Argentina’s negotiations with the IMF will focus minds in Latin America during the first quarter of 2022 – a deadline of March beckons if the country is to make good on a challenging debt repayment schedule.
Later in the year, its noisy neighbour, Brazil, will likely turn up the volume to 11 as its polarized, nasty presidential election campaign reaches fever pitch. Important general elections in Colombia and Costa Rica are also highly anticipated.
But it’s Chile that will be the most notable story for the region as a whole. Whereas the latest twists on the Argentina and Brazil stories recall the LatAm maxim “if you leave for 10 days everything changes, if you return after 10 years nothing has”, recent Chilean developments truly mark a departure for the country.
What’s changing – and why – reflects forces to which Latin America, and emerging markets globally, should be paying closer attention.
The impact of the violent demonstrations that rocked Chile in 2019 is still reverberating. Before 2022 even starts, we will have the outcome of a highly polarized election: with right-wing José Antonio Kast the candidate for those who regret the success of the social movement that prompted the fall not just of a government but of the country’s constitution.
Kast faces off against Gabriel Boric, a leftist deputy and former student leader with a left-leaning, state-led transformational policy agenda. He represents an acceleration of the fiscal loosening that has been a remarkable feature of the Chilean economy in recent years.
Boric was ahead of Kast in polls released on November 28 ahead of the second round of the presidential election, to be held on December 19.
Experiment
You can argue about the rights and wrongs of Chile’s experiment with fiscal loosening, but the figures speak for themselves.
In 2021, the country’s fiscal deficit is expected to be 8.3% of GDP, even higher than the 7.3% recorded in 2020. The fiscal impetus has driven GDP growth, expected to be above 11% in 2021, with three withdrawals from the state pension system creating an unsustainable sugar high of consumption: in the third quarter, imports increased by 5.5% while exports contracted by -2.4%.
Fiscal loosening has also turbo-charged inflation – which will end 2021 at 6.8% – and driven an interest-rate response, with Goldman Sachs predicting rates to hit 5.7% next year.
It has also created a current-account deficit of 7% in the third quarter of 2021. Chile’s debt levels have begun to move up at a faster pace: from 4% of GDP in 2000 to 32.5% in 2020 and an anticipated 40% by 2050. Remember: it’s not just the level, it’s the direction and the speed of travel.
The markets have taken their view: Chilean yields and credit default swap (CDS) rates have almost doubled since the start of 2021. And for anyone who is missing the data signals, Chilean bankers are more strident in their warnings.
The recent third-quarter conference calls were littered with senior bankers’ warnings about the impact of political volatility on the country’s finances: Sergio Lehmann, chief economist at Banco de Crédito e Inversiones, warned that political uncertainty is “still high and will remain significant”. Claudio Soto, Banco Santander Chile’s chief economist, said the political environment was “challenging” for banks.
The sub-par global growth since 2008, which is fanning the flames of radicalization in countries around the world, has reached the totemic corner of EM: Chile
The response has been a big increase in provisioning, as banks have increased liquidity ratios and, in some cases, booked higher provisions as they prepare for an uncertain 2022.
The mistake would be to look at the deterioration in Chile’s financial position through a pandemic lens. Undoubtedly, Covid-19 had a negative impact, but the trend was clearly visible before 2020. Those street demonstrations, after all, began in 2019, a result of frustration at Chile’s poor growth since the 2008 global financial crisis.
In the decade since 2010, the economy averaged just 2.7% growth. In the previous 10 years – even including the 2008 and 2009 crisis years – growth averaged 4.2%; and in the 2000s it was 6.1%.
The clear warning is that the sub-par global growth since 2008, which is fanning the flames of radicalization in countries around the world, has reached the totemic corner of EM: Chile. Chile, which was the first investment-grade country in Latin America; Chile, that has long been held as the economic sovereign model for the region.
But rather than focusing on the domestic political arguments about how best to allocate economic resources within the country, the more urgent question is how to get the whole regional and global economy growing again.
That requires identifying the true problem: a broken global monetary system that has never recovered from 2008; a monetary system that has seen unsecured lending stripped out by new banking regulations, and whose collateral is being sucked out by global quantitative-easing programmes, and is too constrained to drive real economic growth.
Unless and until global policymakers get serious in tackling that challenge, we will continue to see populism, radicalization and polarization.
