Previous Quarterly Editions
Expropriation Risk: 38 38 38 38 Political Violence Risk: 48 48 48 48 Terrorism Risk: 25 25 25 25 Exchange Transfer and Trade Sanction Risk: 35 35 45 45 Sovereign Default Risk: 37 37 37 27
TREND ▼
President Sebastián Piñera’s centre-right government faces a daunting last year in power. Elected promising “better times for all”, especially for economic growth and job creation, the government has instead faced an outbreak of often-violent social protest in late 2019 and, from March 2020, the COVID-19 pandemic.
The government’s authority has been undermined by public perceptions that it has handled the crises poorly, despite having implemented the region’s highest pandemic-relief social spending as a percentage of gross domestic product (GDP) and one of the world’s fastest vaccine rollouts. Chile is currently suffering a sharp second COVID-19 wave, with fresh lockdowns, but has the advantage that, as of end-April 2021, just over eight million people had been vaccinated out of a target 15 million.
COVID-19 halted the large-scale street protests of late 2019. However, although the pandemic’s impact on poverty appears to have been one of the smallest in the region, by affecting lower-income segments the hardest, it has aggravated some factors behind the protests, such as impatience with slowing economic growth, income and other inequalities.
In response to the protests, the main political parties agreed to convene a constitutional convention to reform the 1980 constitution, a decision endorsed by plebiscite in October 2020. The constitution gave the market an important role in providing pensions, healthcare and education and, by its opponents, is regarded as locking in a ‘neoliberal’ model and perpetuating inequality.
Election of delegates to the convention has been postponed until May 15-16, due to COVID-19. The convention’s composition and the proposed new constitution, which will have up to a year to be drawn up and which will then be put to a plebiscite, will be decisive for Chile’s future.
The convention comes with risks. Too little change would frustrate expectations (in any case, over-blown) of a perceptible short-term impact on matters such as educational and healthcare inequalities, prompting renewed social unrest. Too much change could, by increasing the state’s role at the expense of the market and deterring investment, hamper economic growth and job creation. The two-thirds convention majority required for changes suggests that compromise will prevail.
The convention’s composition will also be a key factor in the presidential election due in November 2021. The frontrunners are currently candidates who represent very different visions: Joaquín Lavín who, albeit claiming to be a social democrat, is a member of the right-wing Independent Democratic Union, the Communist Party’s Daniel Jadue, and Pamela Jiles, a left-wing populist with a background in television.
Both Jadue and Jiles would benefit from a perception that the constitutional convention is likely to be too conservative in its changes. All three candidates would, moreover, polarise Chile by being unacceptable to a significant part of the electorate.
An underlying risk in the face of social dissatisfaction is left- and right-wing populism. This is already apparent in, for example, Congress’s authorisation of three withdrawals of savings from people’s privately managed pension accounts, ostensibly to mitigate COVID-19’s effects but as a way of echoing public complaints about the system, which is widely blamed, with limited justification, for low pensions.
TREND ►
As a small, open economy, Chile has long looked to foreign direct investment (FDI) as an economic growth driver. The principle of equal treatment of domestic and foreign investors is an article of faith adhered to across governments. Legal certainty is, moreover, reinforced by Chile’s numerous bilateral and multilateral free trade agreements.
Chile has recently sought to attract FDI in specific sectors identified as strategic for national development or as areas where Chile has a competitive advantage. Examples include renewable energies, lithium and green hydrogen production.
In the context of the proposed constitutional reform, businesses have some concerns about possible changes to their operating conditions. The greatest risk is to Chile’s private pension fund administrators (AFPs) and private health insurers (ISAPREs) due to widespread demand for a greater state role in pensions and, regarding healthcare, the idea that all Chileans should pay their compulsory contribution into the state system, even if they use the private system. This suggests that, ultimately, AFPs and ISAPREs may see their business curtailed by expanded state services, limiting them to providing complementary services for the richest Chileans.
In a measure related to the third withdrawal of pension savings, life insurance companies offering pension annuities (acquired with AFP savings) have been obliged to pay clients, who so request, an advance on future pension payments. The industry regards this as a form of expropriation and may take the matter to the Chilean and, possibly, international courts.
Barring COVID-19 continuing longer than anticipated, economic growth this year is expected to make up most of the ground lost last year in 2020. However, employment will be slower to recover and, as lockdown restrictions are lifted, this could favour renewed protests.
Mini riots have continued during the pandemic. Involving small numbers of marginalised young people, they are a symptom of underlying social problems. Any reappearance of protests will depend on how far the constitutional convention satisfies demands.
Another factor that could prompt street violence is a recurrence of police brutality seen in the 2019 protests. As well as edging peaceful protests towards violence, police brutality prompts anger and a willingness to protest among a broader segment of the population. Additionally, it undermines already low respect for the police.
In recent years, sporadic outbreaks of violence in southern Chile over claims for land by the Mapuche (the country’s largest indigenous people) have become entwined with criminal activities that include the theft of wood from the area’s forestry companies and, reportedly, drug trafficking and demands that non-Mapuche farmers pay protection money against occupation of their land or the burning of their grain harvest.
Attacks on property have become more violent, including injury to people and (rarely) loss of life, and certain parts of the Araucanía Region have become no-go areas. Consequently, the government is under growing pressure to give the armed forces, which currently have a limited role secondary to that of the police, a more active role in law and order. This would further polarise the situation in the region.
In 2020, the inflow of capital to Chile showed little change on its average in 2017-19 and the exchange rate appreciated in real terms, a trend that is expected to persist as the economy picks up, particularly if the price of copper (the country’s main export) remains strong.
Ongoing fluctuations in the nominal peso-dollar exchange rate are likely but the trend over the next two years will likely remain close to the rate’s current level. Reserves dropped slightly last year but in January 2021 the central bank announced a programme to increase them in preparation for the expiry of an International Monetary Fund line of credit in 2022.
There is some concern in Chile about China’s growing presence in key economic sectors such as electricity distribution. However, the government has insisted on its neutrality and a policy of reliance on institutional arrangements such as fair competition authorities.
Standard and Poor’s has recently cut its sovereign debt rating for Chile from A+ to A, changing its outlook from negative to stable. However, Chile’s rating remains the highest in the region. The downgrade reflects spending increases in response to the 2019 protests and COVID-19, which have raised gross central government debt close to 30% of GDP, up from only 9% a decade ago, when Chile was a net creditor. A further increase is expected to around 45% of GDP in 2024-25, after which the aim would be to stabilise the debt at around this level, to guard against a threat to Chile’s investment grade.
Given the presidential and congressional elections scheduled for November 2021, a significant withdrawal of fiscal stimulus is unlikely this year, even if COVID-19 soon eases. Beyond that, a reduction of the fiscal deficit will depend on the speed with which economic growth boosts revenues and copper prices but will also eventually require tax increases.
Return to contents Next Chapter
