RIO DE JANEIRO, BRAZIL – Seen from the outside, Chile is speeding up its economic rebound from the covid-19 crisis. Figures suggest that activity in the country is approaching pre-pandemic levels.
In recent weeks, as Latin American currencies have depreciated against the dollar, copper exports have boosted the value of the Chilean peso. But within the country, inequality and precariousness that led millions to stage protests in late 2019 have worsened, drawing an uncertain outlook for the near future.
The deepest downturn in the Chilean economy last year occurred in the second quarter, when Gross Domestic Product (GDP) plummeted 14%. The government implemented a large fiscal stimulus and unlocked pension funds for Chileans to make withdrawals, which transferred the equivalent of 12% of GDP to bank accounts.
Today, the economic activity index published by the central bank posts three consecutive monthly increases, reaching levels seen before the pandemic hit in March 2020. In addition, the demand for copper, the source of half of the country’s exports, has increased with the return of Chinese consumption and with the acceleration of the transition to clean energies in developed countries, for which copper is a fundamental supply.
“There are very positive issues in Chile when compared to the rest of the region,” says Elijah Oliveros-Rosen, an economist covering Latin America for S&P Global Ratings. A year ago, Oliveros-Rosen published an analysis projecting that Chile would be one of the first countries in Latin America to bounce back from the economic crisis triggered by the pandemic.
The country has vaccinated about 20% of its population, well above the global average of 3.5%. “This means that the reopening of services, of some of the sectors most impacted by the pandemic, is going to happen a little earlier than in other countries. Evidently, this will contribute to economic growth,” assures the expert.
The data suggest that the Chilean economy has learned to operate with restrictive measures, said Luciano Rostagno, strategist for Latin America at Banco Mizuho do Brasil in a note to clients and investors.
The bank estimates Chile will fully rebound by mid-year. “We believe Chile’s clear leadership in Latin American vaccination efforts is protecting the peso from further deterioration. However, looking ahead, Chile’s Constitutional Convention election scheduled for April 11th poses a risk to the currency,” it wrote.
Historic Convention
Chile has a historic process ahead. On April 11th, 155 members of the Constituent Assembly will be elected.They will be tasked with writing a new Constitution to replace the one that has governed the country since 1980, adopted during the Pinochet dictatorship. The demand for a new fundamental charter was born out of a social uprising in which millions of Chileans took to the streets and paralyzed parts of the country in late 2019, tired of the inequality and precariousness in which much of society lives. Abroad, the protests took many by surprise, as for years the Chilean economy was considered a model among its emerging peers for its sustained growth rates and the strength of its banking and pension system.
The pandemic has compounded inequality, experts agree. “One thing is economic growth in Chile, which has been improving rapidly, and another is the composition of economic growth,” says Oliveros-Rosen: “We are observing an economic rebound in Chile but with more inequality, and this applies to the whole region and most countries globally.” The pandemic favored people able to work from home, while many who were not in a position to do so lost their jobs. In Chile, only half of the 2 million jobs lost in the last year have been recovered. And the benefit of being allowed to withdraw money from their pension fund only applies to formally employed people.
Chile is among the six most unequal countries in the world, according to the World Inequality Database run by French economist Thomas Piketty. Half of Chile’s workers earn an average salary of less than 400,000 pesos (US$550), when the cost of living is high compared to other countries in the region, says Marco Kremerman, an economist at Fundación Sol, a research organization in Santiago.
More poverty
“What has occurred in this pandemic is that, despite the fact that some productive sectors have even generated more profit than a year before the pandemic, households have become poorer,” says Kremerman. “We still don’t have an official estimate, it won’t be available until mid-year with the socioeconomic profiling survey, but projections suggest that the household situation is more adverse than it was before the pandemic and before the social outbreak,” he adds.
Kremerman does not agree with the optimistic view of foreign investors: “It is interesting to read and analyze from the perspective of the powers that be. For the financial markets, be it Wall Street or other markets, the question is whether or not to maintain the Chilean model that has generated so much wealth for the richest, the same model that has made us one of the most unequal countries in the world.” If the Convention fails to introduce the changes demanded by 78% of Chileans who voted to replace the Constitution with a new one, Kremerman believes, “that would mean that the risk of a social explosion, of a political crisis, would be present again, and I think that is what Wall Street should be worried about.”
“It is clear that Chile will experience an economic rebound and that indications point to it being more accelerated than in other countries,” says Rodrigo Valdés, former Finance Minister and professor of economics at the Pontificia Universidad Católica de Chile. It is also clear that most Chileans want a more equitable economy, less precarious and with better opportunities. The remaining question is: what happens after the rebound?
“My main doubt is: how much will growth be next year? What happens after this cyclical recovery? What we don’t know is where the potential growth of the economy lies,” the academic notes. “We don’t know yet. That is also connected to the fact that we can slip into a negative spiral of low growth, unemployment, social unrest, more disorder, more protests. Or a positive spiral, in which the economy rebounds and the process of writing a new social contract, which is always stressful, turns out well. In other words, we have the opportunity to become more like a European country after this than a Latin American country.”
Source: El Pais