Previous Quarterly Editions
Expropriation Risk: 40 51 51 51 ►Political Violence Risk:57 49 48 48 ►Terrorism Risk:25 27 28 28 ►Exchange Transfer and Trade Sanction Risk: 35 35 35 44 ▲Sovereign Default Risk:37 37 37 37 ►
TREND ▲
Protest intensity in 2022 and Q1 2023* 2022 Q1 2023Cost of living : High HighAll protest: Medium Very High
Cost-of-living protest risk in 2023*Wage protest: Low Food/fuel policy protests: Low
Inflation began to accelerate in Chile during the second half of 2021, driven by an injection of liquidity in the form of pandemic-related government relief measures and government-authorised withdrawals of individuals’ savings in the country’s private pension funds. Depreciation of the peso and the international price of oil – which Chile mostly imports – also contributed.
At end-February 2023, headline inflation in Chile was running at a twelve-monthly 11.9%. Albeit down from a peak of 14.1% in August 2022, this is still high for a country that, over the previous two decades, had become accustomed to inflation rates that mostly remained close to the central bank’s 2%-4% medium-term target.
In the twelve months to February, inflation was led by food prices (+21.4%) and transport (+11.7%). Due to widespread indexation, inflation also has a pass-through effect in areas such as mortgage repayments and insurance premiums. Public opinion surveys regularly identify the cost of living as one of the country’s most important problems, along with crime and public education and healthcare.
Agriculture receives little support in Chile. The OECD estimates in 2021, government support represented just 2.85% of gross farm receipts, one of the lowest figures among member states. Moreover, this support does not affect food prices in the short term since it consists mainly of grants for irrigation infrastructure and technical assistance for small farmers.
In the case of fuels for transport (petrol, diesel, and gas) a Fuel Price Stabilisation Mechanism, introduced in 2014, adjusts the Specific Fuel Tax at three-weekly intervals in order to smooth variations in domestic prices caused by changes in international prices and the exchange rate. In theory, the mechanism is fiscally neutral, with increases in the tax when prices drop offsetting decreases when prices rise. However, in 2022, the government injected an additional USD2.25 billion into the mechanism. In response to pressure from truck drivers, the government has also capped the price of diesel at its January level through to April.
To support the country’s poorest families, the government announced a package of “Economic Security” measures in January. With a total cost of USD2 billion, the measures include a one-off payment of CLP60,000 for each dependent family member in March (the start of the school year and return to work after the summer holidays), a 20% increase in two existing benefits, and the introduction of an electronic card to buy food shops with a monthly government deposit of 13,500 pesos per dependent. The government also made free school more widely available and, through direct agreements with pharmacies, the government is seeking to reduce (very high) medicine prices.
In 2022, the gradual elimination of pandemic-related relief measures was reflected in a 23.1% contraction of fiscal spending, giving a year-end surplus of 1.1% of GDP, compared to deficits of over 7% in 2020 and 2021. A 6.3% increase in revenues, boosted by the year’s high copper and lithium prices, also contributed to the surplus.
The government estimates that spending this year will rise by 1.2% to 25% of GDP, giving a deficit of 2.4% of GDP. Its target is then to reduce the deficit to 2.2% in 2024 and 1.2% in 2025. Under this plan, gross government debt would increase from 37.3% of GDP at end-2022 to 38.7% at end-2023.
These figures were, however, published before the March defeat of the government’s proposed tax reform in Congress. The reform was designed gradually to increase fiscal revenues by 3.6% of GDP and, although an agreement with the opposition on a more limited increase may be reached, the bill’s defeat implies a risk of higher fiscal deficits and a larger increase in government borrowing.
The left-wing government of President Gabriel Boric, now at the start of its second year, is under mounting pressure to fulfil ambitious campaign promises, which included higher pensions, writing-off student debt, and an important reduction in the housing deficit. A number of sectors, including social housing applicants, teachers and students, have announced plans to mobilize.
However, a repetition of the generalised social protest, triggered in 2019 by an increase in fares on Santiago’s underground railway, is unlikely. This is partly because, for most Chileans, a rise in violent crime and, above all, fear of crime and memories of the violence and destruction that accompanied the 2019 protests appear to have translated into an over-riding desire for order and an aversion to disruption.
*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 calculations, see the introductory essay.
TREND ►
The framework for Chile’s second attempt to write a new constitution, after the rejection of the first attempt in a national referendum in September 2022, largely eliminates the expropriation risk inherent in this first proposal, which would have affected matters ranging from ownership of water rights to mining concessions. However, a number of risks, related to Boric’s campaign promises, persist.
His programme included the elimination of the private pension administrators (called ‘AFPs’) which currently manage Chileans’ pension savings. The outcome of a government pension reform bill, currently before Congress, is uncertain, given the government’s lack of a working majority. However, if management were to be transferred to the state, albeit partially, the AFPs would see this as expropriation in the sense of reducing the area of business in which they are entitled to participate.
Another area of conflict involves the country’s private health insurers (known as ‘ISAPREs’). Under the government’s proposed, but still to be fully defined, health reform, the state health insurer (FONASA) would provide universal basic coverage, relegating the ISAPREs to the provision of second-tier insurance. A Supreme Court ruling on the ISAPREs’ charges and the government’s pending decision on how to implement this ruling currently pose a threat to their financial viability. This could again be interpreted as expropriation.
The election on May 7 of a Constitutional Council to head Chile’s second attempt to draft a new constitution may prompt political demonstrations that degenerate into violence. This will also be a risk in September, which marks fifty years since the military coup in which former leader Augusto Pinochet seized power. However, as in the case of protests in support of social demands, generalisation is unlikely.
The situation in northern Chile is particularly tense. Irregular immigration, mostly of Venezuelans crossing from Bolivia, is identified as fuelling violent crime. This creates a risk of racist violence in response to a problem without an easy short-term solution.
Violence in southern Chile, some of which the government now identifies as terrorism, has been growing steadily since the late 1990s. This has its origins in claims for the restitution of land and other demands, such as constitutional recognition, by the Mapuche, the country’s largest indigenous people. However, these claims are also used as a front for criminal activities, such as the theft of wood from the area’s forest plantations and drug trafficking.
Different armed groups carry out arson attacks on schools and churches as well as the property of forestry companies and non-Mapuche landowners. They also reportedly terrorise Mapuche communities opposed to their methods in order to obtain their silence and/or protection. A state of emergency in force in the area has done little to contain the violence and, previously confined to the Araucania Region and parts of the neighbouring Biobio Region, it has spread south into the Los Rios and Los Lagos Regions.
There is no current risk of capital or exchange controls or trade sanctions. However, the peso’s volatility against the U.S. dollar in response to both domestic and international factors implies an important level of exchange-rate risk.
TREND ►Following Moody’s downgrade of Chile from A1, with a negative outlook, to A2, with a stable outlook, in September, Standard and Poor’s confirmed its A rating with a stable outlook in October, citing the country’s robust institutions and fiscal credibility. In December, Fitch also confirmed its A- rating with a stable outlook, citing a low debt-to-GDP ratio compared to similarly-rated peers and Chile’s policy credibility.
However, after the defeat of the government’s tax reform, both Fitch and Moody’s warned of the risk of higher fiscal deficits and growing debt as the government seeks to respond to social demands.
In response to the rejection in September of the proposed new constitution and the marked improvement in the country’s fiscal situation in 2022, the spread on Chile’s dollar-denominated sovereign bonds against U.S. Treasuries has narrowed sharply. As a result, according to Bloomberg, the country has recovered its longstanding position as a “good house in a bad neighborhood.”
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