THE ECONOMY ENTERED INTO A RECESSION

In 2023, activity will enter a recession, mainly dragged down by a contraction in household consumption (65% of GDP). The index will be affected by the gradual dry-up of the excess liquidity linked to the withdrawal of pension savings, a weaker job market, durably historically high inflation, and the lagged impact of tighter credit conditions (policy rate stands on hold at 11.25 % per year since October 2022, up from a minimum of 0.5% up to July 2021). Meanwhile, the latter will also affect gross fixed investment (24% of GDP), which is expected to drop, influenced as well by eroding business confidence and due to investors being likely to remain somewhat cautious amid the prolonged uncertainty prompted by the ongoing process to redraft the Constitution. Conversely, exports are expected to bring a positive contribution to activity. They should mildly expand, driven by the lithium boom (accounting for 8% of all foreign sales in January-November 2022, up from 1% in the same period of 2021) and by relatively higher growth in China (the leading destination of foreign sales), as the economy reopens from the COVID-19 lockdowns. This could also support copper prices. Mining accounted for 62% of total foreign sales in 2021, with red metal representing 57%.

EXTERNAL SHORTFALL TO NARROW SOMEWHAT AND FISCAL ACCOUNT TO SWITCH BACK INTO A DEFICIT

The large current account deficit registered in 2022 will partially ease this year. The trade balance surplus will widen, as imports contract amid dropping domestic demand, while exports continue to expand. In addition, the lower local economic impetus will also help curb the primary income deficit somewhat, as it should reduce foreign firms’ profit repatriation. Finally, the services deficit should decrease as freight costs moderate, and tourism pursues its recovery. On the financing side, FDI should weaken due to weaker domestic economic momentum and the higher financing cost. Furthermore, more volatile portfolio investment net inflows should fill the remaining gap, along with public, non-financial enterprise, and bank debt issuance. Importantly, in 2022 the central bank also used foreign exchange reserves to cover the external shortfall. As a result, resources went down from USD 51.3 billion in December 2021 to USD 38.6 billion in November 2022 (covering roughly five months of imports). Since May 2022, the country has also had access to a USD 3.5 billion IMF Short-term Liquidity Line (for one renewable year). Furthermore, Chile’s negative net international investment position stood at roughly -14% of GDP in Q3 2022, mainly smoothed by relevant pension funds’ investments abroad (estimated at 21% of GDP). The external debt was at 84% of GDP in Q3 2022, 71% of which was owed by the private sector. Overall, the vast external shortfall exposes Chile to changes in global investors’ moods.

On the fiscal side, after a substantial consolidation in 2022 in the aftermath of the phase-out of COVID-related stimuli, the budgetary deficit is set to widen in 2023. This is underpinned by the economic recession, which will prompt a tax collection drop amid higher financing costs. In addition, the 2023 budget contemplates a rise of 4.2% in actual expenditure based on three planks: economic, citizen, and social security.

POLITICAL UNCERTAINTY AMID THE PROLONGED PROCESS OF REDRAFTING THE CONSTITUTION

President Gabriel Boric, from the left-wing Apruebo Dignidad coalition, was sworn in on 11 March 2022. He was a student leader, and his victory represented a shift from the centrist incumbents who presided over the country since the end of the military dictatorship of Augusto Pinochet in 1990. His coalition holds only 37 out of 155 seats in the fragmented Lower House and five out of 50 seats in the Senate (split evenly between the center-right alliance led by Chile Podemos Mas, several left-wing parties, and independents). As a result, the ruling government relies on negotiating to move forward with reforms. Mr. Boric describes himself as a moderate socialist and aims to increase social spending. To finance higher expenditure, in July 2022, it was presented a tax reform package to increase revenues by 4.1% of GDP once fully implemented (gradually from 2023 up to 2026). However, currently being discussed in Congress, the proposal has already had its impact reduced to 3.6% of GDP. The bill chiefly encompasses raising taxation on higher incomes, increasing mining royalties, and curbing tax exemption and evasion. In addition, the government presented a pension reform in November 2022, which would create a new social security scheme financed by unique contributions equivalent to 6% of employees’ wages and to be fully paid by employers (contributions to increase gradually). Meanwhile, the national referendum held in September 2022 widely rejected the Constitutional Assembly’s draft, which would have expanded the provision of social transfers and reduced government centralization. It strengthened the environmental role and indigenous rights. The outcome was considered a defeat for Mr. Boric, whose popularity dropped recently (from 38% in September 2022 to 30% in December 2022). In December 2022, politicians representing the main parties in Congress reached an agreement for a new constitutional process (pending approval by both houses), which would consider a Council made up of 50 elected delegates (from 155 in the previous cycle) and 24 experts (none previously). It would also include 12 principles that a new text must respect. Moreover, experts would begin to draft the basis of a new Magna Carta before the delegates’ election. Lastly, the national referendum with mandatory voting will occur in November 2023.