Chile would remain an economic star in Latin America

By Odalis F. Marte 

@ofmarte

After the social unrest in 2019, the Chileans found an institutional way to try to resolve the underlying situations that motivated such  discontent in a large segment of the population. That’s good news.

Furthermore, they elected a constitutional assembly from most of the social sectors of the Chilean society giving it more legitimacy than it would have had otherwise. Also, many of the members of the constitutional assembly are well-known professionals who are not traditional politicians or members of the ruling elite.

Despite the fear of some groups in Chile, it is reasonable to expect that the new constitution would establish some social rights that are more in line with European democracies than with the Chicago school, which would not necessarily affect the country-risk for Chile. Nonetheless, divisions in Chilean society would remain in the medium term as the adaptation process to the news political reality takes place, so the probability of the occurrence of some sort of social unrest remains moderate over that time horizon. But I expect Chile to remain an investment-grade country as the economy improves along with its political system.

Despite the struggle Latin America has gone through, Chile has fared relatively well as the country achieved a high rate of vaccination against Covid-19. The country’s sanitary system proved to be able to face the challenges of the desease.

As the Chilean economy is substantially open, and the world economy recovers, it is expected that the country’s GDP growth would accelerate, especially as the demand for commodities expands and prices increase. Chile would have enough income to overcome its fiscal challenges in the short term.

I expect Chile to be upgraded in terms of country-risk assessment taking into account different aspects: its proven capacity to reach some sort of consensus among its society helps its political stability in the long term, its economic resilience against the pandemic shock, as well as its favorable economic performance growth perspective.

                                                                https://www.oecd.org/economy/chile-economic-snapshot/

Interview to Euromoney Country Risk (May, 2021)

Q: (a)     To what extent are the risks associated with the pandemic (global trade and by implication commodity prices, as well as tourism), and other factors influencing your scoring, such as political stability or natural disaster recovery?

R: In the Dominican Republic (DR) I see a business-friendly government that is focused on keeping the economy afloat with some macroeconomic stability and mass vaccination against Covid-19. I also see a private sector responding positively to the economic stimulus, and willing to invest.

The free zone industry is totally recovered while the tourism sector is gradually recovering as mass vaccination in North America is motivating more people to travel abroad again.

Nonetheless, some challenges persist. The pandemic is not over yet, international commodities prices are pushing inflation upward, and natural disasters may occur especially during the hurricane season (although the projected paths for 2021 suggest that the Caribbean basin has a lower probability of getting hit by a major storm compared to last year).

Q: (b)     Is the impact of the pandemic on the deteriorating fiscal metrics (the deficit and debt levels) counterbalanced by economic recovery and strong multilateral creditor support? 

R: The deterioration of the fiscal accounts for the Dominican Republic is evident as tax revenue dropped and governmental expenditures were forced to go up, thus public debt is on the rise. Nonetheless, as the economy recovers tax collections are growing again while the government has managed to control its expenses due to a notable moderation in public works and some administrative improvements. 

Financial multilateral assistance and access to international capital markets have provided an invaluable lifeline in the short term.

Q: (c)     Are the US Joe Biden administration's plans to forge closer relations with the Caribbean helping to improve the risk outlook, or not?

R: I believe it is too soon to tell. To a certain degree, the Biden administration has continued some of the America First policies of its predecesor.

Q: (d)     Are there any particular aspects of political risk improving, or not, for particular countries you could comment on, e.g. information access/transparency, corruption and transparency, among other factors?

R: I see most countries are being careful in keeping the macroeconomic stability as intact as possible while waiting for better access to vaccines against covid-19, and benefiting from the recovery of its major trade partners. 

In my view, it is not easy to see any further improvements as the pandemic and other political issues is capturing most of the attention at the moment.

Q: (e)     Are there (briefly) any other relevant factors, e.g. improving structural dynamics such as demographics or infrastructure considerations which may be underlying your risk assessments?

R: Some demographic risks are seen in the USA, Chile and Costa Rica as fertility rates are dropping while its populations are aging. The USA seems to be leaning toward renewing its infrastructure which is good news for its trading partners and the world economy.

The DR seems to be improving in terms of transparency, but still has a way to go for further institutional development.