Chile’s reputation for investor safety continues to slip

A demonstrator holding a Chilean flag is hit by a water cannon during a rally in Santiago. Photo: Reuters

Global experts on country risk have become more circumspect concerning the world’s low-risk options, with economies downtrodden and debts accumulating due to the pandemic.

The risks of inflation, policy-stimulus withdrawal and possible credit shocks undermining bank stability give investors a good deal to contemplate as the world emerges from the Covid-19 crisis – with variants and vaccination rates adding to a long list of newish risks that include migration, populism and climate change.

Yet concerns about Chile are of a more fundamental kind – the sort of political risk that had seemed to be improving for a while in many countries in the wake of the pandemic last year when governments were rewarded for stability, transparency and policymaking after their swift and comprehensive responses.

Investors should be clear, though. Chile is for now still the safest country in Latin America, on a score that provides it with a top-30 ranking among the safest and often most-advanced industrialized nations in Euromoney’s country risk survey.

However, the Latin American region is not a paragon of safety and neither should it be taken for granted that Chile can be relied upon for its copper-plated safety.

[It is] a necessary step for Chile to embrace and trust in free markets and a global economy 

 - Lorenzo Naranjo, Washington University

Chile has, of course, had to deal with the pandemic, which health experts are keen to point out is not over yet. Chile has seen almost 34,000 coronavirus-related deaths, and authorities were once again forced to shut down Santiago in June, despite its high vaccination rate, as the caseload soared and intensive-care capacity reached 98%.

The vaccines are avoiding catastrophe, but the fact they are not 100% effective, not everyone has been inoculated and that they may be less effective against new variants remain clear and present dangers.

The economic shock and political crisis have therefore prompted many analysts to downgrade Chile as a country-risk option, which its A-rated sovereign creditworthiness does not necessarily indicate. Such subtle differences are not trivial if they have a bearing on asset returns.

After rising to its highest level in the survey just over two years ago, Chile has been progressively downgraded, resulting in a fall in the global risk rankings from 14th out of 174 countries to 26th. This makes Chile less like core-Europe and the US, and more in tune with peripheral lowish-risk options such as Slovakia and improving Uruguay. The latter even looks as if it might soon become the region’s safest country of all:

Chile’s problems have been building for years, culminating in ugly rioting spilling over from mass demonstrations that began in 2019, ostensibly sparked by rises in metro fares lighting a touchpaper for festering animosity towards corrupt officials, privatization and inequality.

The country is divided over how to resolve its problems, with a national referendum to amend the Constitution approved in October. In May, 155 members of a constitutional convention were elected to begin the revision process.

Survey contributor Lorenzo Naranjo, a senior lecturer in finance at Olin Business School, Washington University, St Louis, views the constitutional process with a good deal of positivity.

“[It is] a necessary step for Chile to embrace and trust in free markets and a global economy,” he says.

Naranjo even sees the protests and socially charged climate as hardly different to the social processes observed in countries such as France, albeit exacerbated by the pandemic’s stresses.

Alfonso Dingemans, an academic at the University of Santiago, acknowledges the fact many experts are of that opinion, but also believes that some fear populism will overtake policymaking, which will erode Chile’s advancement.

He says the constitutional process is important, but “it is unclear whether some middle ground can be found”. The agreement to establish the constitutional convention was an institutional response to the crisis, which has eased the situation, temporarily at least.

The correlation of political forces is fragmented and it begs the question of whether the most extreme forms of populism will or can be avoided 

 - Alfonso Dingemans, University of Santiago

However, finding the solutions will not be easy, given the deep divide over what has caused the problems.

“The first steps of the constitutional convention have raised doubt whether it will adhere to its legal mandate [to propose a draft of the new constitution] or that it sees itself, in light of the discredited political class, as an additional, parallel political power,” says Dingemans.

He also sees the intensifying conflict between the state and the Mapuche indigenous group – comprising around 12% of the population – as another key risk. This is because it is unclear whether the political class ­– not just the government – can de-escalate it, as well as the danger that political violence will be legitimized in Chile’s political system.

A third risk relates to the next presidential, parliamentary and regional elections scheduled for November, notably because the political mismanagement and errors made by the current government – led by president Sebastián Piñera – have “transformed a state problem into a party one”, says Dingemans, “where the political right has borne the brunt of the Chileans’ discontent”.

The centre-left coalition has also taken a hit, despite gubernatorial elections giving it some hope, resulting in a surprise revival for the Communist Party.

“The correlation of political forces is fragmented and it begs the question of whether the most extreme forms of populism will or can be avoided,” says Dingemans, who, as with other analysts, has downgraded Chile to reflect these concerns.

Washington University’s Naranjo is similarly concerned by the divisions and problems Chile is facing, but is not completely negative. To be fair, Dingemans also notes the fact there are countries in the region that are faring far worse from their economic problems, their pandemic management and political strengths.

For Naranjo, the mining industry remains a powerful force behind the economic development of Chile, and commodity prices have been strong.

“As long as the world economy is sound, I believe that Chile should continue to develop,” he says.

Both contributors note the fact Chile’s healthcare system has coped well with Covid-19. The country has a reputation for good doctors and scientists helping the government, and the healthcare infrastructure is better than in many other countries. That fact is broadly encapsulated in a score for soft infrastructure that is broadly on a par with Cyprus and Taiwan and is higher than any other country in the region.

Investors, it would seem, have much to remain confident about, if only the political noise will calm down.