Chile: Risk Assessment
Country Risk Rating
Business Climate Rating
- Mining (leading copper producer), agricultural, fishery and forestry resources
- Numerous free-trade agreements
- Flexible monetary, fiscal and exchange rate policies
- Favourable business climate, political and institutional stability
- International companies operating in distribution, air transport and paper
- Member of the OECD and the Pacific Alliance
- Small, open economy vulnerable to external shocks given the dependence on copper and Chinese demand, as well as exposure to climate and earthquake risks
- Weak budgetary resources: 20% of GDP
- Inadequate research and innovation
- Vulnerability of the road network and electricity grid; high energy price because of the country’s geographic situation (long and narrow) long and narrow country
- Income disparity and poor education system
Stronger Growth in 2018
Growth is expected to pick up in 2018. Following the rise in prices and production, copper exports (50% of total exports) are expected to rise. This upturn in mining should encourage investment in the sector, as well as jobs and wage growth. In this context, and with imported inflation moderated by the peso’s appreciation, the contribution of household consumption (64% of GDP) to growth is expected to rise. Public consumption will perform at least as well. The non-mining sector is expected to benefit indirectly, even if construction could lag behind because of persistent overcapacity. Save for a climate disaster, the production of fruit, timber, paper pulp, wine and prepared fish will benefit from strong North American and European demand, as well as the improved regional economy. Nevertheless, confidence among business owners, hit by higher taxes introduced by the previous government, will influence investment and recruitment.
Gradual Rebuilding of Budget Leeway
The robust initial position of the public finances and the fiscal easing have helped mitigate the negative impact of falling copper prices on activity without the deficit and the debt reaching significant levels. In order to rebuild room for maneuver, fiscal consolidation is expected to begin in early 2018, though at a measured pace so as to manage investment in healthcare, education and in road and energy infrastructure. Greater use of concessions, as well as higher income drawn from copper extraction and the completion of the 2014 tax reforms will make this easier. Nevertheless, it will not be enough to halt the increase in debt.
Low Current Account Deficit and Significant Investment Abroad
The current account deficit, already fairly low, is expected to fall thanks to improved trade terms in 2018. Higher copper exports will generate an increase in the trade surplus increase. An increase in imports linked to robust internal demand and the slight upturn in oil prices is likely to be dampened by the appreciation of the peso. The services deficit, broadly due to the reliance on foreign transport services will fall in a context of higher tourism income. Against this, the income deficit will rise in connection with higher dividend repatriation by foreign mining companies and higher payment of interest on external debt, which represented 63% of GDP at end September 2017, three quarters of which concerns the private sector, specifically in the context of FDIs. The flow of FDIs is, moreover, exceeded by Chilean direct investments abroad mostly by pension funds. It is therefore no surprise that Chile’s foreign assets are almost as high as its foreign liabilities.
Opposing President and Parliament Will Co-Habit
From the center-right and supported by the business world, and a businessman himself, Sebastian Piñera (already president from 2010 to 2014) was elected in the second round of the presidential elections on the 17th December 2017 with over 54% of the vote and a participation rate of 48.5%, beating Alejandro Guillier, the center-left candidate. He succeeds Michelle Bachelet, also from the center-left. Bachelet, who was ineligible to stand for a second consecutive term, lost a good deal of popularity because of the economic downturn, corruption scandals involving high-profile figures and allies, as well as reforms deemed insufficient by her electorate but damaging by business leaders.
The new government, installed in March 2018, will have to co-habit with a parliament from the opposing side. This is because at the same time as the first round elections on the 19th November, the center-right party Chile Vamos only won 73 seats out of 155 against 56 for the center-left party Nueva Mayoria led by the unfortunate opponent, 20 for the Frente Amplio on the left and 6 for the independent center-left candidates. In the Senate, half of whose members was renewed, Nueva Mayoria now has 22 seats out of 42. With a left-leaning parliament, Sebastian Piñera will find it difficult to go back on the reforms carried out by his predecessor on tax, social and education matters. The confrontation will focus on the pace of fiscal consolidation, the cancellation of the taxation hike for corporates and wealthy households, the extension of free education and reform of the private pension system. There will be little in the way of significant progress, which could make everyone unhappy. Internationally, the main problem remains the conflict with Bolivia over the re-establishment of Bolivian access to the sea.