Crédito y Caución forecasts solid growth for Chile in 2021

Chile has recently ratified agreements with Brazil and Ecuador, which will be beneficial for regional integration and long-term economic growth
Photograph of a citizen's rally in Chile

AP/RODRIGO ABD  -   Photograph of a citizen's rally in Chile

Crédito y Caución expects Chile's economy to post a solid rebound in 2021, close to 7%, helped by a rapid deployment of vaccination. Copper exports and prices have surged again, and private consumption is expected to grow by more than 8%, supported by the pension withdrawal bills. Fiscal stimulus measures in 2020 amounted to about 8.5% of GDP. Although the public deficit will remain high in 2021 and 2022, Chile is in a strong position to implement this substantial fiscal stimulus. Public debt will rise to 40% of GDP in 2021, a figure below that of neighbouring markets.

Diversified export destinations via a large network of foreign trade agreements somewhat mitigate the trading risk. Chile has 30 free trade agreements with more than 60 countries covering most of the world's largest economies, such as the United States, the European Union, China, Japan, Canada and Australia. Chile has recently ratified agreements with Brazil, its largest trading partner in the region, and Ecuador, which will be beneficial for regional integration and long-term economic growth. Demand for pharmaceuticals and technology related to agriculture and packaging manufacturing is increasing, offering opportunities for exporters in these segments.

Ciudadanos chilenos haciendo cola en una sucursal
PHOTO/AFP - Chilean citizens queuing up at a branch office

Chile is an economy open to international trade, which maintains a good business environment supported by institutional stability, low corruption, prudent macroeconomic policies, credible inflation targets and a sound financial sector. Access to foreign and domestic capital by local firms reduces refinancing risks and the economy's resilience to external shocks is high. However, Chile experienced massive social unrest in 2019 linked to growing inequality and rising living costs. As a result, the country faces a process of rewriting and approving a new constitution, which will last at least until 2022, whose challenges and uncertainties could weigh on the economic outlook and financial market sentiment.

The Chilean economy remains highly dependent on copper, which accounts for more than 40% of export earnings and 10% of GDP, and on demand from China, which accounts for 30% of Chilean exports. However, thanks to fiscal reforms, the dependence of public revenues on copper revenues has declined from more than 25% to 10% in the last decade. The services sector accounts for more than 60% of GDP. Although Chile is highly integrated in global financial markets, it is vulnerable to changes in market sentiment. A flexible exchange rate serves as an effective buffer, mitigating the impact of copper prices and volatile external demand. In the early stages of the coronavirus pandemic, copper prices deteriorated and capital withdrew from the country, leading to a 15% depreciation of the peso against the dollar. However, access to capital, both from the state and private companies, was quickly restored and, thanks to the recovery of copper prices and capital inflows, the peso has fully recovered.