Economic studies
Chile

Chile

Population 19.1 million
GDP per capita 14,772 US$
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Country risk assessment
A3
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Synthesis

major macro economic indicators

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 3.9 0.9 -5.8 8.5
Inflation (yearly average, %) 2.3 2.6 3.0 3.6
Budget balance (% GDP) -1.5 -2.8 -7.4 -4.8
Current account balance (% GDP) -3.6 -3.8 1.4 -2.0
Public debt (% GDP) 25.6 27.9 32.5 33.6

(e): Estimate (f): Forecast

STRENGTHS

  • Mining (leading copper producer), agricultural, fishery and forestry resources
  • Numerous free-trade agreements
  • Flexible monetary, fiscal and exchange rate policies
  • Member of the OECD and the Pacific Alliance

WEAKNESSES

  • Small and open economy vulnerable to external shocks given the dependence on copper and on Chinese demand
  • Exposure to climatic and earthquake risks
  • Inadequate research and innovation
  • Income and wealth disparity, poor education and health systems

Risk assessment

Economic rebound amid supportive copper prices and an expansionist fiscal stance

The economy continued to recover in Q1 2021, expanding by 0.3% year-on-year (YoY), mainly driven by inventory replenishment (+3.1% YoY), after four quarters in contraction. In addition, household consumption (+2.8% YoY), also benefited from economic measures to support income and the second round of pension withdrawals. Looking ahead, activity is expected to continue benefiting from the reopening process, strong copper international prices, ongoing fiscal stimulus and the third round of pension withdrawals approved in late April 2021. The latter could grasp up to USD 19 billion (equivalent to 7.5% of 2020 GDP), which would add to the 14% of GDP equivalent already paid during the first two rounds. With respect to COVID-19, authorities began to lose mobility restrictions for the vaccinated population in early July 2021 (after setbacks in Q1 2021), when advanced vaccination finally started to bear positive fruit. As of 23 July 2021, the country had 62% of its population fully immunized and 71% took at least one dose. With a robust consumption resumption, the improved pandemic framework and taking into account the inflationary risk, in July 2021 the central bank understood that a highly expansionary monetary-policy stance was no longer required. Therefore, in the same month, it started to normalize the benchmark rate by 25 basis points to 0.75% per year (expected to continue in the upcoming months). Overall, the downside risks are related to new COVID-19 strains. Furthermore, in the short-term, the November 2021 presidential elections and the high uncertainty regarding the constitution rewriting could dampen private investment recovery.

 

Current account back into deficit; fiscal deficit still high

The current account surplus narrowed in Q1 2021 to 0.9% of GDP in four rolling quarters, mainly explained by deteriorated income (higher profits repatriated by foreign firms related to strong copper prices) and, to a lesser extent, services deficits. Conversely, the trade balance surplus improved, driven by higher metal prices that boosted export revenues and stood out the rebound in imports. On the financing side, foreign direct investment in Q1 2021 was still half of the value observed in the same quarter of 2020. In the quarters ahead, the current account balance is expected to return into deficit, overall driven by the recovery of economic activity (rising imports and higher profits for foreign companies). Nonetheless, FDI should be enough to cover the external needs. Concerning the external debt, it stood at 75% of GDP in Q1 2021, 68% of which is owed by the private sector. The negative net international investment position is still at a moderate level, at roughly -10.3% of GDP in Q1 2021, mainly smoothed by the existence of relevant pension funds’ investments abroad (estimated at 32% of GDP as of March 2021). However, it is important to note that a third round of pension withdrawals started in May 2021, which means that some of their overseas assets are likely to be sold to serve the withdrawal demands. Moreover, the central bank has approximately USD 49.7 billion in foreign exchange reserves (covering over 8 months of imports), while the Treasury held around USD 16 billion in Sovereign Wealth funds at the end of May 2021. Regarding the fiscal account, the government will again run a high deficit in 2021 in line with still elevated stimulus. That said, although gross public debt will continue to climb, from a low level, Chile´s long record of prudent fiscal policy will allow it to continue accessing affordable market financing.

 

The outcome of the constitution convention increases the risk of relevant changes to the current political and economic model

In May 2021, Chile chose the 155 delegates who will rewrite its constitution. The outcome was considered as a defeat by the ruling Piñera government, which expected to garner at least one third of the votes in order to avoid disruptive changes to the current constitution (since each new proposal requires a two thirds majority), but fell short and reached 37 seats only (24% of total seats). Similarly, the centre-left, obtained 25 seats, less than the 28 seats conquered by the leftist Apruebo Dignindad. Indeed, independent candidates were the major winners, obtaining 65 seats (42%) when including the 17 seats reserved for representatives of indigenous people. On 4 July 2021, the constitution convention started its work. It will have nine months (plus three additional months, if required) to complete the draft of the new constitution, and then a new national vote will determine whether to accept it or not. The discussions are likely to address the current political structure, the provision of social goods and environmental protection. Moreover, the country will hold presidential elections in November 2021. The center-right and the far-left coalitions held their respective primary elections in mid-July 2021. The winners were, on the left, Gabriel Boric (a former student leader and current congressman) and, on the centre-right, Sebastián Sichel (an independent and former Social Development Minister under Piñera). Both seem well positioned for general elections, although not all parties have so far nominated their candidates.

 

Last updated: July 2021

Payment

Promissory notes, cheques and bills of exchange are frequently used for commercial transactions in Chile. In an event of default, it offers creditors some safeguards, including access to the summary proceeding (Juicio Ejecutivo). Under a juicio ejecutivo, based on his appraisal of the documents submitted, a first instance judge (Juzgado Civil) may order a debtor to pay at the moment of the notification – if the debtor fails to do so, his property will be seized. These documents may need to be validated by court before becoming legally enforceable.

