Previous Quarterly Editions
Expropriation Risk: 38 38 38 39 ▲ Political Violence Risk: 48 48 48 57 ▲ Terrorism Risk: 25 25 25 25 ► Exchange Transfer and Trade Sanction Risk: 35 45 45 35 ▼ Sovereign Default Risk: 37 37 27 37 ▲
TREND ▲
The next presidential election (first round: November 21; run-off: December 19) is moving into full swing and, along with the election of a new Lower House of Congress and senators for nine of the country’s 16 regions (November 21), will focus attention over the coming months, leaving President Sebastián Piñera’s centre-right government as a mere caretaker. The elections imply a level of uncertainty that is unusual for Chile, which reflects both the unpredictability of the election results and the fact that the outcome could change public policy to an extent not seen since the restoration of democracy in 1990.
The country’s next president may not be from one of the two coalitions that have governed Chile for the past 30 years: the centre-left coalition formerly known as the Concertación and the right-wing Chile Vamos coalition (recently renamed Chile Podemos Más). Both are fielding competitive candidates, but there is also a third frontrunner, Gabriel Boric, representing an alliance between the new left-wing Frente Amplio coalition and the Communist Party. His candidacy occurs in the context of a restructuring and fragmentation of political parties and the emergence of a new generation of politicians.
The large-scale street protests seen in Chile in late 2019 reflected widespread anger about income and other inequalities. However, the results of the presidential primaries held by Chile Vamos and the Frente Amplio/Communist Party (FA/PC) alliance in July -- in which, in both cases, the more extreme candidates were eliminated -- suggest that voters want governability as well as change.
Following the protests, the main political parties agreed to convene a constitutional convention to reform the 1980 constitution, a decision overwhelmingly endorsed by a plebiscite in October 2020. This constitution, inherited from the 1973-90 Pinochet dictatorship, assigned an important role to the market in providing pensions, healthcare and education. By its opponents, it is blamed for locking in a ‘neoliberal’ model and perpetuating inequality.
The convention, elected in May, is heavily left leaning. However, its terms of reference stipulate a two-thirds majority for approval of each article of the proposed new constitution, which must be put to a plebiscite, suggesting that compromise will be necessary. Two months after its inauguration, the convention is in the final stages of defining its rules of operation before beginning to debate the terms of the new constitution. It is unfortunate that, due to a pandemic-related postponement of the election of the convention’s delegates, this debate will occur during a presidential campaign, raising the political temperature in the convention and possibly further damaging its declining approval rating -- and, therefore, the legitimacy that is essential for a successful outcome.
As a small, open economy, Chile has long seen foreign direct investment (FDI) as an economic growth driver. The principle of equal treatment of domestic and foreign investors is an article of faith that has been adhered to across governments.
Expropriation of overseas or local companies is extremely unlikely, even under a FA/PC government (except possibly of water rights, in the context of acute shortages). However, Boric advocates a review of Chile’s free trade and investment protection agreements to incorporate citizen and local government participation and, in the case of investment agreements, ensure their alignment with the country’s new development model and industrial policies. Boric also opposes Chile’s (pending) ratification of the TPP-11 Agreement.
Under the authorisation of Congress for a third withdrawal of savings from people’s privately managed (AFP) pension accounts, life insurance companies offering pension annuities (acquired with AFP savings) were obliged to pay clients, who so requested, an advance on future pension payments. The industry has denounced this as a form of expropriation. Bills currently before Congress would permit a fourth withdrawal of savings and a second pre-payment of pension annuities, prompting US life insurers with operations in Chile to appeal for intervention by the US government.
Natural resource industries and, particularly, mining companies have warned of the risks of an increased regulatory burden, related principally to the environment in the context of a longstanding drought and growing concern about the impact of climate change. The mining industry is also concerned about a proposed new royalty tax, currently being debated by the Senate.
Following the 2019 protests, 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. As COVID-19 cases have gradually dropped and lockdown measures been lifted, there has been no sign of a larger-scale reappearance of protests and, as the economy picks up, this is unlikely in 2021 and probably through to, at least, the end of the ‘honeymoon’ of the new government, which will take office in March 2022.
TREND ►
In recent years, 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. They include the theft of wood from the area’s forestry companies and, reportedly, drug trafficking as well as 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, in some cases, loss of life, and certain parts of the Araucanía Region have become no-go areas. This has deterred investment in one of the country’s poorest areas. The situation calls for a comprehensive grassroots-based strategy that can be sustained over longer than the life of a single government.
TREND ▼
There is no current risk of capital or exchange controls. However, the volatility of the peso against the dollar makes exchange-rate risk a concern. This volatility reflects factors that include the price of copper (the country’s main export), increased liquidity due to government COVID-relief programmes and AFP withdrawals, and political uncertainty (to which the price of assets have become unusually sensitive in recent months).
There is some concern in Chile about China’s growing presence in key economic sectors such as electricity distribution, and, possibly, the planned rollout of 5G mobile technology as well as the manufacture of Chilean passports and identity cards (with the consequent access to personal data). However, the government has insisted on its neutrality and a policy of reliance on institutional arrangements such as fair competition authorities.
Following a cut from A+ to A by Standard and Poor’s in March, Chile’s sovereign debt ratings -- the highest in Latin America -- have remained unchanged. Nonetheless, the main rating agencies have warned of the risks posed by mounting government debt which, combined with the use of assets from a sovereign fund, has significantly deteriorated the country’s net position. From 9% of gross domestic product (GDP) a decade ago, when Chile was a net creditor, gross central government debt had risen to 33% of GDP by March. Further increases are expected, perhaps to 50%, before stabilisation can be achieved.
The Central Bank has also warned that, due to the injection of liquidity through government programmes and AFP withdrawals, the economy is overheating. Further AFP withdrawals would, therefore, render both the government and companies more dependent on overseas borrowing and increase their exposure to exchange-rate risk in a context of the peso’s depreciation against the dollar.
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