Home Insights A Tale of Two Crises: Coronavirus suspends social unrest in Chile

A Tale of Two Crises: Coronavirus suspends social unrest in Chile

Chile, until recently, was a shining example of economic growth, political stability and declining poverty in the midst of a struggling Latin America. However, the...

Chile, until recently, was a shining example of economic growth, political stability and declining poverty in the midst of a struggling Latin America. However, the country’s outlook declined rapidly in October 2019 when social unrest triggered by a student protest in Santiago spread, like a virus, across the country leading to widespread violent protest and discontent with social and economic inequalities.

The uprising gained momentum in late 2019 but began to wane at the beginning of this year after the government took action to pacify the protestors. March was set to be a critical month in determining the future of the protests as the students returned from holiday and a referendum was scheduled for April. However, before this happened the Coronavirus hit Chile and while it presented a further economic and healthcare challenge it gave the government a convenient reason to install curfews, ban public gatherings and enlist the support of the armed forces; effectively quelling any protests in addition to the spread of Coronavirus.

A Chilean executive in the real estate sector summarized the situation well, “I haven’t slept for months waiting for one of the supermarkets or shopping centres we manage to be looted or burned. Now with the Coronavirus I am sleeping more peacefully.”

In addition to the effects felt by the country in general, many of our clients are concerned specifically about the potential impact of continued social unrest and the Coronavirus on Chilean infrastructure investment. This article explores some of these effects and potential outcomes for the sector.

Great Expectations

In early October 2019, the President of Chile, Sebastián Piñera, confidently declared on television, “In the midst of this troubled Latin America, let’s look at Chile”, he went on to compare the “miracle” of Chile against its neighbours who were suffering economic stagnation, political crises, corruption scandals and other local issues. “Our country is a true oasis”, he added; famous last words.

In Piñera’s defence such political upheaval was unimaginable in Chile, a country whose postdictatorial history had very successfully delivered economic growth, political stability, solid institutions, expanding social services and increased investor confidence. This had delivered an impressive decline in poverty from 45% of the population in the mid-1980s to 8.6% today and approximately 65% of Chileans are now categorized as middle class, compared to 24% in 1990, according to official figures.

What the government and most observers missed was that this rapid social and economic development would make the expectations of the people, who had been often told of Chile’s move into the first world, difficult to manage.

As an example, consider the visit of former President Lagos to a housing complex in the suburb of Renca, near Santiago, that had been built almost twenty years ago for people who, until then, had lived in poor-quality prefabricated houses. During his visit, he was surprised to find that the residents were angry because their houses had been built without space for a car. When designing and constructing the project it wasn’t even a remote possibility that people living there would ever be able to afford a car.

With this middle-class growth also comes a higher level of indebtedness, since access to credit is an important catalyst for this new purchasing power. “The middle class is indebted with an established consumption standard: a house, a car, [holiday travel] … the people have access to a higher level of consumption, but this is anchored in debt and the debt they can access is expensive”, the head of a Chilean health conglomerate told us.

There are myriad issues that have contributed to the social unrest, but in general terms the Chilean lower and middle classes feel widespread discontent due to income inequality and a distrust of the government and large corporates. The protestors believe that many parts of the system need to change: students are looking for a better deal on education, retirees want better pensions, others detest privatization of critical infrastructure and there is a general desire for better healthcare, improved access to culture, etc.

Are these complaints justified? In the OECD, Chile does have the third worst income inequality ratio 1 but education and healthcare expenditure as a percentage of GDP are about average 23. As an example of the income inequality, the Chilean Chamber of Construction stated that an average family would require a mortgage of more than 45 years to buy a home (assuming a mortgage payment of 25% of the monthly family income). According to the institution, housing prices increased 67.8%, between 2011 and 2019, while the income of Chileans barely increased by 24.7%.

Until recently, many politicians and business leaders have opposed an increase in government subsidies for health, education and pensions. They argued that the Chilean system has been the most successful in Latin America, and that changing it would be dangerous. In macroeconomic terms, they were right. Chile occupies the highest position in Latin America, and number 44 among 189 countries, in the United Nations Human Development Index, which considers not only economic growth, but also health and education standards.

Despite the above, many Chileans remain unhappy. They have heard several of their presidents cite macroeconomic figures that suggest Chile is about to enter the first world, and yet they do not see this reflected in their lives. Many Chileans have not fared as well as Chile.

The distrust of large corporations is perhaps a more general issue across much of Latin America and stems from recurrent instances of crimes such as corruption, price fixing, production limitation, fraud, etc.

Government response to the social unrest

The protestors in Chile are demanding far-reaching changes, but it is not possible to find viable longterm solutions to these structural issues in such a troubled environment. The government’s initial strategy was to try and pacify the protestors with targeted solutions to discrete issues, but this seems to underestimate the breadth of the social disquiet. “[The government] is trying to take care of people’s requests while it seeks time and peace to settle the underlying issues, the government seeks to pacify the issue, but there is no credibility. The first thing has been to try to put patches on issues such as minimum wages, health, minimum pensions, benefits for the elderly, subway tickets, among others; but there are no structural solutions”, the CEO of a national retail chain told us.

