Chile: Risk Assessment
Country Rating1
Rating: A2
Business Climate Rating1
Rating: A2
Risk Assessment2
Growth buoyed by reconstruction
A recovery plan enabled the country to ride out the recession and facilitated an economic recovery in 2010, despite an earthquake and tsunami in February. Growth was driven by domestic demand and in particular by a sharp rise in investments focused on restoring communications and rebuilding quake-stricken areas. The destruction of infrastructure has nonetheless continued to penalize the industrial sector. But growth in retail sales testifies to a sharp upturn in household consumption. Strong domestic demand has been accompanied by an acceleration of imports, which in turn has affected domestic product growth. Economic activity is expected to accelerate in 2011, driven by intensified reconstruction work. Household consumption has been trending up, buoyed by the rise in wages, decline in unemployment, and better access to credit. Any tightening of monetary policy will likely be limited in scope amid the appreciation of the peso and with inflation under control.
Improved payment behavior
Companies benefit from a very hospitable business environment, in particular a strong and efficient banking system. According to Coface monitoring records, payment incidents involving Chile have, overall, been below the world average. Payment behavior has returned to pre-crisis levels, and is expected to stabilize. However the earthquake weakened some smaller businesses, and certain export sectors are suffering from the appreciation of the peso, which reduces competitiveness and affects corporate financial stability.
Budget situation: return to equilibrium delayed
Because of the expenses incurred as a result of the earthquake, the budget remained in deficit in 2010. An austerity budget in 2011 should be able to contain the deficit while allowing reconstruction to continue. Housing and public works are expected to see a 33% increase in their allocated budget, as well as a significant contribution from investment funds. Financing for the reconstruction program are expected to be covered by temporary tax hikes and limited use of external financing.
The current account deficit is likely to widen in 2011. The trade surplus will shrink with economic growth and the peso appreciation spurring imports. Despite a recovery in copper prices, exports are likely to remain constrained as a result of the damage to industrial sector infrastructure and a loss of competitiveness due to the peso appreciation. Profit repatriation by foreign investors is moreover expected to contribute to widening the incomes account deficit. Financing needs are likely to be covered by foreign direct investment and borrowing abroad. With stable foreign debt ratios and an acceptable level of exchange reserves, the country's external position presents no particular problems.
Political stability
President Sebastian Piñera, (National Renewal Party), in power since March 2010, has formed a center-right coalition ('Coalicion Por El Cambio') unlikely to fundamentally challenge the policies implemented by the previous left-wing coalition, social policies included. The new administration is expected to continue to manage public finance with the same circumspection that has enabled the country to build up stabilization and investment funds, and to contain public debt. The focus is likely to be on modernizing the administration, introducing greater flexibility into the employment market, and reducing extreme poverty.
Strengths
- Abundant mining resources (world leader for copper), extensive agriculture, fishing and forestry
- General consensus on the prudent economic policy in place for the last 20 years
- Many free trade agreements signed (52)
- Regional platform for investors attracted by the country’s political stability, the quality of its institutions and infrastructure and its sound financial system
- International standing boosted by membership of OECD since the end of 2009
Weaknesses
- Small size of economy, heavily exposed to world economic fluctuations due to its openness
- Excessive dependence on copper exports (half of total)
- Dependence on foreign sources for energy
- Disparities of income among the greatest in the world due notably to deficiencies in education