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
Activity to remain lackluster
GDP growth slowed down in 2019, majorly impacted by the deterioration of the global risk scenario (US-China trade war escalation and decelerating activity in China), the temporary disruptions to the mining sector and, especially, the social upheaval triggered in October 2019. The latter caused deep side effects on sectors such as retail and transport. In 2020, activity is likely to remain lackluster. On the one hand, supportive fiscal and monetary policies (real policy rate in negative field at end-2019) will contribute positively to the economy. Budget-wise, following the Q4 2019 protests, the government announced a USD 5.5 billion (roughly 2% of GDP) fiscal stimulus package out of which USD 3 billion will be allocated to stimulate activity and employment by increasing investment expenditure, and the remainder will be dedicated to reconstruction efforts of public infrastructure. But, on the other hand, confidence indexes, which have strongly eroded since the protests started, and the deteriorating job market will prevent a stronger economic momentum (thus household consumption and private investments will remain weak). Finally, further escalation of trade tensions would represent another downside risk. Copper prices would be under pressure, affecting the small Chilean open economy for which copper represents roughly 10% of GDP, 25% of fiscal revenues and 50% of exports.
External vulnerability has increased amid lower global activity
The current account deficit was still wide in 2019, mainly explained by the trade balance, which remained hampered by the weak global trade environment that has hit copper demand and prices. This year, the current account deficit should significantly narrow due to weak domestic demand and the relatively more depreciated exchange rate, which will both weigh on imports. Alongside, foreign direct investment should still be enough to cover the external deficit (albeit the former should be somewhat impacted by the deterioration in the political environment triggered by the 2019 social unrest). Moreover, the country´s external debt has significantly increased in the last decade. Currently it stands at around 72% of GDP, over 70% of which is owned by the private sector (22% by banks and financial institutions, 78% by non-financial companies). Nevertheless, Chile´s negative net international investment position is still at moderate level, at roughly -24.3% of GDP as of September 2019, mainly smoothed by the existence of relevant pension funds’ investments abroad (about 30.7% of GDP as of September 2019). Finally, the country has a high level of foreign exchange reserves (covering roughly 7 months of imports and representing 14% of GDP). In November 2019, the central bank announced that it could sell up to USD 20 billion in order to smooth depreciation pressures on the Chilean peso (to last through May 2020).
Regarding the fiscal framework, a loosening policy is expected in 2020, as a consequence of the USD 5.5 billion fiscal package announced in December 2019. In fact, the government has formally given up reducing the structural balance to 1% in 2022 (the revised 2020 structural deficit is now at 3% of GDP, up from the previous 1.7% estimate). Moreover, policymakers now see public debt stabilizing at roughly 38% of GDP by 2024, up from the 30% forecasted before.
Social discontent is a key challenge for the government
President Sebastián Piñera of the center-right Chile Vamos coalition has experienced an acute drop in popularity, driven by the economic slowdown, higher living costs and the perception that the government has been inefficient in solving social demands. Despite the Chilean economy having relatively sound economic fundamentals, there is a deep discontent over still high inequality, low pension levels and precarious access to health and education. Indeed, in October 2019, these factors contributed to trigger the most intense social unrest since the return to democracy. What began as a student protest against rising transportation charges quickly turned into confrontation with public forces, damage of public infrastructure, and ultimately of the economy. Furthermore, the government also showed little skill and empathy in the management of the conflict.
Dealing with the population’s longings will remain a key challenge for the government. In response to the protestors’ demand, a referendum will be held on April 26 2020 on whether the country should draft a new constitution to replace the one imposed in the 1980s by the Pinochet dictatorship. In this occasion, Chileans will be asked if they want a new constitution, and if they want it to be drafted by a constitutional Convention (made up of citizens elected for this purpose), or a mixed constitutional convention (made up in halves by currently-sitting members of Parliament and directly-elected citizens). If the population votes for a new constitution, a second vote on 25 October 2020 would elect the members of the constitutional convention, and a third vote would accept or reject the new constitution after it is drafted, which is expected to occur in March 2022 at the latest.