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
- Member of the OECD and the Pacific Alliance
- Small, open economy vulnerable to external shocks given the dependence on copper and Chinese demand
- 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 / stretched country
- Income disparity and poor education system
Still fair, but decelerating, growth in 2019
After having reported an average annual growth rate of only 1.7% through the 2014/17 period, GDP observed a sharp improvement in 2018. The stronger performance was mainly underpinned by relatively higher copper prices and the rebound in business confidence since the election of the business-friendly President Sebastián Piñera. These factors also contributed to a rebound in investments after four consecutive years of contraction. A low inflation level and an accommodative monetary policy have also contributed to boosting household consumption. In 2019, while investments should remain robust, household consumption could observe some deceleration. This is in part due to the side effects of inflation moving back to the 3% target (driven by a low comparison base and by recent exchange rate depreciation), and the central bank implementing a tightening monetary cycle (a first hike was announced in end October 2018: 25 basis points to 2.75%). Moreover, employment figures have disappointed in light of a growing labor force. Downside risk to the activity outlook comes mainly from an escalation of the US-China trade war, which could hurt global growth as well as copper prices. China and the United States represent the main destinations of Chile’s exports, representing 28% and 14% respectively of total exports in 2017. Additionally, copper accounts for 10% of the country’s GDP, 25% of its fiscal revenues, and 50% of its export earnings.
Two deficits expected to remain moderate and manageable
The current account deficit widened in 2018. The relatively weaker outcome is mainly explained by the trade balance, as imports (driven by higher energy prices) rose at a faster pace than exports (copper prices lost momentum along the year due to the global trade protectionist rhetoric). As copper and energy prices should remain at similar levels in 2019, no big changes in balance are expected. It is worth noting that despite the relatively higher current account deficit, foreign direct investments are enough to ensure the external balance. In addition, the country holds foreign exchange reserves worth roughly 14% of GDP, or seven months of import coverage, in addition to sovereign wealth funds estimated at around 9% of GDP. However, Chile is not totally immune to shifts in foreign investors’ mood towards emerging economies. The country holds an external debt of 60% of its GDP, over 70% of which is owed by the private sector (21% banks and financial institutions, 79% non-financial institutions). In late 2018, Congress approved a general banking law to move towards the Basel III standard. Regarding the fiscal balance, the robust initial position of the public finances has helped mitigate the negative impact of sluggish activity in 2014/17. In the wake of rebounding activity, the government was able to reduce the fiscal deficit in 2018. In 2019, fiscal consolidation is expected to gain further momentum, in line with the goal of reducing the structural deficit by 0.2 percentage point per year, until reaching a deficit of 1% in 2022.
With no majority, the government is trying to pass more reforms
The incumbent President Sebastián Piñera from the center-right Chile Vamos alliance took office in March 2018. Mr. Piñera was elected thanks to his pledges to reduce mining regulations, to make adjustments to President Michelle Bachelet’s (2014/18) labor reform, to simplify tax rules, to reduce some corporate taxes, and to narrow the fiscal deficit. Nonetheless, neither his party nor the main opposition holds a congressional majority (hence the necessity to build consensus to pass reforms), and he will struggle to find support among the opposition for measures such as reducing labor unions’ strength and mining regulations.
In early June 2018, Mr. Piñera announced that he would not cut the corporate tax rate that Mr. Bachelet’s government raised to 27% – a step back on a campaign promise. He argued that maintaining the rate would help solve the fiscal imbalance and fund social reforms needed for the education, health, and pension systems. Subsequently, at the end of October 2018, Mr. Piñera presented a pension reform. The country holds a highly privatized pension system that was introduced in the 1980s under the Pinochet dictatorship. Nevertheless, over the years, the combination of an aging population, insufficient pension contribution rates, poor-paying jobs and high unemployment rates have contributed to low pay-outs. Although the proposal goes in direction of the opposition in some areas, the government might need to make some adjustments to the initial proposal in order to pass the bill through Congress.