Bills of exchange that are guaranteed by a bank are widely accepted, though somewhat difficult to obtain. They limit the risk of payment default by offering creditor additional recourse to the endorser of the bill.

Cheques, which are used more often than bills of exchange or promissory notes, offer similar legal safeguards under Juicio Ejecutivo in the event of unpaid for a cause (protesto), uncovered cheques, or closed accounts. Checks and the other mentioned documents, if not paid on time, can be reported to a Credit Report Company called Boletin Comercial.

The same is true of the promissory note (pagaré), which − like bills of exchange and cheques – is an instrument enforceable by law and, when unpaid, may also be recorded at Boletín Comercial (see below). The promissory note needs to be validated (protestada) by a public notary or in a judicial trial.

The Boletín Comercial is a company dedicated to conducting financial risk analysis. It provides to other information companies (such as Dicom, SIISA) information about the debts registered at national level for all kind of debtors. Boletín Comercial is the official and most important company, on this matter, at national level under the authority of the Santiago Chamber of Commerce (Cámara de Comercio de Santiago). Both, Companies and individuals, can be registered as debtors in the Boletin Comercial. The register provides key financial information that can be consulted by anyone who is interested in obtaining a picture of the financial behaviour of a Company or individual.

Electronic transfers via the SWIFT network, widely used by Chilean banks, are a quick, fairly reliable, and cheap instrument.

Debt Collection

Amicable phase

Collection begins with an amicable collection process where parties can agree on a payment settlement or other payment plan. The length of this amicable phase depends on the predefined term of the documents supporting the debt (cheque, invoice, promissory note, bill of exchange). A formal notice is sent by a recorded delivery letter inviting the debtor to pay.

If the parties did not include any specific clauses in the commercial contract, the applicable rate for delays on the payment is the conventional interest rate as defined by the central bank of Chile on a periodical basis.

 

Ordinary proceedings

When a settlement agreement cannot be reached with the debtor, the creditor will initiate a legal collection process ruled by local civil procedure.

Aside from the Juicio Ejecutivo creditors who are unable to settle with their debtors out of court may enforce their right to payment through the corresponding legal action ruled by the civil procedure. According to the local procedural laws, there are two kinds of judicial collection procedures; i), ordinary proceedings (Juicio Ordinario); ii) and abbreviated proceeding (Juicio Sumario) depending on the value of the sued amount and the type of documents that support the debt.

The claimant needs to explain the basis for their legal action and enclose all supporting documents (original copies) and evidence. After the first presentation in court, the judge will decide whether the legal action has basis or not. If the judge considers there are enough arguments and evidence, he will give course to the process.

All judicial action needs the presence of a barrister or solicitor (lawyer), whether taking place in front of a minor court (Juzgados – primera instancia) or superior court (Corte Apelaciones o Suprema − segunda instancia).

Debtors can dispute ruling with motivated arguments that law contains at the Código de Procedimiento Civil (Civil Procedure Code, defences) such as payment of debt, prescription, compensation, etc. Judges will consider these arguments and will accept or reject the defence. It is important to note that, while the defences of the debtor are discussed by the parties in the trial, the steps relating to seizure of assets are not stayed. The idea of this is that the debtor cannot delay the procedure unnecessarily.

Trials can last from six months up to two years, depending on the document, the debtor’s defence, and if an appeal is filed following the initial judgement.

Enforcement of a Legal Decision

Domestic judgments are enforceable when all appeals have been exhausted. If the debtor fails to comply with the decision, the court can order an auction of the debtor’s assets. Collection from a third party owing to the debtor is not possible.

Foreign judgments may be enforced if the Supreme Court validates these through an exequatur proceeding. Chilean law only recognises foreign judgements on a reciprocity basis: the issuing country must have an agreement with Chile regarding recognition and enforcement of legal decisions. Proceedings can last from between one to two years and the amounts to recover decrease because it is not possible to request the restitution of taxes paid to the treasury, which national companies can require.

Insolvency Proceedings

Out-of court proceedings
Extra-judicial reorganization

The 2014 bankruptcy law recognizes agreements between creditors and debtors that are reached outside of a bankruptcy proceeding, whereby a court approves the agreement that was developed outside of the bankruptcy court. In order to be approved, two or more creditors whose claims represent at least 75% of the total claims corresponding to their respective group must accept the plan.

Chilean law distinguishes different categories of creditors during a bankruptcy process, e.g. employees owned money, creditors that have a mortgage (usually banks), etc. Creditors in these categories have preference for payment over others. If creditors do not meet the criteria to be part of these categories, they do not receive have any kind of preference for payment.

While considering the approval of said plan, the court stays the procedure and the legal actions against the debtor. However, during this time also, the debtor is prohibited from disposing of any of its assets. After approval, the plan has the same effect as a judicial reorganization.

 

Restructuring proceedings

Restructuring processes carried out without a formal bankruptcy process are also carried out through a court trial at the request of the creditor(s). In the event that the debtor is not able to reorganize his debt through any agreement or negotiation, creditors may request the liquidation of the company.

 

Judicial reorganization

These agreements are more formal than extra-judicial agreements, and can only be filed by debtors, as they have to declare their insolvency to the court. The proceedings apply to both secured and unsecured creditors. Once debtors enter the judicial reorganization process, they must subsequently propose a reorganization plan, which requires the approval of at least two thirds of the total number of creditors.

 

Liquidation

Liquidation is organized through a single procedure initiated upon demand of the debtor or creditors. The latter can file for bankruptcy when a debtor defaults without appointing an administrator for its business. Once bankruptcy is declared, a trustee is given responsibility for the debtors’ business and assets.

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