In October 2019 they broke out in Chile massive social riots, due to a deep frustration on the part of the population faced with inequality, rising costs of living and access to public services. One of the protesters' key demands was to reform the old Pinochet-era constitution, accused of entrenching inequalities by putting healthcare, education, hotels and pensions under private control. Eventually, the government gave in and announced a referendum to change the constitution, held in October 2020, with a turnout of 51% of the population, of which 78% voted in favor. The process of rewriting and approving the new constitution will last until 2022 and poses many challenges: this adds to the political uncertainty, which could weigh on the economic prospects and sentiment on the financial markets.
From the data published by atradius, the GPD contracted by 2020% in 6, due to the negative impact of weather conditions on mining, the US-China trade dispute, ongoing social unrest and the coronavirus pandemic. However, a rebound has begun since the third quarter of 2020 and this year the economy is expected to grow by 7%, aided by a quick vaccination process. Copper exports and prices rose again and private consumption is expected to grow by more than 8%. Meanwhile, real fixed investment will increase by about 8,5%, while inflation remains within the target of the Central Bank of 2-4%.
The Chilean economy still depends heavily on copper exports (over 40% of export earnings and 10% of GDP) and from Chinese demand, which accounts for over 30% of exports. However, due to tax reforms, the dependence of government revenues on copper earnings has decreased, from over 25% to 10% over the past decade. Additionally, diversified export destinations through an extensive network of foreign trade agreements mitigate trade risk. In the meantime, the service sector accounts for over 60% of GDP. While Chile is highly integrated into global financial markets, the high stock of inward investment portfolios by non-residents (over 250% of official reserves) makes it vulnerable to changes in market sentiment.
The Chilean banking sector is predominantly owned by foreign banks (about 60%). Following the adoption of a banking law in 2019, the regulatory framework has been aligned to Basel III in March 2021. Capital buffers are adequate and credit quality is good, reflecting prudent lending practices. Non-performing loans have remained at low levels in recent years (around 2% on average) and are fully provisioned. The main vulnerability is exposure to changes in market sentiment, as the sector is a net external borrower and deposits do not fully cover loans. However, dependence on external wholesale interbank financing is low, as banks focus on domestic financing (mainly private pension funds).
In order to mitigate the economic impact of the pandemic, the Central Bank cut the key interest rate by 125 basis points to a historic low of 0,5% and adopted measures to support credit lines for both consumers and businesses in early 2020; fiscal measures to support the economy amounted to about 8,5% of GDP. Therefore, the budget deficit increased to 7,4% of GDP in 2020 and will remain high in 2021 and 2022 (about 6% of GDP and 4,5% of GDP respectively), as public spending will remain at high levels. The government has set up a so-called investment plan”Paso a Paso: Chile recovers” (Chile recovers step by step), an investment plan worth 12 billion dollars for social spending, job creation and infrastructure investments. The public debt structure (rising this year to 40% of GDP) remains low-risk, as the majority is peso-denominated (77%) and nationally held (72%; i.e. pension funds) with maturities long-term, currency mitigating and refinancing risks.
The shock resilience of the economy remains strong given prudent macroeconomic policies, a credible inflation-oriented central bank regime, a robust banking sector, the use of natural and financial hedges, and abundant reserves (including tax savings in the two public sustainable development funds). The floating exchange rate acts as an effective shock absorber, mitigating the impact of copper prices and the volatility of external demand. Furthermore, in order to overcome the volatility related to the pandemic and increase market sentiment, Chile has received from the IMF an unconditional two-year flexible credit line (FCL) of 24 billion, an instrument provided only to countries with solid macroeconomic policy frameworks.
Chile's business environment remains one of the best in the region, underpinned by strong institutions, low corruption and effective macroeconomic policies. And good access to foreign and domestic capital by local firms reduces refinancing risks. Chile has 30 bilateral and multilateral free trade agreements with more than 60 countries, covering most of the world's major economies, including the US, EU, China, Japan, Canada and Australia. Chile has recently ratified bilateral agreements with Brazil (main trading partner in Latin America) and Ecuador, beneficial for regional integration and long-term economic growth. Currently, the sectors offering the greatest opportunities are agriculture, packaging and pharmaceuticals. The demand for industry-related machinery and technologies is on the rise, providing opportunities for exporters of these segments.
