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
- Member of the OECD and the Pacific Alliance
- Small and open economy vulnerable to external shocks given the dependence on copper and on Chinese demand
- Exposure to climatic and earthquake risks
- Inadequate research and innovation
- Income and wealth disparity, poor education and health systems
Economy set to rebound amid supportive copper prices and an expansionist fiscal stance
In Chile, the first COVID-19 case was reported on 4 March 2020. At first, a well-calibrated and dynamic quarantine model was implemented. Nonetheless, a reckless and hasty easing of mobility restrictions had to be reverted in May, when the number of daily new COVID-19 cases started to surge again. In fact, the number of daily new COVID-19 cases peaked in June 2020 and started to decrease afterward, allowing for a gradual reopening. Consequently, the economic contraction in 2020 was larger than initially expected, even in the presence of large expansionary policy stimuli. In 2021, the economy is likely to rebound. First, the ongoing fiscal stimuli will not be fully unwound, including USD 2 billion in subsidies aimed at creating new jobs and recovering those lost during months of lockdown. This adds to a USD 34 billion plan on public works for the 2020-2022 period (roughly 14% of 2019 GDP), with most of the investment set to be private. Moreover, household consumption should also be supported by the slow improvement on the job market, the second withdrawal from pension funds, and stable low inflation. Regarding external sales, exports will be bolstered by the gradual resumption of global activity (notably in China, the main trade partner) and supportive copper prices. Overall, the downside risks are related to the evolution of the COVID-19 pandemic, and the rewriting process.
Current account back into deficit; fiscal deficit still high
The current account registered a significant correction in 2020, mainly driven by a stronger trade surplus (supported by resilient mineral exports and the drop in imports due to the plunge in domestic activity). Regarding the financing, net foreign direct investment (FDI) remained positive, albeit lower. In 2021, the current account balance is expected to return into deficit, overall driven by the recovery of economic activity (rising imports and relatively higher profits for foreign companies). Nonetheless, FDI should be enough to cover the external needs. Concerning the external debt, it stood at around 82% of GDP in Q3 2020, 67% of which is owned by the private sector. The negative net international investment position is still at a moderate level, at roughly -13.8% of GDP in Q3 2020, mainly smoothed by the existence of relevant pension funds’ investments abroad (34% of GDP as of September 2020). Moreover, the IMF approved a USD 23.8 billion precautionary two-year Flexible Credit Line in May 2020. Finally, Chile has approximately USD 38 billion in foreign exchange reserves (covering roughly 8 months of imports), while the Treasury held around USD 22 billion in Sovereign Wealth funds at the end of September 2020. However, it is important to note that in July 2020, Congress approved a law allowing a one-time withdrawal of 10% from pension savings on an individual capitalization account (a second similar withdrawal bill is under discussion in Congress). Regarding the fiscal account, the budget deficit significantly widened in 2020 as a side effect of the GDP collapse and the strong fiscal stimulus that was implemented. Looking ahead, the government will still run a high deficit in 2021, in line with the social pressures for higher fiscal spending. That said, although gross public debt will continue to climb, Chile´s long record of prudent fiscal policy will allow it to continue accessing affordable market financing.
A fragile political environment at least until the November 2021 general elections
In response to public dissatisfaction, which triggered the violent protests in Q4 2019, Chile held a referendum in October 2020 on whether the country should draft a new constitution in order to replace the one imposed in the 1980s by the Pinochet dictatorship. On this occasion, Chileans overwhelmingly voted in favor of going forward with the rewriting and through a fully elected Constitutional Convention (rather than a mix of this body and current lawmakers). The population will choose the 155-member constitutional body on 11 April 2021. The body will then start discussions in Q2 2021 and will have up to a year to draft the new constitution. Although each clause must be approved by two-thirds of its members (smoothing the risk of extremist inputs), uncertainty on the content of the new constitution will remain high. This is underpinned by the fact that the obligatory ratification referendum will only take place during H1 2022. Overall, the new constitution is expected to enhance the role of the state in the provision of social services. Finally, the popularity of the center-right President Sebastián Piñera, of the currently divided center-right Chile Vamos coalition, is expected to remain weak and thus vulnerable to the passage of populist measures by the Congress and new rounds of social protests. Lastly, Chileans will also choose their president on 21 November 2021.