters that include industrial and residential energy use, transport, building standards and the labelling of electric appliances, the law aims to reduce the country’s energy intensity by 10% by 2030.
Climate change and the environment in general figure prominently in debate in the Constitutional Convention, elected in May 2021 and scheduled to present a proposed new political constitution by early July (although its timeframe may be extended).
The election to the Convention of representatives of some of the country’s numerous grassroots environmental movements has given them a new institutional channel of expression.
Tending to focus on specific and often very local issues, they previously relied mainly on social media and protests to draw attention to their demands.
Given Chile’s long geography, the physical impacts of climate change vary depending on the particular climate zone, but can be summarised as:
In mitigating GHG emissions, Chile has the advantage of extremely favourable conditions for generating solar and wind energy. These sources currently account for close to a third of the country’s installed generation capacity and the competitive price of the electricity they produce suggests that Chile could, as it aims, become an important producer and exporter of green hydrogen.
It is premature to judge the new government’s climate change performance as distinct from its stated, and genuine, intentions. Chile is likely to remain on course to achieve its current carbon-neutrality and NDC targets, but faster progress will be hampered by more immediate government concerns, such as social issues and governability, slower economic growth, constraints on fiscal resources and, on the part of companies, increased uncertainty about the investment climate.
TREND ▲
Expropriation risk, previously negligible in Chile, has become a concern as a result of proposals put forward by some of the Constitutional Convention’s ten subject-specific commissions. Most of these proposals have yet to be debated by the floor of the Convention, where their approval for inclusion in the proposed new constitution – which would subsequently be put to a national plebiscite – requires a two-thirds majority.
The Environment Commission, the most radical of the Convention’s commissions, is proposing the nationalisation of copper and lithium mining. However, Boric has indicated his opposition to the nationalisation of copper, which would have a huge fiscal cost in terms of compensation. In the case of lithium, he has proposed the creation of a state company for the industry’s future development, without necessarily excluding private companies.
The Environment Commission has also proposed the cancellation of existing water use rights (which, barring their non-use, are currently permanent) and their transformation into temporary, fee-paying concessions subject to five-yearly review. The drought and the need to protect the availability of water for human consumption increase the likelihood of a measure along these lines, which would have a particularly negative impact on agriculture.
The country’s main mining companies, for which water availability is also a key risk, have already invested in desalination or are beginning to do so. The Environment Commission is also proposing drinking water distribution, currently in the hands of private companies, be managed only by state services or community organisations, but has yet to indicate how the transition would be implemented.
Foreign investors in Chile are protected by the country’s numerous free trade and investment protection agreements. In the early part of his campaign, Boric indicated his government would review free trade agreements, but he has since clarified that Chile will continue to respect the obligations they contain and any changes would be negotiated, not unilateral.
TREND ►
Following the often violent mass protests that erupted in late 2019, reflecting widespread anger about income and other inequalities, miniature riots have continued, mostly on Friday nights and in quite specific spots in the capital, Santiago. Involving small numbers of marginalised young people, these are not protests as such, but a symptom of underlying social problems.
The likelihood of future protests and their scale will depend on the new government’s ability to satisfy exceedingly high public expectations, particularly on pensions, health care and education. Slower economic growth, following overheating in 2021 and a related consumption boom, and high inflation (7.8% in the twelve months to end-February) will also fuel discontent.
The new government also faces a broader problem of public order. Immigration, often illegal, principally from Venezuela, and protests against it have fuelled violence in northern Chile. Parts of the area are currently under a state of emergency, giving the government special powers that include deployment of the armed forces to maintain order.
In the Araucanía Region of southern Chile and neighbouring areas, violence has become increasingly common. Initially related to the land claims of the Mapuche, Chile’s largest indigenous people, it now also involves criminal activities such as the theft of wood from the area’s forestry plantations and drug trafficking. The area has also been under a state of emergency, which the new government has decided to lift.
A number of radical Mapuche groups operating in southern Chile can be classified as terrorist, rather than merely criminal. They use violence against ‘outsiders’ in Wallmapu, the historical Mapuche homeland, targeting principally forestry companies and non-Mapuche landowners, as well as the Chilean state’s security forces. They also reportedly terrorise Mapuche communities not sympathetic to their methods in order to obtain their silence and/or protection.
This terrorism risk is currently confined to certain parts of the Araucanía Region and the neighbouring Biobío Region over which the Chilean state no longer has effective control, and it is a key challenge for the new government. An attempted visit to one such area by the new interior minister on March 15 had to be aborted in the face of an incipient ambush.
There is no current risk of capital or exchange controls. However, the volatility of the peso against the U.S. dollar makes exchange-rate risk a concern. This volatility reflects factors that include the price of copper (the country’s main export) and the impact of higher inflation on monetary policy as well as, crucially, political uncertainty related principally to concerns about the terms of the proposed new constitution. In this context, asset prices are unusually sensitive to short-term domestic events as well as to the external context and its effects on, for example, the price of oil, for which Chile is largely dependent on imports.
Chile’s sovereign debt ratings remain the highest in Latin America, although the country has recently slipped below Uruguay in the five-year Credit Default Swap Index. The main rating agencies have warned of the risks posed by mounting government debt, boosted by extraordinary spending during the pandemic, particularly in 2021. From 9% of gross domestic product (GDP) in 2010, when Chile was a net creditor, gross central government debt had risen to 36% of GDP by September 2021. The new government’s stated aim is to contain the increase to 45% of GDP at the end of its four-year term, helped by a tax reform to increase tax revenues by 5% of GDP over the four years.
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