As a consequence of the Covid pandemic, all major developing regions have suffered a sharp decline in GDP growth and the situation is still precarious with infections continuing to spread and burdening health systems. However, in early 2021 a number of emerging markets managed to bring the virus under control, rapidly expanding their testing and treatment capacity, implementing local lockdowns if necessary. Furthermore, several vaccines are in the final stages of approval, while others are already in distribution. As economies slowly reopen, pent-up demand and exports pick up, the hope for this year is renewed GDP growth. In this scenario, promising markets are identified on the basis of three criteria:
- the pace of GDP recovery in the wake of the Covid-19 crisis
- a relatively low number of Covid-19 cases (per 100.000 population)
- stable political and institutional conditions
Of all emerging market regions, Latin America has been hardest hit by the pandemic, both in terms of cases of infection and death rates: the recovery will be partial and uneven, depending on how fiscally willing governments are to support their economies, how effectively vaccines can be distributed, and how much a country is dependent on tourism. atradius stresses how Chile has an interesting business environment, underpinned by sound institutions, low corruption rates and effective macroeconomic policies. While the economy has been hit by the pandemic, it has nonetheless proved to be resilient to the shock, well-prepared for a robust recovery in the coming years: the economy is relatively diversified, with the highest share of remote work activity in the region. The recovery began in retail sales and the manufacturing sector in the third quarter of 2020, although tourism and hospitality continue to be weak. Export receipts benefited from a recovery in the price of copper, the main export product. Vaccine rollout has started and is expected to be one of the fastest in the region.
In Chile, a well-calibrated and dynamic quarantine model was implemented at the beginning of the pandemic; however, a hasty easing of mobility restrictions had to be narrowed down in May as the number of daily new cases started to climb again. Having peaked last June, cases have started declining thereafter, allowing for a gradual reopening. The economic contraction in 2020 was greater than initially expected, even in the presence of large expansionary policy stimuli and for this year Coface predicts a rebound in the economy. First, ongoing fiscal stimulus will not be completely removed, including $2 billion in grants aimed at creating new jobs and recovering those lost during the months of lockdown. This comes in addition to a €34bn plan on public works for the period 2020-2022 (around 14% of 2019 GDP). Furthermore, household consumption should also be supported by the slow improvement in the labor market and the relatively low inflation rate. As for foreign trade, exports will be strengthened by the gradual recovery in global activity, in particular in China, main partner, e from the price of copper.
The current account experienced a significant correction in 2020, mainly due to a large trade surplus (supported by mining exports and declining imports due to the collapse in domestic activity). On the financing side, net FDI remained positive, albeit lower than expected. As for external debt, it stood at around 82% of GDP in the third quarter of 2020, 67% of which held by the private sector. The net negative position of international investment is still at a moderate level, at around -13,8% of GDP in the third quarter of 2020, mainly due to the existence of significant pension fund investments abroad (34% of GDP in September 2020). Furthermore, in May 2020 the IMF approved a precautionary flexible credit line of 23,8 billion. Finally, it should not be forgotten that Chile holds around 38 billion in foreign exchange reserves capable of covering around 8 months of imports, while the Treasury held around 22 billion in sovereign wealth funds at the end of September 2020. However, it is important to note that last July Congress passed a law allowing a one-time withdrawal of 10% from your retirement savings to an individual savings account (a second similar levy bill is under discussion in Congress). As for the fiscal account, the budget deficit widened significantly in 2020 as a side effect of the collapse in GDP and the strong fiscal stimulus implemented. According to analysts, the government will continue to run a high deficit in 2021, in line with social pressures for higher fiscal spending.
In response to public dissatisfaction, which sparked violent protests in the fourth quarter of 2019, Chile held a referendum last October on whether to replace the one imposed in the 80s by the Pinochet dictatorship with a new constitution. On this occasion, Chileans voted overwhelmingly in favor of proceeding with the rewrite and through a fully elected Constitutional Convention. On April 11 next, the population will choose the 155-member constitutional body: the body will therefore begin discussions in the second quarter of the year and will have up to a year to draft the new constitution. While each clause must be approved by two-thirds of its members, uncertainty about the content will remain high, as the mandatory ratification referendum will only take place in 2022. Overall, it is expected that the new constitution will strengthen the role of the state in the provision of social services.
While most Latam countries have limited fiscal space to support their economies, Chile has one of the strongest medium-term fiscal positions: relatively low public debt allows it to implement sizeable fiscal stimulus measures (5% of GDP); furthermore, the financial system is well protected from external shocks, with conservative credit standards and an established central bank credibility. Chile suffered from capital outflows in the early stages of the pandemic, but access for both public institutions and private companies was quickly restored, supported by the IMF credit line and two sovereign wealth funds. For businesses and investors, the sectors that present the greatest opportunities in Chile are agriculture, packaging and pharmaceutical products: the demand for machinery and industrial technology is progressively increasing.