There is a perception from some business leaders that the government response has not been powerful enough, “Unfortunately the government and the state apparatus have not been strong enough and have not wanted to confront this violent movement”, they commented. “We must remember Piñera’s relationships with the military, [during his first mandate], he left many incarcerated, took away prison benefits and never supported them in his speeches. Therefore, it is understandable that they are not fully supporting him now”. While Piñera may not enjoy the full support of the armed forces neither do the protestors – the military apparatus is strongly right-wing, so a scenario like Venezuela, where the military supported a socialist revolt, is a very remote one.

The government’s cautious approach is understandable given the country’s history of human rights abuses, according to a Chilean political commentator, “We have no government because the government does not dare to use public force, and, furthermore, nobody wants to be prosecuted within a year, for excessive use of force and violation of human rights.” The government has already been criticized by some for alleged human rights violations and investigations have been carried out on this matter by different organizations such as Amnesty International, Human Rights Watch and the Office of the United Nations High Commissioner for Human Rights, among others. So far, 32 deaths have been confirmed and at least 3,765 have been injured since last October with 445 people registering eye injuries caused by the impact of rubber pellets or tear gas fired by the police.

On 15th November, after several weeks of riots, the country’s main political parties agreed to hold a constitutional referendum in April 2020. This plebiscite will ask the Chilean people if they want a new Constitution, and if it should be written by ordinary citizens or by a combination of citizens and legislators. “This possible constitutional reform with a socialist tone, for which there has even been talk of limiting private property, if so, statistically would bring a setback”, said one prominent Chilean businessman. “It seems that we will follow the destiny of all Latin American countries: selfdestruction!”.

As expected, the announcement of the referendum did not stop the protests and was marked even more strongly as the anniversary of the death at the hands of the police of the young Mapuche Camilo Catrillanca. The social unrest was expected to gain momentum in March prior to the referendum in April, which would have been difficult for the government to contain.

Conveniently for the government, the global Coronavirus pandemic hit Chile in early March and forced the referendum to be postponed until 25th October, under an agreement made between the political parties on 19th March. Before the pandemic, it was expected that the only way that this plebiscite could be frustrated would be through an intervention by the army, focused on ending once and for all the social mobilization.

Under the Coronavirus framework, the Chilean government announced on 13th March the prohibition of public events with more than 500 people, a mandatory quarantine for all foreigners or Chileans who come into the country, a curfew across the country from 22:00 to 05:00 to decrease social contact and enhanced police control, supported by the armed forces, to control the movement of people. This effectively put an end to any planned protests.

The current priorities of the government are to strengthen the health sector and ensure that companies have sufficient access to liquidity to get through these months of economic crisis. In line with this, the Piñera government announced on 8th April a new economic stimulus plan in which it commits USD 24 billion to support the economy through the crisis. This plan seeks to facilitate the conditions for banks to lend working capital to companies for a period of 48 months with a grace period of up to 6 months and for an amount equivalent to 3 months of sales.

Chile’s health system is stronger than its neighbours, and in January it began to prepare preventive measures: buying tests, equipment, etc so the arrival of the pandemic caught them forewarned – a considerably better response than most developed nations! In terms of the economic reaction, the country was coming from an adverse economic scenario and the financial system was already prepared to identify incoming shocks and respond to them. “Some reaction instruments were already active”, an executive of a bank in Chile highlighted. Indeed, the problems experienced last year left companies in a situation of economic vulnerability, but they were very well trained in terms of their reaction plans, “It was phenomenal training”, the executive added.

What does this mean for the infrastructure sector?

When the social crisis began, the protesters deliberately targeted infrastructure, attacking the subway, stopping roads, burning tolls, etc. “These protests are true acts of vandalism”, explained an alarmed executive of a large conglomerate. These attacks were carried out in an “organized and professional” manner, suggesting they were planned and executed in a coordinated way, despite the fact that there is still no official pronouncement on who is behind this planning. And yet, “despite their efforts, they do not have the capacity to immobilize Chile by harming the infrastructure”, said a Chilean businessman. He added that “one of the things that the Lagos government did, very well, was to invest in infrastructure, Chile has a spectacular metro, good roads, etc. the system of concessions worked very well.”

Despite having such strong infrastructure, compared to its peers, the attacks have entailed no lesser costs for Chileans. According to the Chilean Chamber of Construction, the value of the damage has reached USD 4.6 billon, of which USD 380 million corresponds to the damage suffered by 77 of the 136 stations of the Santiago Metro. In public infrastructure alone, the amount required for reconstruction is USD 2.3 billion, of which USD 1.9 billion is required for streets and sidewalks (USD 1.3 billion for Santiago, USD 380 million in Valparaíso and USD 282 million in Concepción). Finally, the estimated figure for damage to non-residential infrastructure, that is, Industry, Commerce and Financial Establishments, has reached USD 2.3 billion.

