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 Chinese demand
- Exposure to climatic and earthquake risks
- Inadequate research and innovation
- Income and wealth disparity, poor education and health systems
Economic rebound amid supportive copper prices and an expansionist fiscal stance
The economy continued to recover in Q1 2021, expanding by 0.3% year-on-year (YoY), mainly driven by inventory replenishment (+3.1% YoY), after four quarters in contraction. In addition, household consumption (+2.8% YoY), also benefited from economic measures to support income and the second round of pension withdrawals. Looking ahead, activity is expected to continue benefiting from the reopening process, strong copper international prices, ongoing fiscal stimulus and the third round of pension withdrawals approved in late April 2021. The latter could grasp up to USD 19 billion (equivalent to 7.5% of 2020 GDP), which would add to the 14% of GDP equivalent already paid during the first two rounds. Concerning COVID-19, authorities began to lose mobility restrictions for the vaccinated population in early July 2021 (after setbacks in Q1 2021), when advanced vaccination finally started to bear positive fruit. As of 23 July 2021, the country had 62% of its population fully immunized and 71% took at least one dose. With a robust consumption resumption, the improved pandemic framework, and taking into account the inflationary risk, in July 2021 the central bank understood that a highly expansionary monetary-policy stance was no longer required. Therefore, in the same month, it started to normalize the benchmark rate by 25 basis points to 0.75% per year (expected to continue in the upcoming months). Overall, the downside risks are related to new COVID-19 strains. Furthermore, in the short term, the November 2021 presidential elections and the high uncertainty regarding the constitution rewriting could dampen private investment recovery.
Current account back into deficit; fiscal deficit still high
The current account surplus narrowed in Q1 2021 to 0.9% of GDP in four rolling quarters, mainly explained by deteriorated income (higher profits repatriated by foreign firms related to strong copper prices) and, to a lesser extent, services deficits. Conversely, the trade balance surplus improved, driven by higher metal prices that boosted export revenues and stood out the rebound in imports. On the financing side, foreign direct investment in Q1 2021 was still half of the value observed in the same quarter of 2020. In the quarters ahead, the current account balance is expected to return into deficit, overall driven by the recovery of economic activity (rising imports and higher profits for foreign companies). Nonetheless, FDI should be enough to cover the external needs. Concerning the external debt, it stood at 75% of GDP in Q1 2021, 68% of which is owned by the private sector. The negative net international investment position is still at a moderate level, at roughly -10.3% of GDP in Q1 2021, mainly smoothed by the existence of relevant pension funds’ investments abroad (estimated at 32% of GDP as of March 2021). However, it is important to note that the third round of pension withdrawals started in May 2021, which means that some of their overseas assets are likely to be sold to serve the withdrawal demands. Moreover, the central bank has approximately USD 49.7 billion in foreign exchange reserves (covering over 8 months of imports), while the Treasury held around USD 16 billion in Sovereign Wealth funds at the end of May 2021. Regarding the fiscal account, the government will again run a high deficit in 2021 in line with still elevated stimulus. That said, although gross public debt will continue to climb, from a low level, Chile´s long record of prudent fiscal policy will allow it to continue accessing affordable market financing.
The outcome of the constitution convention increases the risk of relevant changes to the current political and economic model
In May 2021, Chile chose the 155 delegates who will rewrite its constitution. The outcome was considered as a defeat by the ruling Piñera government, which expected to garner at least one-third of the votes to avoid disruptive changes to the current constitution (since each new proposal requires a two-thirds majority), but fell short and reached 37 seats only (24% of total seats). Similarly, the center-left, obtained 25 seats, less than the 28 seats conquered by the leftist Apruebo Dignindad. Indeed, independent candidates were the major winners, obtaining 65 seats (42%) when including the 17 seats reserved for representatives of indigenous people. On 4 July 2021, the constitution convention started its work. It will have nine months (plus three additional months, if required) to complete the draft of the new constitution, and then a new national vote will determine whether to accept it or not. The discussions are likely to address the current political structure, the provision of social goods, and environmental protection. Moreover, the country will hold presidential elections in November 2021. The center-right and the far-left coalitions held their respective primary elections in mid-July 2021. The winners were, on the left, Gabriel Boric (a former student leader and current congressman) and, on the center-right, Sebastián Sichel (an independent and former Social Development Minister under Piñera). Both seem well-positioned for general elections, although not all parties have so far nominated their candidates.