Chile

major macro economic indicators

(e): Estimate (f): Forecast

Risk assessment

A mild economic recession in 2023

GDP figures for Q1 2023 confirmed weak economic momentum this year. Activity dropped by 0.6% year-on-year (from -2.3% in Q4 2022) and rose by 0.8% quarter-on-quarter (from +0.2% in Q4 2022). Albeit the marginal expansion, the breakdown reveals a weak composition. Growth was fuelled by the external sector and was predominantly based on the softening of imports (-4.6% QOQ), while exports observed only a slight expansion (+ 0.5% QOQ). In contrast, domestic demand shrank for the fifth consecutive quarter (-1.5% QOQ) as household consumption (-2.5% QOQ) continues to normalise compared with the high levels reached in mid-2022. Investments also contracted in the period (-0.9% QOQ). In the next quarters, household consumption will continue to drag on activity, affected by the dry-up of excess liquidity relating to the withdrawal of pension savings, a weaker job market, durably and historically high inflation (albeit decelerating to some extent) and by tight credit conditions. While the central bank is likely to start cutting its policy rate (which stood at 11.25% per annum in early July 2023) in Q3 2023, the downward trend should be gradual. In addition, tight credit conditions also tend to affect gross fixed investment (24% of GDP) and are influenced by investors that are somewhat cautious regarding the prolonged overhaul of the Constitution. Moreover, the recent approved mining royalty bill and the government’s April 2023 decision to limit future lithium contracts to public-private partnerships with state control could also somewhat undermine future investments. Conversely, exports are expected to bring a mild positive contribution, driven by relatively higher growth in China (the main destination of foreign sales) as the economy reopens after the Covid-19 lockdowns. Nonetheless, the Chinese trend has been led by the services activity, while demand for metal commodities has proved lacklustre (copper and lithium international prices YOY were on average lower in H1 2023, representing a downside risk for Chilean exports). Mining accounted for 57% of total foreign sales in 2022, with the red metal on its own representing 45% and lithium 8%.

External shortfall to strongly narrow and fiscal account to switch back to deficit

The large current account deficit registered in 2022 will improve significantly this year. Figures for Q1 2023 confirm that this movement is on track and is led by the widening of the trade balance surplus. The latter is underpinned by sliding imports amid softer domestic demand and relatively lower average oil prices, while exports continue to expand. In addition, the services deficit is decreasing as freight costs undergo a sharp correction and tourism pursues its recovery. Last, lower local economic momentum should also help curb the primary income deficit to some extent, thereby reducing foreign firms’ profit repatriation (albeit still high during the first quarter of the year). On the financing side, FDI could also weaken due to recent policy developments affecting the mining industry and the higher financing cost, but should be able to cover the lion’s share of the external shortfall. Furthermore, more volatile portfolio investment net inflows should fill the remaining gap, along with public, non-financial enterprise, and bank debt issuance. Importantly, after using 24% of its foreign exchange reserves in 2022 amid a wide external account deficit and higher political uncertainty at that moment, the central bank announced in June 2023 a one-year program to rebuild its buffers by USD 10 billion. As at June 2023, reserves stood at USD 39.6 billion (covering roughly 5 months of imports). In addition, in August 2022, the IMF executive board approved a two-year flexible credit line of USD 18.5 billion for Chile. Furthermore, the country’s negative net international investment position stood at roughly -16% of GDP in Q1 2021, mainly smoothed by the existence of relevant pension fund investments abroad (estimated at 23% of GDP). External debt stood at 68.7% of GDP in Q1 2023, 68% of which was owed by the private sector.
On the fiscal side, after a strong consolidation in 2022 in the aftermath of the phase-out of Covid-related stimuli, the budgetary deficit reappeared in 2023. The situation is underpinned by the economic slowdown and lower average mineral commodity prices, which have prompted a drop in tax collection, and higher financing costs. In addition, expenditure has also risen owing to higher pension payments and capital expenditures. After years of debate in Congress, a new mining royalty bill was finally approved in May 2023 that is expected to collect annually roughly 0.45% of GDP when fully phased in. In closer detail, the top tax rate will reach 46.5% for companies that produce over 80 thousand tonnes of fine copper a year. Additionally, a 1% ad valorem rate will also be applied for large copper producers.

Weak political base blocks government reforms

The popularity of President Gabriel Boric from the left-wing Apruebo Dignidad coalition weakened from 50% in March 2022 (when he took office) to 33% in June 2023. This can be attributed to more sluggish economic momentum in Chile and to pardons granted in December 2022 to some activists arrested during widespread social protests in Q4 2019 on charges such as robbery and looting. Moreover, the ruling coalition holds only 64 out of 155 seats in the fragmented Lower House and 18 out 50 of seats in the Senate. As a result, the incumbent party has struggled to pass reforms. These include a tax reform which the Lower House watered down in March 2023. The bill aimed at raising social spending through increased taxation of higher incomes and curbing tax exemption and evasion. In early June 2023, President Boric announced he would insist on the reform and push it through the Senate where it would need a two-thirds majority to pass. Meanwhile, a pension reform presented in November 2022, which would maintain the status quo on individual contributions and gradually increase employer contributions until they reach 6%, is being stalled in the Lower House. In addition, in January 2023, Congress reached an agreement for a new constitutional process to rewrite the Constitution, this time considering a Council made up of 50 elected delegates (from 155 in the previous failed process) and 24 experts (in contrast to none previously). It also included 12 principles that must be respected in a new draft of the bill. Experts first drafted the new Magna Carta before the delegates’ election, which took place in May 2023. Importantly, the Council ballot led to right-of-centre parties winning a qualifying majority, diverging from a progressive majority that drafted the first text. Overall, this second constitutional process should lead to moderate changes in Chile's business-friendly environment. The national referendum with mandatory voting to approve or reject the new bill will take place on 17 December 2023.

Last updated: September 2023

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.