Emerging

New challenges

rd  
Eco Emerging // 3 quarter 2021  
economic-research.bnpparibas.com  
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9
CHILE  
NEW CHALLENGES  
The economy should rebound strongly in 2021 thanks to a successful vaccination campaign, improved prospects for  
global growth and higher copper prices. According to the monthly economic index, in early Q2, real GDP returned  
to the pre-pandemic level of December 2019. Looking beyond 2021, economic growth prospects could be marred by  
persistent political tensions plaguing the country. Debates over the presidential election on the one hand and the  
process of drawing up a new constitution on the other will probably disrupt the implementation of economic policy  
as well as private sector investment decisions by both resident and non-resident investors.  
ECONOMIC GROWTH REBOUNDS IN 2021  
FORECASTS  
After plunging 5.8% in 2020, real GDP is expected to grow by 7% in  
2
021. The rebound in GDP observed in H2 2020 extended into H1 2021,  
2
019  
2020  
2021e  
2022e  
driven mainly by improved global growth prospects (notably for Chile’s  
main two trading partners, the US and China) and the upturn in copper  
prices, fuelled by strong demand from China.  
Real GDP growth (%)  
1.1  
-5.8  
3.0  
7.5  
3.0  
Inflation (CPI, year average, %)  
Central Gov. balance / GDP (%)  
Public debt / GDP (%)  
2.8  
3.8  
3.3  
Domestic demand also continued to rise in the first months of 2021,  
despite a spike in new Covid-19 cases since mid-January. The infection  
rate and the hospital bed occupancy rate continued to rise and have  
reached significantly higher levels than during the first wave of the  
pandemic in March 2020, despite the smooth rollout of the country’s  
vaccination campaign. Consequently, the authorities had to reintroduce  
relatively tight health restrictions, which strained Q1 growth. By May,  
however, the central bank’s monthly economic index (adjusted for  
seasonal variations) had virtually returned to the pre-pandemic level  
of December 2019, and the employment rate had bounced back to  
-2.8  
28.1  
-3.6  
70.0  
40.6  
4.8  
-7.4  
32.0  
1.3  
-4.7  
38.0  
-1.0  
72.0  
51.3  
5.3  
-3.0  
38.0  
-4.0  
72.6  
54.1  
4.8  
Current account balance / GDP (%)  
External debt / GDP (%)  
81.1  
38.5  
5.5  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
e: ESTIMATES & FORECASTS  
TABLE 1  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
5
1%, after plummeting to 45% in July 2020 (compared to a long-term  
average of about 58%).  
GDP GROWTH AND MONTHLY EMPLOYMENT INDICATORS  
Short-term prospects are rather favourable. From a health perspective,  
although the crisis is still going strong, the number of new Covid-19  
cases, the infection rate and the hospital bed occupancy rate have  
declined continuously since mid-June. At the same time, the vaccination  
campaign continues to be a success. At the end of June, the government  
had beat its January targets: more than 85% of the over-50 age group  
and 53% of the 18-50 age group had received two doses of the vaccine.  
At the same date, 74% of the 18-50 age group had received at least  
one dose of the vaccine, and the vaccination campaign for 12-17 years  
old is slated to begin in July. Under this environment, and depending  
on the evolution of the pandemic in its neighbouring countries, the  
health restrictions should be gradually lifted over the course of the  
third quarter.  
0I n5 dex Dec 2019 = 100  
Monthly GDP  
Employment  
1
1
00  
95  
90  
85  
80  
75  
2018  
2019  
2020  
2021  
THE AUTHORITIES PROVIDE MASSIVE SUPPORT  
CHART 1  
SOURCE: CENTRAL BANK  
The government and the central bank will continue to provide massive  
economicsupport, liketheydidinearly2020. Thegovernment’srecovery  
plan, a multi-year programme launched in March 2020, was rounded  
out by new measures announced in March 2021 to offset the negative  
impact of reintroducing health restrictions on domestic demand.  
Amounting to a cumulative total of 13% of GDP, these measures aim  
to increase healthcare spending, subsidies for low-income households,  
and unemployment benefits, as well as to defer tax payments. Other  
measures include support for small and mid-sized enterprises (SME)  
via the state-owned bank Banco Estado, and a system of state-backed  
loans for companies and households via FOGAPE, the small business  
guarantee fund. A multi-year public investment plan was also launched.  
