Previous Quarterly Editions
Expropriation Risk: 39 40 40 51 ▲Political Violence Risk:57 57 57 49 ▼Terrorism Risk:25 25 27 28 ▲Exchange Transfer and Trade Sanction Risk: 45 35 35 35 ►Sovereign Default Risk:37 27 37 37 ►
TREND ►
Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Since its re-integration with the rest of the world after the 1973-90 Pinochet dictatorship, Chile has adhered to a foreign policy that, at least outside Latin America, is agnostic as regards ideology. This pragmatism, maintained across different governments, reflects the overriding importance of trade for the small, export-driven economy.
Accordingly, Chile has a policy of “active neutrality” in its relations with China and the U.S., its two largest trading partners, and has a free trade agreement with both. Trading and other relations with Russia are minimal, while those with the European Union are framed by a broad Association Agreement, signed in 2003.
China is Chile’s largest export market. In 2021, it accounted for sales of USD36.5 billion (of which USD28 billion were copper), well ahead of the U.S. (USD14.9 billion). Moreover, although China is also Chile’s largest source of imports, it represented an important trade surplus for Chile (USD12.4 billion, compared to a total surplus of USD10.5 billion).
Chinese companies have invested relatively little in Chile, accounting for a stock of foreign direct investment (FDI) of just USD1.7 billion in 2020 (the latest year for which by-country figures are available), compared with USD31.8 billion from the U.S. However, investment from China has been increasing and, despite FDI’s importance for Chile’s economic growth, some unease has been expressed domestically about the position Chinese companies have acquired in some sectors regarded as strategic such as electricity distribution, where China’s State Grid controls two of the four largest operators, telecommunications infrastructure.
The pressures to which Chile’s neutrality policy can be subject were illustrated in November 2021 when the Civil Registry backtracked on the announced award to a consortium led by China’s Aisino Corporation of a ten-year contract for the supply of passports and identity cards. The reversal, officially attributed to inconsistencies in Aisino’s bid, reportedly followed U.S. suggestions the award could cost Chile its place in that country’s Visa Waiver Programme. The contract was subsequently awarded to the current supplier, France’s Idemia, which had offered the second lowest bid.
Chile’s relations with the U.S., as well as Europe, are broader than with China, including cooperation agreements in numerous areas. Left-wing rejection of free market economic policies, referred to by these sectors as “neoliberalism” and symbolised by the U.S., does not translate into greater identification with China because of its human rights violations. Recently, as Chile seeks to address social inequalities, European countries have increasingly come to be regarded as a possible social welfare model.
TREND ▲
A proposed new, markedly left-wing constitution, which had raised some expropriation concerns, was overwhelmingly defeated in a national referendum on September 4. They included the transformation of water use rights, currently owned by their holders, into revocable and non-tradable permits. Due to the effect on the sale value of agricultural properties, this was considered tantamount to expropriation. In addition, under the proposed constitution, expropriations would have been compensated at a not clearly defined “just” price, rather than market price, and the legal security of mining concessions would have been undermined.
Renewed efforts to replace the country’s existing constitution, which dates to the Pinochet dictatorship, are already being discussed. The mechanism adopted, its timing, and the outcome are uncertain, but a new draft would almost certainly be less radical and, therefore, more market-friendly than the recently defeated proposition.
Given its similarities to key reforms in the programme of President Gabriel Boric’s left-wing government, in office since March, the constitution’s rejection has also allayed concerns related to these reforms. For example, it has further reduced the already low risk a pension reform bill, due to be announced shortly by the government, could propose the transfer to state management of the pension savings held by Chileans in the individual accounts managed by the private system. However, the scope of the private administrators’ business may be limited by the creation of a parallel state system.
Slowing economic growth and the likelihood of a recession next year have increased awareness of the importance of attracting FDI. Some sectors of the government coalition view FDI as a pillar of a “neoliberal” system that condemns Chile to remain an exporter of raw materials. This is reflected, for example, in the government’s insistence on renegotiating parts of a previously agreed modernisation of its Association Agreement with the European Union, including its investment chapter. More recently, however, government discourse has shifted to FDI attraction and the creation of propitious conditions for its arrival.
TREND ▼
Following the proposed constitution’s defeat, small groups of students and schoolchildren have mounted sometimes violent demonstrations, principally in Santiago, and have, for example, interrupted the operation of the city’s underground railway. This is reminiscent of the demonstrations that preceded the October 2019 outbreak of social unrest. These demonstrations are likely to persist but not to mushroom as they did in 2019. Polls and the referendum’s result indicate Chileans have tired of conflict and are currently more concerned about rising crime, high inflation, and slowing job growth.
However, the government does face three important public order challenges: the rise in crime and an increase in its violence, often related to drug trafficking; violence in southern Chile, which is also sometimes related to drug trafficking and other crimes such as the theft of wood; and illegal immigration in northern Chile, which has also fuelled violent crime. These issues and, particularly, the violence in southern Chile call for a long-term approach and short-term results may prove elusive.
The violence in southern Chile, which has been growing steadily since the late 1990s, 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, the violence has since been permeated by criminal activities, such as the theft of wood from the area’s forest plantations and drug trafficking.
Some of the more radical groups operating in the area can be classified as terrorist. As well as targeting forestry companies and non-Mapuche landowners, seizing land, and carrying out arson attacks, they reportedly terrorise Mapuche communities not sympathetic 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 Region.
There is no current risk of capital or exchange controls. However, exchange-rate risk has increased given the peso’s marked volatility against the U.S. dollar. This is attributed to political uncertainty in Chile, as well as international factors including the price of copper, the country’s main export.
In July, faced with a particularly sharp depreciation of the peso, the central bank announced a programme of daily interventions in the foreign exchange market for up to a total of USD25 billion through to September 30. However, as from September 12, in light of a mitigation of the peso’s volatility, the number of daily interventions has been halved.
TREND ►On September 15, Moody’s downgraded Chile from A1, with a negative outlook, to A2, with a stable outlook, citing factors including fiscal spending pressures related to the impact of inflation on household budgets and a weak economy. This followed a sharp increase in the country’s risk level as reflected in five-year credit default swaps.
After a fiscal deficit of 7.7% of GDP in 2021, the government expects to run a virtually balanced budget this year. However, gross central government debt has climbed steadily and is expected to close the year at around 38% of GDP, up from 36.3% in 2021 and 32.5% in 2020.
Moreover, following the defeat of the proposed new constitution and its effect in weakening the government, the government has indicated plans to trim proposed tax increases designed to increase fiscal revenues by 4.1% of GDP over the next four years. There is also concern about the current account which, in 2022, is forecast to show a deficit in excess of 6% of GDP for the second consecutive year.
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