Chile

Chile's fiscal framework remains a comparative strength. The deficit is projected to narrow to ~1% of GDP in 2026, with public debt stable near 40% – well below emerging market peers. The government's "National Reconstruction" bill combines fiscal consolidation with targeted stimulus: corporate tax cuts (27% to 23% phased to 2029), a 12-month zero-VAT window on residential sales, and USD1.4bn in annual payroll tax credits for SMEs.

The financial sector carries scars from pandemic-era pension withdrawals that reduced local financial depth and increased reliance on foreign investors. Credit conditions have improved but the banking sector monitors asset quality closely amid sluggish construction and retail. Corporate insolvencies remain contained and below pre-pandemic levels, with retail and construction most exposed. After a +5% increase in 2025, we forecast a partial recovery this year bringing the number back to 2024 levels (-4%). However, the new US tariff (12.5%, effective 24 July) and weather-related copper output disruptions could introduce localized stress in export-facing sectors.

The mining royalty regime (a 1% ad valorem tax on copper sales plus a margin-based royalty of 8-26% on operating income) may generate a record USD8bn in fiscal revenues from private miners in 2026. This provides fiscal resilience but also creates sensitivity to copper price declines.

Chile's business environment is undergoing its most significant reset in decades. The Kast administration has moved aggressively on deregulation: 43 environmental regulations suspended within the first week, accelerated mining permitting targeting a three-year project development window and the comprehensive "National Reconstruction" bill. The package aims to unlock a USD100bn+ mining investment pipeline and position Chile to compete with Argentina and Peru for critical mineral capital.

Yet the structural gap between ambition and execution is widening. Exploration investment remains limited at just 6% of global spending, which seems insufficient for the world's largest copper producer. Permitting delays persist despite reform rhetoric, and community opposition to large-scale mining continues to escalate. The lithium regime, despite pro-investment signaling, has not fundamentally changed: the state-centric legal model inherited from the Boric era still governs access and monetization. Chile's productivity growth has stagnated, labor market segmentation constrains inclusive growth and the education system struggles to align with labor market needs. The broader risk is that deregulation delivers short-term project announcements without addressing the deeper institutional and human capital constraints that have eroded Chile's competitiveness relative to regional peers.

Chile's political landscape has undergone a seismic shift. José Antonio Kast – the most right-wing president since the democratic transition – took office in March 2026 after winning the December 2025 runoff with 58%, the highest margin since re-democratization. His "emergency government" framing (security, economic stagnation, migration) initially resonated, but approval has collapsed from 57% to 34% by June, with disapproval reaching 52%.

The administration faces structural governance constraints. The Senate is evenly divided, the lower house depends on the populist Party of the People for a working majority and legislative fragmentation limits the scope of policy execution. Early stumbles – fuel price hikes of +30-60%, a withdrawn proposal to eliminate free university tuition for over-30s, two cabinet resignations within three months – signal difficulty translating electoral mandate into governance.

Internationally, Chile is being pulled between competing poles. The US imposed a 12.5% import tariff on Chilean goods despite Kast's explicit alignment with Washington. China absorbs nearly half of Chile's mineral exports, making any decoupling economically prohibitive. Ideological proximity to the US administration does not guarantee commercial immunity, as the tariff demonstrates. Relations with Peru are strained by the border wall initiative, and domestic opposition accuses the government of deepening inequality.

The core political risk is a mismatch between the speed of deregulation and the pace of tangible economic improvement. If living standards do not visibly improve, the approval trajectory suggests growing social friction, with potential for protest escalation reminiscent of the 2019 estallido social.