At the same time, the central bank cut its key policy rate by 125 basis  
points over a 3-month period, where it has held at the minimum rate  
of 0.5% since April 2020. The central bank also provided support for  
liquidity and lending to households and SME.  
A large number of employees were also authorised to withdraw funds  
from their retirement savings on three occasions (in July and December  
020 and again in April 2021). According to IMF estimates, these  
2
withdrawals amounted to the equivalent of 15% of GDP in April 2021,  
and partially offset the loss of revenue caused by the pandemic.  
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0
Since May 2020, Chile has also benefitted from a 2-year arrangement  
with the IMF via a flexible credit line of USD 24 bn (roughly two thirds  
the amount of foreign reserves when the FCL was granted). Designed  
for crisis prevention and to reassure investors, the facility is reserved  
for countries that the IMF esteems to have “very solid” economic  
fundamentals. For the moment, only Chile, Colombia, Mexico, Peru  
and Poland have benefitted from FCLs. The IMF renewed its support in  
May 2021, esteeming that the country’s economic fundamentals were  
still solid (moderate external vulnerability and a supportable, short-  
term deterioration in public finances triggered by its economic support  
plans).  
FOREIGN RESERVES AND THE EXCHANGE RATE  
CLP/USD FX Reserves (USD bn, RHS)  
900  
42  
8
00  
00  
41  
40  
39  
38  
37  
36  
35  
34  
33  
7
600  
500  
400  
300  
In January 2021, the central bank also pledged to gradually increase  
the level of foreign reserves by USD 12 bn over 15 months. In May  
2
021, foreign reserves amounted to nearly USD 48 bn.  
200  
100  
A PERSISTENTLY TENSE POLITICAL ENVIRONMENT  
0
2
014  
2015  
2016  
2017  
2018  
2019  
2020  
2021  
Unlike the economic situation, the political and social situation is  
deteriorating. The political crisis that broke out in October 2019 has  
not abated.  
CHART 2  
SOURCE: CENTRAL BANK  
Faced with rising inequalities, unequal access to education and  
healthcare, and pension system reforms, rising popular discontent led  
to the outbreak of spontaneous protests in fall 2019. In response, the  
government has proposed a series of reforms and a new social pact,  
including the adoption of a new constitution.  
All in all, greater political instability and the prospects of deteriorating  
After public consultations in October 2020, a large majority of Chileans public finances could strain the country’s investment prospects and  
confirmed that they wanted to abandon the current constitution medium-term growth outlook. Chile also suffers from structural  
(
dating back to 1980, when Augusto Pinochet was in power). The new weaknesses (dependence on commodities, decline in productivity in  
constitution must be drafted by a constitutional assembly comprised the mining sector). In April 2021, the IMF lowered its 5-year growth  
of newly elected members (and not current congressional members).  
outlook to 2.5%, down from its previous forecast of 3.2% in October  
019.  
2
Elected in May 2021, the constitutional assembly is extremely divided:  
no one party has the number of votes necessary to pass amendments.  
As a result, the process of drafting a new constitution (which must be  
completed before year-end 2022) has been marked by the formation of  
numerous coalitions and endless discussions.  
Completed on 5 July 2021  
Moreover, independent, left and far-left parties won more seats than  
expected, to the detriment of the centre-right and right parties close to  
the government. Once again, this reflects popular aspirations for far-  
reaching social reforms, as well as the rejection of the government’s  
party and the lack of confidence in the political establishment. These  
discussions have also mixed with debates about the elections, with  
presidential, congressional and regional elections scheduled for  
November (with the second round of the presidential election to be  
held in December).  
Hélène DROUOT  
helene.drouot@bnpparibas.com  
This tense political climate, combined with haggling over the content  
of the new constitution (social rights, education, healthcare and  
retirement…), will have an impact on public finances, which could  
alarm national and foreign investors.  
Moreover, investors did not really welcome the reform that enabled  
employees to dip into their retirement savings, in part because they  
run against the country’s normal practices, and in part, because  
the withdrawals will have an impact on the medium to long-term  
equilibriumofthepensionregimes.Althoughthesewithdrawalspartially  
offset revenue losses in 2020, they also reduce the replacement rate  
for numerous employees (i.e. the percentage of earned income received  
by the employee when calculating pension rights). According to IMF  
estimates, about 25% of the contributors to pension funds withdrew all  
of their retirement savings during the first two rounds of withdrawals.  
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QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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