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Overseas business risk for Chile

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Overseas business risk for Chile

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Information on how UK companies can control risks when doing business in Chile.

1.Political

The Republic of Chile is a unified state divided into 16 administrative regions governed under a presidential system. The current constitution provides a clear separation of the powers in 3 independent branches: Executive (President), Legislative (Senate and Chamber of Deputies) and Judiciary (Supreme Court, Appeals Courts and local systems).

The President is elected for a 4-year term and may not hold two consecutive terms in office. Congress has two chambers and consists of a Senate (currently 50 seats; members serve 8-year terms) and a Chamber of Deputies (currently 155 seats; members serve 4-year terms). Members of Congress are elected on a proportional representation system according to each region’s population. Suffrage is universal for citizens over 18 years of age. Rule of law is particularly strong, with a free press, modern transparency legislation and a demonstrably independent judicial system.

The current president, Gabriel Boric, representing a leftist coalition, began his first term in March 2022, taking over from the right-wing government of Sebastián Piñera. Boric rode a wave of popular discontent with long-standing grievances about social and economic inequality that burst into violence and protest – a Social Crisis – on 18 October 2019.

Simmering discontent at growing inequality culminated in a month of social unrest and protest demanding political reform in October 2019 – halfway through President Piñera’s second term. The then-coalition government, Congress and opposition political parties agreed a constitutional reform process centred on a possible re-write of Chile’s Pinochet-era constitution. However, a large majority (61.9%) rejected the first draft produced by an elected constitutional convention in a September 2022 referendum. Many felt the draft addressed the left’s grievances and not urgent or enduring public priorities such as inflation, law and order, and immigration. In January 2023, Congress enacted a new constitutional process and selected delegates for two of the three constitutional bodies. Both bodies began work on 6 March. On 7 May, voters elected representatives to the 50-person Constitutional Council, the third body responsible for drafting the new text from 7 June to 7 November. A mandatory-voting referendum on the new proposed text is set for 17 December 2023.

Social unrest and violence has increased in the Araucanía region in southern Chile over the past few years. The longstanding conflict between the indigenous Mapuche people and the State reignited in 2018 when police killed a Mapuche man and then attempted to cover up the incident. Since then, violence has risen as both sides retaliate against each other. The security situation in the region led hauliers to strike in 2018 and 2022 following increased attacks by Mapuche extremists, paralysing the transport of goods for days. Drug trafficking in the area is controlled by Mapuche groups and this has led to deadly confrontations with police.

Since March 2020, the COVID-19 pandemic consumed much of the government´s attention, attempting to balance economic activity with public health. Chile suffered a devastating first and a less severe second wave of the virus. The government acted quickly to secure vaccine supplies and achieved one of the highest vaccination rates in the world. On 9 May 2023, Chile recorded its first day without a COVID-related death since the onset of the pandemic. Later in May 2023, the final sanitary and testing measures to enter the country were removed and the country has largely returned to a normal footing.

Public tenders in Chile are often closely scrutinised with both sides of the political spectrum keen to call out perceived corruption or cronyism. There have been various examples of tenders being relaunched following public pressure or investigations.

Priorities for the Boric government include improving gender equality (including raising the number of female-led SMEs), increasing ESG standards (Environmental, Social and Governance) and moving the country up the value chain with a greater focus on innovation and higher levels of research and development spending. Chile is a like-minded country to the UK in a number of areas and welcomes advice and guidance on how to address these topics.

2.Economic

Chile is a liberal, open market economy with macroeconomic stability. It is the fifth largest economy in Latin America and has the second highest GDP per capita in the region after Panama (US$28,684 in 2021 when adjusted for Purchasing Power Parity in 2021). Successive governments have balanced pro-market policies and a liberal economic model with a commitment to an enhanced welfare state and the elimination of poverty. Despite this, levels of inequality remain high compared to most other OECD countries.

The Chilean economy grew 2.1% in 2022, as the economy landed after overheating in 2021 due to a series of voluntary pension withdrawals. The withdrawals were in response to the Covid-19 pandemic and forced through against the wishes of the finance ministry. The new government implemented fiscal consolidation policies in 2022, cutting expenses by 23.1% and achieving a rare budget surplus of 1.1%. The Chilean economy is reliant on extractives and higher revenues from copper and lithium, Chile’s two main exports, boosted reserves. Chile stands to gain from electrification and net zero policies and many of these technologies require these two elements. Inflation was pervasive in 2022, reaching 12.8% in the year, the highest since 1992, as interest rates climbed to 11.25%, a historic high.

According to the IMF Chile will enter a recession in 2023 with the economy expected to shrink by 1.0%. More optimistic analysts believe Chile can avoid negative growth, with the service and mining sectors remaining resilient. Much depends on the global outlook. Declining inflation and interest rates should also help GDP performance.

