Strategic intelligence in Latin America

Chile

Chile begins a Constitutional reform that must balance social equality with economic recovery.

On the back of severe social unrest since 2019, an overwhelming majority of Chileans voted this year for a new constitution and 2021 will be dominated by this constitutional process, with voters hoping for better pensions, health, education and the reactivation of the economy after a strict lockdown to fight the pandemic. Chile is expected to continue to fight COVID-19 in the midst of high political uncertainty, but still offering a favourable investment environment. However, once the new constitution is in place, investors should be sensitive to signs of social discontent and the effects of increased social spending on State finances.

Politics

In April 2021, the members of the Constitutional Convention will be elected through a general election with the mission of drafting the new constitution.

Drafting will operate under the “blank page” principle, that is, for those articles that do not achieve the minimum quorum to be approved, the articles currently in force will not be kept but these segments will remain blank and must be discussed as laws in Congress.

Since this formula opens spaces to discuss and modify all the articles of the Constitution without exception, there is particular concern about basic aspects of the Chilean development model, including the pension system, the independence of the Central Bank and the protection of private property. The concern is moderated by the existence of a ratifying plebiscite at the end of the constituent process.

The results of the election of constituents are therefore key to understanding where the country is headed and the main risks facing the economy.

 

“2021 will be difficult for Chile due to high political uncertainty, in addition to COVID-19. Reassuringly, the recent reactions from Congress to the latest episodes of violence and the positions expressed by the majority of the electorate suggest that Chile continues to be a conservative country and that a moderation of conflicts can be expected. If the majorities manage to keep the most radical minorities under control, then by the end of 2021 Chile will have a marked economic and social recovery.”

Director, Investment Bank, Chile

Pensions

The Chilean pension system, implemented from the 1980 Constitution and based on mandatory individual savings, managed by Pension Funds, the so called Administradoras de Fondos de Pensiones (AFPs) is one of the pillars of the Chilean economic model and explains an important part of the increase in savings in recent decades.

The Constitutional Convention will undoubtedly seek to reform the AFP system to increase the state’s participation in the administration of pension funds and their financing.

Market observers are predicting that the AFP system will undergo major changes during the constitutional discussion; the AFPs will not disappear but their business model is likely to change. The main uncertainty is how this change would affect the Chilean capital market, the financing of companies and the level of savings.

International relations

China has been Chile’s main trading partner for decades, especially relevant as the first buyer of copper and recently importer of wines, meat and numerous other products.

Chile is also a very open and investment-friendly country and there were no specific barriers against China but despite this, direct investment from China had been relatively low. This changed radically in 2020 after a series of large-scale investments, especially the purchase by Chinese capital of the main electricity transmission companies.

There is consensus at the political and business level that there is a growing risk attached to strategic companies being controlled by Chinese state companies, considered arms of the Chinese Communist Party.

Currently, Chilean law is highly friendly to foreign investment and has few state protection mechanisms. It is expected that an important point in the legislative and constitutional discussion will address possible mechanisms to limit the influence of foreign states through corporate investments.

Energy

One of the sectors with the best outlook in Chile is renewable energy, driven both by recent regulatory changes and by favourable market conditions. The government and industry recently signed an agreement to end coal-fired generation by 2040 and industry sources indicate that the date could actually be moved forward to 2039 or 2038, as many companies are opting for alternative sources for reasons of compliance.

During 2021, numerous electricity generation projects will be developed throughout Chile, both solar and wind. However, the magnitude of the final installed capacity will be unknown until the routes are defined and the operating permits for the projects are granted. Expectations are generally positive both for the increase in alternative renewable energies in the total energy matrix and for the effect on energy costs and employment.

Mining

Another industry with good prospects for 2021 is mining, especially copper mining. Copper remains the country’s main export and this will continue for the long term. In addition, Codelco is the main company of the State of Chile and an important source of income to finance fiscal spending.

For this reason, the news of an increase in global copper demand associated with a reactivation of economic and industrial activity is especially good for Chile, which, of course, could be interrupted again in the event of a worsening of the COVID-19 pandemic. According to executives of mining companies, the industry has improved its practices and protocols considerably compared to the first wave of the pandemic, so the direct effects on the industry are expected to be less.

Mining activity has a huge effect on national employment. Despite being an industry with a low intensity of direct labour, it generates considerable indirect employment (it is estimated that for each job in the industry between 5 and 6 indirect jobs are generated).

For these reasons, in 2021 both the industry and the government will make special efforts to obtain the approval of new mining projects, especially large-scale ones, considering the increasing environmental and regulatory restrictions implemented.

Social unrest

Although the strained relationship with native peoples is not new, the current conflict in Araucanía has developed during the last 3 decades and has its origin mainly in the Indigenous Law and in the development of the forest industry.

Acts of violence and the presence of armed groups have become more frequent since 2010. Our sources in the area warn that the current Indigenous Law does not include effective mechanisms to discourage the use of undue or violent pressure by indigenous communities in negotiations with the state.

The conflict has affected investments and has been a significant factor in the economic deterioration of the region, which is currently the poorest in Chile. High unemployment and poor prospects for young people entering the workforce mean that many are likely to start joining violent groups.

The relationship of the state with indigenous peoples will be another of the great issues that the Constitutional Convention must address. Even indigenous peoples will have reserved quotas in the Convention and its constitutional recognition is under discussion.

The next government will probably resume with some modifications the “Araucanía Plan” that was conceived by the current administration to reactivate the local economy, increase employment and reduce violence. The plan was basically scrapped after the October 18, 2019 uprising and has been waiting to be activated again ever since.

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