Economic Studies
Chile

Chile

Population 19.1 million
GDP per capita 14,772 US$
A4
Country risk assessment
A3
Business Climate
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Synthesis

major macro economic indicators

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 3.9 1.1 -6.2 4.5
Inflation (yearly average, %) 2.3 2.3 2.9 2.7
Budget balance (% GDP) -1.5 -2.6 -8.7 -4.0
Current account balance (% GDP) -3.6 -3.9 0.0 -2.0
Public debt (% GDP) 25.6 27.9 32.8 37.5

(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

Economy set to rebound amid supportive copper prices and an expansionist fiscal stance

In Chile, the first COVID-19 case was reported on 4 March 2020. At first, a well-calibrated and dynamic quarantine model was implemented. Nonetheless, a reckless and hasty easing of mobility restrictions had to be reverted in May, when the number of daily new COVID-19 cases started to surge again. In fact, the number of daily new COVID-19 cases peaked in June 2020 and started to decrease afterwards, allowing for a gradual reopening. Consequently, the economic contraction in 2020 was larger than initially expected, even in the presence of large expansionary policy stimuli. In 2021, the economy is likely to rebound. First, the ongoing fiscal stimuli will not be fully unwound, including USD 2 billion in subsidies aimed at creating new jobs and recovering those lost during months of lockdown. This adds to a USD 34 billion plan on public works for the 2020-2022 period (roughly 14% of 2019 GDP), with most of the investment set to be private. Moreover, household consumption should also be supported by the slow improvement on the job market, the second withdrawal from pension funds and stable low inflation. Regarding external sales, exports will be bolstered by the gradual resumption of global activity (notably in China, the main trade partner) and supportive copper prices. Overall, the downside risks are related to the evolution of the COVID-19 pandemic, and the rewriting process.

 

Current account back into deficit; fiscal deficit still high

The current account registered a significant correction in 2020, mainly driven by a stronger trade surplus (supported by resilient mineral exports and the drop in imports due to the plunge in domestic activity). Regarding the financing, net foreign direct investment (FDI) remained positive, albeit lower. In 2021, the current account balance is expected to return into deficit, overall driven by the recovery of economic activity (rising imports and relatively higher profits for foreign companies). Nonetheless, FDI should be enough to cover the external needs. Concerning the external debt, it stood at around 82% of GDP in Q3 2020, 67% of which is owed by the private sector. The negative net international investment position is still at a moderate level, at roughly -13.8% of GDP in Q3 2020, mainly smoothed by the existence of relevant pension funds’ investments abroad (34% of GDP as of September 2020). Moreover, the IMF approved a USD 23.8 billion precautionary two-year Flexible Credit Line in May 2020. Finally, Chile has approximately USD 38 billion in foreign exchange reserves (covering roughly 8 months of imports), while the Treasury held around USD 22 billion in Sovereign Wealth funds at the end of September 2020. However, it is important to note that in July 2020, the Congress approved a law allowing a one-time withdrawal of 10% from pension savings on an individual capitalization account (a second similar withdrawal bill is under discussion in Congress). Regarding the fiscal account, the budget deficit significantly widened in 2020 as a side effect of the GDP collapse and the strong fiscal stimulus that was implemented. Looking ahead, the government will still run a high deficit in 2021, in line with the social pressures for higher fiscal spending. That said, although gross public debt will continue to climb, Chile´s long record of prudent fiscal policy will allow it to continue accessing affordable market financing.

 

A fragile political environment at least until the November 2021 general elections

In response to public dissatisfaction, which triggered the violent protests in Q4 2019, Chile held a referendum in October 2020 on whether the country should draft a new constitution in order to replace the one imposed in the 1980s by the Pinochet dictatorship. On this occasion, Chileans overwhelmingly voted in favour of going forward with the rewriting and through a fully elected Constitutional Convention (rather than a mix of this body and current lawmakers). The population will choose the 155-member constitutional body on 11 April 2021. The body will then start discussions in Q2 2021 and will have up to a year to draft the new constitution. Although each clause must be approved by two-thirds of its members (smoothing the risk of extremist inputs), uncertainty on the content of the new constitution will remain high. This is underpinned by the fact that the obligatory ratification referendum will only take place during H1 2022. Overall, the new constitution is expected to enhance the role of the state in the provision of social services. Finally, the popularity of the centre-right President Sebastián Piñera, of the currently divided centre-right Chile Vamos coalition, is expected to remain weak and thus vulnerable to the passage of populist measures by the Congress and new rounds of social protests. Lastly, Chileans will also choose their president on 21 November 2021.

 

Last updated: February 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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