Infrastructure is essential to the operation of any country and the government in Chile knows this well, consequently, the Constitution Commission of the Chamber of Deputies approved the idea of legislating the project that allows the use of the armed forces to protect critical infrastructure without the need to declare a State of Emergency. This includes distribution of water, gas, electricity, communications, infrastructure of hospitals and airports, and also the Carabineros police stations, as they have been a constant target of attacks.

It is clear that investment is required but despite government action there is no chance to call for new investment or new concessions due to the uncertainty generated by the Coronavirus on the short-term and the discontent of the population on the medium term. Investment processes have not yet been cancelled but they have all been suspended until the economic situation improves. Before the crisis, a 4% growth in investment was expected, now the Central Bank estimates a decline of 8%. According to a regional investment bank, a 9.4% contraction of fixed investment is expected for 2020, although it may be offset by the economic stimulus announced by the government.

To the costs caused by the devastation, including the loss of jobs and the fall in investment, we must also add the cost of reconstruction, the hard work of recovering the economy and being able to rebuild the image of Chile vis-à-vis the world and give investors the legal and social security they need. The executive of a bank in Chile pointed out, “The global financial crisis (2008) had a major impact on expectations, but we managed to recover. It was a short-term nightmare without lasting effects. In this case, the major difference is the confidence shock [from a constitutional change] could have an impact with lasting effects.”

Without adequate measures to ensure a favourable investment climate, the infrastructure sector would enjoy a boost thanks to reconstruction. However, this would be only temporary since the deterioration of business confidence due to uncertainty would generate a subsequent decline in activity. Given the additional crisis generated by the Coronavirus pandemic, it is unlikely that any aid package will be developed specifically to reactivate the infrastructure sector for the foreseeable future.

The future is more uncertain than ever

All the government efforts for the time being are understandably focused on protecting the country from the Coronavirus pandemic but under the assumption that this will eventually pass, Chile must think about its future and the risk of a constitutional crisis. Despite the fears that Chile might cease to be an economic model for Latin America, there are reasons to be cautiously optimistic about its future.

While most of the advocates for a constitutional change are convinced it is the only way to eliminate inequality, it is unclear what percentage of the vote these people represent. “There are people who think that it is necessary to migrate to a socialist economy without private property where capitalism is eliminated. I think they are a minority, but unfortunately these days, that minority is widely heard”, admitted a CEO of a Chilean multinational company. “Chile is a fairly moderate middle-class country, I don’t think that’s what [the majority of] people want.” What is certain is the need for institutional changes capable of turning the economy around, and in this first phase what is at stake is if reform will materialise, with polls suggesting 80% in favour and 20% against.

For the government, the first great challenge will be to regain the confidence of its people, proposing viable political solutions to this social crisis that go beyond issues of public security. They will have to navigate successfully between two simultaneous crises: the internal and the global.

In the short term, the Chilean government should focus on being able to counteract the immediate effects of the health crisis and ensure the necessary liquidity for the population. Assuming a successful exit from the pandemic, the structural changes that a large part of the Chilean society demands, cannot be ignored. Infrastructure must be repaired and rebuilt alongside further investment in and potential reform of the health and education systems. Finally, and most importantly, Chile must find a solution to the economic inequalities felt by the protestors. Such actions must be conceived and executed with a long-term perspective beyond a single government.

Business confidence is declining, which will reduce investment plans in the country until there is more clarity on a potential new Constitution and its content. Chile could lose its appeal if such changes imply an increase in corporate taxes and greater power for unions. Despite this, Teodoro Ribera, the Chilean Minister of Foreign Affairs, believes that Chile can continue to excel in the region, both by restoring the confidence of local investors and/or by ruling out the other Latin American options: Argentina’s populist government is likely to worsen its long-term growth, Bolivia is trying to get out of a crisis, Peru is at a political impasse and Mexico’s economy continues to fall. So, the question remains, “What other country would Chilean multinationals invest in?”

In the same vein, a board member of a regional Chilean company, called this upheaval a “hiccup” with “ups and downs but where everything is expected to return back to normal”. Another optimistic businessman added, I think Chile is a country of moderate people, it is a country that tends to be organized and is not violent. The people are left-minded but with a tendency towards the centre. If Chile’s likely new Constitution could guarantee basic economic freedoms, many investors may continue to view Chile as an oasis of stability.” Both businessmen suggested that despite the extraordinary circumstances, Chile can develop an even better and fairer economic model than it has had for the last 30 years. “At some point, sanity will prevail, but not in the hotheaded scenario we have now”.

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1 OECD (2020), Income inequality (indicator). doi: 10.1787/459aa7f1-en (Accessed on 13 April 2020)
2 OECD (2020), Education spending (indicator). doi: 10.1787/ca274bac-en (Accessed on 13 April 2020)
3 OECD (2020), Health spending (indicator). doi: 10.1787/8643de7e-en (Accessed on 13 April 2020)
Photo Credit: October 21 2019 REUTERS Edgard Garrido

About the Author

Cecilia De Orbegoso
Cecilia De Orbegoso leads business development in South America, co-ordinates our commercial activities and is responsible for establishing and maintaining client relationships. Cecilia has significant experience as an Equity and Treasury Analyst and as an investment specialist for the Peru Trade and Investment Office.

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