Chile’s Risk Premium Jumps as Kast’s Austerity Hits Reality

The Honeymoon Ends Before Inauguration

José Antonio Kast has not yet taken office, and the market euphoria that accompanied his December election victory is already fading. Chile’s five-year credit default swaps — the cost of insuring sovereign debt against default — climbed to 53 basis points last week, up 14 points from a seven-year low of 39 hit on February 2. The spread between Chilean and U.S. Treasury bonds widened to 89 basis points, up from a 19-year low of 86.2 recorded four days earlier, according to JPMorgan’s EMBI index.

Three shocks arrived simultaneously. The 2025 fiscal deficit came in at 2.8% of GDP, far above the government’s original 1.7% target. January’s economic activity index (Imacec) showed an unexpected 0.1% year-on-year contraction — the first decline in 19 months. And the Iran war has injected extreme volatility into oil markets: Brent crude briefly touched $119 per barrel on Monday before crashing below $89 on Tuesday as Trump signaled the conflict could end soon and the IEA convened an emergency meeting on reserve releases. For a country that imports nearly all its fuel, the wild price swings complicate monetary policy planning and threaten to keep inflation elevated even if the spike proves temporary.

The $6 Billion Question

Kast’s centerpiece pledge — cutting $6 billion in fiscal spending within 18 months, roughly 7% of projected 2026 expenditure — would represent the largest austerity package since Pinochet slashed the budget in 1975. In a democracy, economists say, it will be far harder. Andrés Pérez, chief Latin America economist at Banco Itaú, noted that any cut exceeding one percentage point of GDP requires congressional approval, which would slow and likely dilute the process. The incoming finance minister, Jorge Quiroz, has already hinted at a longer timeline for the reductions.

The government has pledged not to touch social spending on education and health but has not specified where the axe will fall, beyond criticizing the size of the public workforce. BCI chief economist Sergio Lehmann said what Quiroz has signaled so far “is still far from sufficient to reach his target.” Meanwhile, Kast has simultaneously promised to increase funding for police, prisons, and immigration enforcement — expenditure categories that typically grow once expanded.

A Narrow Path to 4% Growth

Chile’s debt-to-GDP ratio has nearly doubled over the past decade to 41.7%, edging toward the 45% threshold the government considers prudent. Kast has pledged to push growth to 4% by the end of his term — nearly double the average pace of the last decade — through deregulation, tax cuts, and bureaucratic streamlining. Allianz projects GDP growth of 2.4% in 2026 and 3% in 2027, with a fiscal deficit narrowing to 1% of GDP if consolidation proceeds. Elevated copper prices offer a tailwind, but Pérez at Itaú cautioned that reaching 4% trend growth “would require several structural reforms that go beyond simply optimizing investment.”

For now, Chile remains one of the safest credits in Latin America — its EMBI spread of 90 basis points sits well below Colombia (210), Brazil (230), and Argentina (576). But the direction of travel matters more than the level. A country that was moving toward post-pandemic lows just five weeks ago is now moving away from them, and the new government has not yet spent a single day in office.