Government gross debt was estimated to be 36.2% of GDP in 2022 and is likely to rise to 37.8% in 2024. The government aims to stabilise this figure over the medium term. Inflation is projected to decrease to 8.7% in 2023 and 4.1% in 2024 due to fiscal austerity measures. Chile’s relatively high unemployment rate slightly decreased reach to 7.9% in 2022. This was driven by more jobs in the construction, commerce and transport sectors. Unemployment is expected to increase slightly over the coming months.

Despite efforts to diversify its economy, Chile remains vulnerable to fluctuations in international copper prices. Chile is reliant on demand from China, their primary market, and to climate and natural disaster risks, primarily earthquakes. The long-term prospects for copper have important consequences for the wider economy. Chile has notably invested heavily in renewable energy, which is expected to account for over 20% of Chile’s energy generation by 2025.

Chile’s top trade partners are China, the United States, Brazil, Japan, Argentina, South Korea and Germany. The country’s extensive network of free trade agreements allows Chile to access to 88% of the global market (by size) through 29 treaties with 65 economies. These treaties include bilateral agreements with the US, the EU and China. Chile also has a bilateral deal with the UK, the UK-Chile Association Agreement, a continuity deal based on the EU-Chile agreement. This deal entered into force in 2021. Chile is also a member of the Pacific Alliance (with Mexico, Colombia and Peru) and the Comprehensive and Progressive Transpacific Partnership (CPTPP).

Chile’s international trade represented 64.4% of the country’s GDP in 2021. The country main exports aside from copper and lithium are fish, wood pulp, wine, and fruits (such as apricots, cherries, blueberries and peaches). Major imports include petroleum oil and gas, motor vehicles, electrical apparatus and automatic data processing machines. According to the IMF, the volume of exports of goods and services decreased by 0.4% in 2022 and is expected to increase by 1.3% in 2023 and 3.5% in 2024, while the volume of imports of goods and services decreased by 2.9% in 2022, a rate that’s expected to drop to by 7.5% in 2023.

Chile joined the OECD in 2010, becoming the second Latin American country after Mexico to do so. It graduated from the DAC list of aid-eligible countries in 2017.

Chile’s rising per capita income, its openness to investment and its dynamic business environment, largely free of significant obstacles make the country one of considerable commercial opportunity for British companies. Particular sectors with potential include mining, energy (including green hydrogen), infrastructure, digital economy, financial services (including fintech), professional services and retail.

3.Human rights

Chile’s human rights record has improved substantially since the return to democracy in 1990, though the military period left a painful legacy and hundreds of cases are still unresolved in the legal system.

Chile has ratified all the main international human rights treaties, and the eight core International Labour Organisation (ILO) conventions. After the rescue of 33 miners from the collapsed San Jose mine in 2010, Chile ratified the ILO convention on health and safety. It has also ratified Convention 169, which includes a commitment to consult indigenous groups over projects affecting them.

In the wake of a heavy-handed response from Chile’s police to the October 2019 protests, human rights and reform of the police remain under scrutiny. According to the December 2022 report by Chile’s National Human Rights Institute (INDH), Chile has implemented reforms including greater provision of legal, medical and financial support to victims, increased human rights education and crowd management training for police, and support for prosecution against human rights violators. However, Chile has yet to implement many international recommendations such as improving crowd control equipment and methodologies, significant improvement in police training, and reforms to regulations regarding the use of force by police.

Discrimination against women in the workplace and against minorities and poor conditions in prisons remain areas of concern. Issues also remain with Chile’s indigenous groups - about 8% of the total population - with, sometimes violent, protests for the return of traditional lands. The UN Special Rapporteur on Indigenous Issues has recognised the progress made in Chile, but commented that the country continues to face challenges, including, how to manage land rights claims, the exploitation of natural resources and conflict with the Mapuche community (by far Chile’s largest indigenous group). The government established in 2015 a systematic consultation process in order to provide any community affected by the activities of the state or a private organisation the opportunity to present its complaints and be included in the resolution process.

The ancestral homeland of the Mapuche people, the Araucanía region, is plagued by regular flare-ups of violence, destruction of property and protests. A long-time supporter of indigenous rights, President Boric campaigned on a promise to reset relations with Chile’s indigenous people and to re-energise dialogue to resolve the historic land rights grievances that have fuelled the country’s Araucanía conflict between indigenous Mapuche communities and the State since the nineteenth century. While one of his first acts as president in March 2022 was to remove the State of Emergency imposed on Araucanía under the previous administration, he swiftly reinstated the measure in May 2022 following rising violence. Political dialogue was also undermined when Chile’s proposed new constitution was rejected by nationwide referendum in September 2022. The draft text contained significant but controversial provisions for indigenous rights, including judicial and territorial autonomy. Mining and power projects can pose a threat to indigenous groups as both have a particular interest on the use of water reservoirs for their main productive activities (energy generation and agriculture respectively). As Chile looks to further expand its energy and mining infrastructure, tensions could rise.

4.Bribery and corruption

Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.

In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.

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