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Chile: Beware the Ides of March

05 Mar 2020
By Fernando Rodriguez
Protesters in Santiago, Chile in 2019. Source: Carlos Figueroa

An upcoming constitutional plebiscite has led to civil unrest and financial uncertainty in Chile.  Although concerning, it is not yet cause to write off Latin America’s financial powerhouse.

People outside of the country might think the protests in Chile have ended, as they have now left the global headlines. However, unfortunately, more civil unrest is expected this month, and the unrest in March is expected to be worse than the 18 of October (18-O) uprising last year, which was inspired by a hike in subway fares and sustained by long-standing frustration over inequality.

Why March? Well, the protesters have been on holiday. Unlike other countries in the southern hemisphere, Chileans go on holiday in February, not January.  In March, Chileans return from their summer break and students go back to school.

After almost three months of social upheaval closed out 2019, the first months of this year were back to normal. GDP in 2018 had a strong 4 percent growth rate, but 2019 saw growth slip to just 1 percent. Still, this was welcome news after the deep contractions during the months of protest created expectations of negative numbers for the year’s end. Some analysts predict GDP growth in 2020 to be the same as 2019, although the Institute of International Finance forecasts 2.2 percent GDP growth. However, a lot hinges on the upcoming vote in late April and the proposed change to the constitution.  The plebiscite, if ratified, will lead to a new constitutional convention.

Because the current constitution was conceived during Chile’s dictatorship, it is seen by many Chileans as tainted, restrictive to democracy, and as an impediment to mobility at the lowest rungs of the economic ladder. Because it could change the ground rules of the political economy, the plebiscite is a major concern for international investment, due to the potential threat to property rights. Supporters say the rewrite is indispensable to a more equitable Chile, while critics fear it will result in a carte blanche for liberal idealism. As of now, however, the likes of Scotiabank remain bullish, pointing to a rebound in export and power generation activity in January and arguing that some projects are too far along for investors to pull out.

Competing Forecasts of Chile’s Future

The executive director of Anglo American, Mark Cutifani, is cautious but optimistic. Cutifani has expressed hope that the “new Magna Carta” of the country would not impact the mining industry, which continues to be integral to the country’s growth, saying “One thing we know for certain is that Chile knows how important mining is for this country and I would be greatly surprised if they did something that would impact foreign investment.”

Chile is the only South American nation admitted to the OECD and has been the Latin American country with the best risk rating for decades. Moody’s maintained a stable outlook for Chile in December, but on February 5, the Economist Intelligence Unit cited “policy uncertainty” due to the potential reform of the constitution. Oxford Economics predicted a potential downgrade for Chile in 2020 due to uncertainty based on the fiscal effort that will be needed for the reconstruction post-18-O, the public expenditure required, and reforms to the pension system – all this could influence a decline in the country’s rating.

However, in the face of a wider investment slow down, there have been some notable holdouts, such as in the case of Santander Bank. There were also the two deals signed by Icelandic investor Björgólfur Thor Björgólfsson the month after the events of 18-O for WOM telecom that, combined, are worth over one billion USD.

Chile’s intuitions remain strong amongst the adversity

It is true that, after almost four months of crisis, the country has not collapsed. The economy has had some very bad months; however, it has not broken the country and the key pillars of its macroeconomic strength (solid banking system, autonomous Central Bank, economic openness, and responsible fiscal policy) remain strong.

Neither is the economy in recession, nor have the state institutions been deployed, which shows the strength of Chilean political, economic, and financial structures. The financial position of the country is less limited than in past years, but the Treasury fund is under control. The political institutions, particularly the president and the congress, whose reputations have suffered the most damage, continue to function normally and the discussion of the laws in Congress continues. This is sometimes difficult, but there progress is being made. The judiciary and the public ministry also continue their work, slowly, in the investigation of acts of violence, maintaining political neutrality. Overall, while the state institutions operate in an environment of many criticisms, this has not become an obstacle to the fulfilment of their constitutional commitments.

However, a history of strong institutions and stable growth may not be enough.  Following the events of 18-O, there is a climate of suspicion and distrust that weighs on institutions, undermining cohesion and unity. Meanwhile, the reputation of institutions has been compromised. The economy depends on the fiscal impulse to avoid a recession and to reduce unemployment. It is likely that the strength and political will for fiscal responsibility will be directed to smaller projects of rapid execution, rather than megaprojects of longer duration. The role of the fiscal impulse in this phase is to compensate for the fact that there will not be a positive flow of investments until the constitutional issues have been settled at the end of April.

Perhaps, as people come to realise that this country’s progress has been due to foreign investment and level treatment of international investors, the vote for No Change to the constitution could win in April.  But as recent votes and referendums in other parts of the world have taught us, it pays to prepare for the unexpected. In the meantime, I expect the protesters to remain indignant until May, perhaps even until the winter months. So yes, unfortunately, there will be mass protests on the streets again, and this time, they may be worse.

Fernando Rodriguez is the General Manager (South America) for Swann Global and is based in Santiago, Chile. He holds a degree in economics and a Master’s degree in International Trade from Monash University in Australia.

This article is published under a Creative Commons Licence and may be republished with attribution.