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Chile

Macroeconomic rebalancing under way but political uncertainty is on the rise

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MEDIUM RISK

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

Updated in January 2023.

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GDP USD 317bn (World ranking 42, World Bank 2021)
Population 19.2mn (World ranking 61, World Bank 2021)
Form of state Presidential republic
Head of state Gabriel Boric (President)
Next elections 2025, presidential and legislative
  • Natural resource base: Chile is the largest copper producer in the world, but also benefits from other minerals, forestry and agriculture
  • Strong medium-term growth
  • Business-friendly environment
  • Sound macroeconomic policy framework
  • Widely accepted, democratic political system with successive peaceful transfers of power
  • Classified as an OECD high-income economy
  • Sensitive to commodity prices, particularly copper
  • High level of income inequality
  • Numerous strikes and political street protests could trigger instability
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Macroeconomic rebalancing under way but political uncertainty is on the rise

Following a remarkable recovery from the pandemic, Chile’s economy is undergoing a transition towards lower growth. Against a positive output gap, the authorities are tightening macroeconomic policies and economic activity is cooling down. Several factors are weighing on growth: high inflation is eroding the real wages, a tepid labor-market recovery is weakening consumer sentiment and policy uncertainty has also caused investment to shrink. We expect Chile to enter a recession in 2023, partly reflecting the normalization of the economy after a huge fiscal stimulus and pension withdrawals in 2021, which caused it to overheat.  In addition, we expect the Chilean peso to be under pressure owing to interest-rate rises in the US, a large current account deficit and jitters over constitutional reform.

The near-term outlook is challenging but very strong fundamentals and policies continue to support Chile’s resilience. While the country is facing high inflation pressure, we expect this to ease to close to 5% by the end of 2023, before converging to the medium-term target (3%). The disinflation will be driven by tight monetary policy that causes credit growth to slow, as well as by lower aggregate demand. The government’s structural fiscal consolidation is advancing significantly faster than anticipated, partly thanks to an increase in revenue from the tax reform. We estimate the fiscal deficit to narrow significantly in the 2022-2027 forecast period to -1% on average (from -7.5 % of GDP in 2021).

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Contained public finances risks, tension on external accounts

As the fiscal deficit decreases, Chile's public debt levels will remain low compared to regional peers. Within the budget envelope, the government reallocated spending to support the most vulnerable, including measures to mitigate the impact of high energy and food prices, employment subsides and targeted transfers to households. The government has also replenished the sovereign wealth fund, with deposits of USD6bn in the first quarter of 2022. The gradual fiscal consolidation guided by the fiscal rule is expected to rebuild buffers and stabilize gross public debt below 40% in the 2022-2007 forecast period, which is low by international standards. Public debt is mostly denominated in domestic currency, with average maturity for external debt above ten years.

At the same time, the Chilean economy is confronting an acute deterioration of the external environment. External risks and global uncertainty have markedly increased: the global slowdown and commodity price volatility; a de-anchoring of inflation expectations alongside further tightening of global financial conditions; additional commodity price shocks etc.  The balance-of-payments risks posed by Chile's widened current account deficit will be contained by the country's favorable access to financing, including a USD18.5bn (6.2% of GDP) two-year flexible credit line (FCL) and short-term liquidity line (SLL) with the IMF.  We expect the current-account deficit to narrow to -4.4% of GDP in 2023 as a domestic recession compresses imports, widening the trade surplus. It should remain around -3.5% of GDP in 2024-27.
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Relatively strong business environment but rising political uncertainty

Chile’s business environment compares favorably to peers. Chile ranks 59th in the World Bank Doing Business survey 2020, with high scores for protecting minority investors, enforcing contracts, resolving insolvencies, starting a business and dealing with construction permits. However, Chile’s business environment will be weakened by the government’s reform agenda, which includes tighter regulation and an increased role of the state in many sectors. In particular, higher taxes, as well as stricter environmental, labor and social regulations, will increase the cost of doing business. Constitutional reform and President Boric's statist policies pose potential risks to the business and investment environment in the medium and long term.

Political uncertainty is rising. President Boric of the left-wing Apruebo Dignidad (AD) coalition will face a host of obstacles to an ambitious agenda.  His government's minority position in Congress, elevated levels of crime and political violence, high inflation, an economic recession and a prolonged constitutional reform process will weigh on governability in 2023. We expect talks about the new Constitution to bring volatility to Chilean markets over the year.  

Trade structure by destination/origin

(% of total, 2021)

Exports Rank Imports
China 38.8%
1
29.9% China
United States 15.8%
2
17.4% United States
Japan 7.7%
3
8.4% Brazil
South Korea 5.1%
4
5.3% Argentina
Brazil 4.8%
5
3.2% Germany

Trade structure by product

(% of total, 2021)

Exports Rank Imports
Metalliferous ores and metal scrap 36.4%
1
11.2% Road vehicles
Non-ferrous metals 25.7%
2
10.4% Petroleum, petroleum products and related materials
Vegetables and fruits 8.1%
3
5.6% Telecommunication and sound recording apparatus
Fish, crustaceans, molluscs and preparations thereof 6.6%
4
4.2% Electrical machinery, apparatus and appliances, n.e.s.
Pulp and waste paper 2.9%
5
4.2% Other industrial machinery and parts

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Allianz Research
research@allianz-trade.com
Roberta Fortes
Senior Economist
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