Chile: 30 pesos or 30 years of reform? How politics is impacting on business in one of Latin America’s most developed economies
Chile is one of the most developed countries in Latin America. The country has also been seen as one of the region’s most stable economies attracting large inward investment.
That was all brought into question in October 2019, with the proposal to introduce a modest 30 peso increase in Metro fares, a move which became the catalyst for a wave of civil unrest. Clearly, the demonstrations were not about the 30 pesos. They were about the previous 30 years of various government reforms. Privatisation reforms to healthcare and pensions, and a more open-door policy on immigration, have cumulatively stoked a sense of social unease across working and middle-class households.
The business community largely failed to anticipate the unfolding chain of events. Taken from the perspective of corporates, underwriters, and reinsurers, how such events are defined can impact hugely on coverage: are these events simply acts of political turbulence or are they acts of terrorism? Most of the market practitioners understood that the events were not a terrorist event. They were political in nature and therefore covered by corporate political risk management programs. Most of the big corporate players in Chile have insurance programmes in place as they tend not to carry the business losses arising from such events on their own profit and loss. The underwriters, by and large, paid out on those claims. This meant that Chile has not experienced the same coverage issues witnessed in other countries.
But this is by no means the end of the problem in terms of corporate risk management.
The spike in claims has impacted the reinsurance market and is resulting in a sharp increase in premiums in some business lines, for example, policies including Strike, Riot, and Civil Commotion clauses.
This is having short-term impacts on the corporate market with affordability and market capacity becoming a key issue.
It could also have longer term impacts with foreign investors potentially reviewing their business and investment strategy in Chile. Chile is an open economy that benefits from great levels of international investment. Chile is recognised as one of the most open markets in Latin America having benefitted widely from foreign investment and foreign ownership of business assets. But this makes Chile susceptible to capital flight during periods of political instability, in fact Chile has already witnessed a spate of international moves as technology companies locating investments and new operations in Colombia and Mexico, discarded Chile in the current climate. The country has also seen a trend towards domestic Chilean investors investing their capital outside of Chile right now.
In addition, mid-size businesses do not typically have the same level of insurance coverage as large corporates, and as a result, they have suffered disproportionately following the recent civil unrest. Especially because some areas in the downtown of the main cities were fully destroyed, impacting greatly on mid-size and smaller enterprises. Throw the impact of COVID-19 into this mix and together they represented a perfect storm.
Faced with the ongoing uncertainty in the local political landscape, all business entities in Chile will need to improve their ‘eyes and ears’ reconnaissance on political risk and uncertainty in the near future. The importance of business strategies addressing the geo-political landscape has moved up the corporate agenda.
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