Conservative Sebastian Piñera was sworn in on 11 March as the president of Chile. The 68-year-old billionaire already governed the country from 2010 to 2014. Piñera’s first term was marked by a vibrant economy lifted by booming copper prices. However, it was also marred by continuous student protests seeking an education overhaul. After his first presidential term, Piñera polled as the most unpopular president since the reinstatement of democracy in the nineties. Nevertheless, he returned to power this year after a 4-year term of centre-left president Michelle Bachelet. During her term running the world’s top copper exporter, investor confidence fell while economic growth was at a meagre 1.8% on average (in comparison with 5.3% during Piñera’s time in office). Her tax and spending reforms – meant to reduce inequality – in combination with lower copper prices, led to significant public deficits and swelled public debt with 10 percentage points in 4 years. Before taking office, Piñera pledged to jump-start the economy and improve public finances while this time also focussing on social issues such as ending poverty and boosting pensions.
Impact on country risk
Piñera is expected to opt for more business-friendly policies than his predecessor in one of South America’s most stable and most developed countries. However, policy formation and enactment under the new administration are likely to be slow. The 2017 legislative elections didn’t result in any coalition holding a majority of seats in either the House or the Senate. Without a majority, Piñera and his Chile Vamos coalition will need cross-coalition support to pass legislation. The president will have to work together with either the centre-left Nueva Mayoría – its historical rival and the second largest coalition – or with the left-wing Frente Amplio, founded by the very students who led the protests against Piñera in his first term. On the upside, Piñera seems more willing to moderate his stance on social issues, which will facilitate reaching compromises. Piñera’s return to power comes at a time where copper prices are on the rise. As a result, growth is expected to increase to 2.5% in 2018, before rising to more than 3% in the medium term. Public revenues are also likely to be boosted, consequently narrowing the fiscal deficit. Moreover, diversification is likely to move forward (Chile relies on copper for roughly 40% of current account receipts) thanks to a soaring demand from China for lithium and fruits. Nevertheless, the country has important challenges on the horizon. Firstly, the vital Chilean copper industry faces risks of strike actions in the coming year due to difficult wage negotiations. As a consequence, macroeconomic forecasts might prove too optimistic. Secondly, despite expected mounting external revenues, imports are on the upswing as well. Hence, the current account deficit is deteriorating while the relatively elevated external debt is growing. Furthermore, a potential slowdown in the Chinese economy or a trade war triggered by US protectionism could hurt the Chilean economy.
The outlook is stable for the short-term political risk. It is currently in category 2 based on the country’s relatively low short-term debt and its healthy level of foreign exchange reserves (covering almost 5 months of imports in September 2017). As for the MLT political risk – currently in category 3 – a downgrade cannot be excluded given the evolution of the current account balance and external debt.
Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com