2020 has put every country in the world under maximum pressure. Not only every nation’s political, economic, and social systems have been harshly tested, but also public health systems, education, and every other angle of society has had to navigate through turbulent and unknown waters. Chile has been no exception to these phenomena, which obviously add to our own local challenges.
Today, Chile faces three main challenges, whose consequences we observe with optimism: The elaboration of a new Constitution; the recovery after the deep economic and social consequences of the Covid-19 pandemic; and a new strategy to continue to attract foreign investment.
Chile is today the richest country in South America on a per capita basis and poverty levels have dropped dramatically over the last 30 years. Despite of the growth and development accomplished, Chile has not surpassed the ranges of inequality aspired by the majority of the population and there are perceived abuses that generate social resentment, facts that triggered massive protests and social upheaval in October 2019, demanding the country’s wealth to be distributed more equally and other social demands, notwithstanding the empirical positive results Chile obtained these las 30 years. Most political parties with Congress representation, with the support of the government of Sebastián Piñera, aimed to answer to social demands through institutional channels, calling for a national plebiscite to ask Chileans whether they wanted or not a new constitution to undertake the country’s challenges under a new paradigm. This constituent process is the first of the challenges that Chile is currently facing.
On October 25, 2020, a plebiscite was held in an exemplary peaceful polling day, in which 7,531,261 people participated, equivalent to 50.9% of the national electorate, the highest percentage of electors since the vote became voluntary in Chile. According to the final ballot counting, 78.27% voted in support of rewriting the Constitution, task that will be entrusted to a Constituent Convention, as 78.99% of citizens voted for this option.
This Constituent Convention will be made up by 155 members having gender parity between men and women and possibly reserved seats for indigenous people. They will be democratically chosen in April 2021, within the rules applicable for the election of members of the Chilean House of Deputies. Once the names of potential members of the Constitutional Convention and its conformation are known, institutional uncertainty will begin to wane.
The convention will have a term of 9 months, with the option of a one-time extension of 3 months (1-year term in total) to draft a new constitution, which will be ultimately submitted again for approval or rejection in a referendum with a compulsory vote.
Once its entrusted assignment ends, the constitutional convention will be dissolved, and its members will be ineligible to hold publicly elected offices for one year.
During the discussion of the new Carta Magna, the Constitutional Convention must respect certain pre-established rules, which were set in the “agreement for social peace” reached by political parties in November 2019, which seek to guarantee stability during said process and achieve broad consensus among its members. This includes that the new Constitution must respect the character of the Republic of the State of Chile; its democratic regime; final and enforceable judicial decisions and the treaties ratified by Chile and that are in force. Among the international treaties signed by Chile, it is worth highlighting the American Convention on Human Rights (or “Pact of San José de Costa Rica”) and the various Free Trade Agreements signed between Chile and the rest of the countries.
Also, it is established that all the rules of the new Constitution must be approved by 2/3 of the members of the convention.
It’s worth mentioning that in its 200-years of history as an independent nation, Chile has had several constitutions, all of which have preserved the same core aspects. So, we envision that the new Constitution will most probably follow the same tradition.
In line with this, Moody’s, has said that the potential for major and fundamental institutional changes due to the new Constitution is low to moderate due to broad public support to preserve key elements of Chile’s economic model, such as free markets, property rights, and the independence of the Central Bank.
The second challenge Chile is currently facing is how to recover from the deep economic and social consequences that the Covid-19 pandemic has generated.
As everywhere in the world, Covid-19 and its economic consequences have been a priority to the Chilean government, which has continuously worked since March 2020 to reduce the effect of the world and local economic upheaval on Chilean citizens, their families and in companies.
The government’s emergency economic plan has focused on the protection of employment and incomes to families as well as liquidity for SMEs, among many other measures.
Also the government has announced a broad plan to reactivate the economy, which includes a robust plan of public investment in physical, social and digital infrastructure, prioritizing cities and housing, highways and roads, ports and airports, potable water, irrigation and reservoirs, hospitals and outpatient clinics, educational establishments, public transportation, parks, sports and cultural centers, digital networks and resources for regions and municipalities.
It is estimated that public investment for the period 2020-2022 will total US$34 billion, US$4.5 billion of which is additional investment. This could generate 250,000 new jobs, with public works being developed in every region of Chile in a decentralized manner.
The third challenge Chile faces is to continue to attract new foreign investment.
Despite the world and local economic crisis in the first eight months of this year, Chile received US$10,161 million in foreign direct investment (FDI), according to preliminary figures published by the Central Bank of Chile. This represented an increase of 11% on the same period in 2019 when the inflow reached US$9,120 million. It was also 31% up on the average for the past five years and 12% up on the average for the period since comparable records began (2003-2020). Foreign investment in Chile continues to grow despite the blow that Covid-19 has meant for the local economy. This is good news because, as well as confirming investors’ confidence in our country, it contributes to the economy’s reactivation and the creation of new jobs that will help many Chilean families to overcome the crisis.
The Covid-19 crisis and the depreciation of the Chilean peso have also created opportunities in different industries. Several international players have acquired Chilean companies this year. In the last months, Carey has acted as advisor in 16 M&A operations for USD 980,5 million, leading TTR’s ranking among Chilean law firms. We expect that distressed M&A, insolvency and bankruptcy proceedings should open new opportunities for foreign investors during the next months, especially considering that Chile’s stability and free-market economy, despite the uncertainties presented by the constituent process, are attractive to investors that look for opportunities in emerging markets.
With a note of optimism, we invite all actors of society to turn the current global and local crisis, into new opportunities for future endeavours and projects in Chile.
Jaime Carey, Managing Partner, Carey