Chile: Spanish investors are preparing for a gloomy 2023

Spanish investors in Chile are already preparing to hold their nerve in the face of the complicated economic times that are predicted for the country, especially in 2023. Next year Chile could become the only regional market to register a recession, despite the fact that the whole area and the global economy will suffer a blow to growth due to the complex international context that lies ahead. 

But, despite the gloomy outlook, Spanish companies remain firm in their long-term commitment to a market in which they have had a strong presence since the 1990s. This year, Acciona, Sacyr and OHLA have been awarded hospital construction contracts and the latter has strengthened its presence in solar parks. 

Recently, moreover, President Gabriel Boric has encouraged Spanish firms to increase their presence and participate in the Public-Private Alliance Infrastructure Plan 2022-26 and in the "Let's Invest in Chile" Plan. 

Spain is the world's third largest investor in Chile, a key market for construction and renewable energy companies, where more than 600 companies operate, from Repsol, ACS, Telefónica (outbound), Abertis, FCC, Santander, Mapfre, Enel-Endesa and Grifols to Iberia, Indra, Técnicas Reunidas, Elecnor, Mango, Inditex, Redeia, Agbar and Azvi. And also Sacyr, OHLA, Iberdrola, Acciona, Siemens, Enagás, Ferrovial and Naturgy, which in the last three years, despite the COVID and its aftermath, have started, bid for or been awarded new projects in Chile.

But now it is looking bleak for the Chilean economy. Political uncertainty; the aftermath of the pandemic and the withdrawal of economic stimulus aid; the slowdown in China, on which Chile is highly dependent (39% of its merchandise exports); the impact of the war in Ukraine on trade and in the form of high inflation that is affecting investment have multiplied the negative projections. 

A panorama that complicates the task of Gabriel Boric, at the helm of the country since March, and which has not managed to dispel the political and social unrest, aggravated by the rejection of the Magna Carta and doubts about the tax and pension fund reforms being promoted by the government (which proposes replacing the private system with one with state participation and putting an end to the AFPs that were a model for the area). Experts point out that the government's policies have not had the necessary consensus to generate an environment that promotes investment and growth and recall that Boric lacks a parliamentary majority, which hinders his reforms. And that uncertainty and low levels of confidence hinder savings and investment. 

International organisations and private experts are already predicting troubled times for 2003, and the Chilean government and Central Bank are also pessimistic. Both the Fund and ECLAC predict that, after growth of 1.9 to 2.2% this year, Chile will be the only country in the area with a fall in GDP in 2023, with declines of -1 and 0.9%. The OECD forecasts a contraction of 0.5%, the same as that announced by Finance Minister Mario Marcel. Private analysts are more pessimistic, forecasting a fall in GDP of 1.5%. The IMF, however, expects Chile to return in the medium term to the potential rate of expansion, estimated at 2.5%. Chile recorded a historic GDP rebound of 11.7% in 2021, after a 5.8% plunge due to the pandemic a year earlier. 

Business confidence suffers a significant deterioration in the face of debate over a constitutional reform that could damage the business climate (and follows a rejection of the Magna Carta judged positive by markets) and Boric's fiscal plans, while inflation, higher interest rates and lower public sector spending weigh on the economy. The multi-billion dollar withdrawal of capital from pension funds (some $50 billion) in 2021 boosted consumption, but lowered savings and increased inflation. In addition, Chile has suffered significant capital flight and has been one of the countries that has seen the largest depreciation of its currency since the social protests of 2019.

The economy shrank 0.4% in September compared to the same month a year earlier. And the latest Focus Economics monthly survey points to a longer recession than previously thought: more than a year, until the fourth quarter of 2023. The Chilean economy is "bad and getting worse", according to the latest barometer of the UNAB Institute, for which "there are unmistakable signs of entering a period of recession". Chile, unlike oil and gas exporting countries, which have benefited from rising prices, has not had such extraordinary income, as the price of copper has been fluctuating. 

On the other hand, Boric has decided not to finance his social agenda with debt, but with the increase in revenue that his tax reform foresees. And he has chosen to control the budget and maintain fiscal responsibility. This decision, welcomed by the markets, nevertheless affects economic growth in the short term. Meanwhile, the high level of inflation remains a concern, although the central bank believes that prices will begin to slow their rise. Nevertheless, the rate will close this year at 12%, far from the 3% target, and in 2022 it will be one of the highest in the region along with Argentina and Venezuela, and the highest in 30 years. Inflation was 13.7% annualised in September. 

Not all is negative, of course. According to the Central Bank, the Chilean financial system remains solvent and with adequate levels of liquidity in adverse scenarios and severe stress. And foreign investment, the engine of growth, although it fell by 14% in the first half of the year, seems to have regained momentum since July and reached 15,177 million in January-August. Moreover, debt rating agencies such as S&P have decided to maintain the country's sovereign rating, even though they warn of the current high uncertainty.