Latin America: Copper-bottomed Chile wrestles with risk
Tax reforms from Chile’s new, left-leaning government are having an unsettling effect on the economy, which is also suffering from a plummeting copper price. The country’s new president is looking next to tackle inequality with further reforms, but as a result the pressure will ratchet up its strong credit rating.
A new economic term is entering the lexicon for Chilean companies and high net-worth individuals: country risk. The new, leftist government of Michelle Bachelet is taking Chile on a fresh, but uncertain path: a tax law has been implemented, but there are still many unanswered questions about the education reform that will be funded by that fiscal reform, as well as key labour and constitutional reforms on the way.
Chileans have realized that there is something called country risk – it exists – and that is leading to the desire to diversify outside the country
The immediate impact of the changed political environment has been a drop in domestic investment, as local business remains wary. “Large Chilean companies are in wait-and-see mode,” says Alfonso Eyzaguirre, managing director and senior country officer at JPMorgan in Santiago. “We all know the headlines [of the reform agenda], but it is very difficult for the locals to have a clear view on what the future is going to look like. With so many things changing in a short period of time, that has created the perception of risk that is generating some noise locally – and we are seeing that in terms of [lower] investment and employment.”