Chile’s Big Decision: Economic Rebirth or Environmental Regulation?

Chile’s economy is growing again. The government forecasts 2.7% GDP growth for 2024, ending a cycle of economic stagnation and political turmoil from 2019 until 2023. However, many local investors still think the country should invest much more to catch up with the most developed nations.?

Many Chilean business leaders say the government should cut down on environmental regulations, arguing that these laws make the project approval process too rigid and costly. The question for Chile is how to reconcile that concern with its bold carbon emissions reduction goals.?

The big picture

Chile’s economy is finally gaining traction after five years of sluggish economic performance, growing 1.9% in 2024 Q1. The Finance Ministry forecasts 2.7% growth this year, while the Organization for Economic Cooperation and Development (OECD) projects 2.3% annual GDP growth.?

The five years between 2019 and 2023 were marked by nationwide social unrest, the COVID-19 pandemic, and two failed attempts to write a new national constitution. All of this contributed to higher government budget deficits and more regulatory uncertainty for private investors.?

Despite government spending increases, Chile still has a low debt-to-GDP ratio of 40%. However, its gross debt has increased since 2007, when it hit an all-time low of 3.9% of GDP. Chile is still considered an investment-grade country by the three largest US-based sovereign credit rating agencies (Standard & Poor’s, Moody’s, and Fitch Ratings).

Is Chile back in business?

Chile’s government says the country is back on a growth path after a necessary adjustment cycle that included interest rate hikes, which successfully brought down post-pandemic inflation. In November 2022, Chile’s central bank set the benchmark interest rate at 11.25%, the highest rate in 20 years. Today, the local benchmark rate is 5.75%.

That was the message that Finance Minister Mario Marcel and Central Bank of Chile President Rosanna Costa delivered during a June 2024 event in Santiago organized by Chile’s largest manufacturing industry lobby, (SOFOFA).?Both referred to the political uncertainties that arose when Chile tried to rewrite its constitution in 2022 and 2023.

SOFOFA President Rosario Navarro, the event’s host, said?Chile has a long-term problem. She pointed out that while Chilean GDP growth outperformed the world’s GDP growth average from 1990 to 2014, this trend has reversed. Also, Chile’s total investment has declined from 27% to 22% of GDP in the last decade. Today’s total investment level is at 25% of GDP, which Navarro argues is not enough for Chile to become a developed country with the same living standards as Western European and North American countries. Asian countries, which are the fastest-growing emerging markets, have consistently invested a larger share of their GDP than Chile has over the past decade.

Business leaders’ perceptions

Navarro blames excessive government regulations for Chile’s inability to foster investments and catch up with developed countries, a view that other influential business associations share. The Confederation of Production and Commerce (CPC) reported that the amount of investment under litigation in courts due to environmental licensing disputes increased from USD670 million in 2013 to more than USD9 billion in 2023.???

Because Chile set increasingly ambitious environmental goals for itself during international climate negotiations, tighter regulations are making it difficult for mining, energy, infrastructure, real estate, and even agriculture companies to complete projects. The pro-business think tank Pivotes.cl reported that throughout 2023, the total number of projects submitted for environmental processing was the lowest since 1997, while the amount of approved investments was the lowest since 2007. Moreover, the average number of days needed to process a government-required environmental impact study has risen from 411 in 2014 to 1,097 in 2023.?

One example of how environmental licensing can stall investment can be seen in the southern Magallanes Region. Facing requirements regarding bird migration routes, HIF and Enel Green Power temporarily paused their USD500 million Faro del Sur green hydrogen project set to produce 325 MW of renewable generation. This issue has become so present in Chile’s public discourse that it has earned its own jargon: “permissionology,” or permisología in Spanish. Finance Minister Marcel agreed that Chile should cut red tape in his speech at the SOFOFA event.?

More generally, several Chilean business leaders have said they would like to see left-wing President Gabriel Boric embrace private-sector demands beyond just reducing bureaucracy. Universidad de Chile Economics Professor Joseph Ramos said that Boric scared private investors on the campaign trail with his progressive promises of enacting a new constitution that would enlarge the government’s role in the economy. Boric campaigned as an environmentalist, which rang alarm bells for business leaders worried by regulations. CPC president Ricardo Mewes said in a recent interview with journalist Cristián Warnken that Boric did move more to the center during his administration, but argues that the ruling coalition still has an anti-business bias.?

Opportunities and risks ahead

The most relevant sectors for Chile’s economic output are services, copper mining, and construction.

Copper mining alone accounts for almost 12% of Chile’s economic activity, and the industry’s impact goes far beyond that. Mining companies require several services to operate, such as transportation and security. Plus, metropolitan areas near mines must offer hotels, restaurants, schools, hospitals, shopping malls, and all the necessary services for day-to-day life. This dynamic is visible in northern big cities such as Antofagasta, Calama, Iquique, and Arica. Therefore, rising international copper prices in recent months have benefited many sectors.

Chile’s 1.3% decrease in copper exports in 2023 was a major factor behind the country’s poor economic performance over the last year. Conversely, the price of copper rose from USD3.8 per kilogram in 2023 to USD4.6 per kilogram in May 2024. Both government and private investors see energy transition as a positive factor for copper demand, as this metal is heavily used in electric vehicles. However, one risk is that technological changes could make EVs less reliant on copper. Still, such a technical breakthrough does not seem likely in the next couple of years.

Another strong bet in Chile is lithium, another key ingredient for energy transition. Although Q1 2024 lithium sales reported by SQM and Albemarle increased by 31%, the falling price of the mineral over the past year had negatively impacted payments that the government received for leasing its properties in the Salar de Atacama, the world’s largest lithium deposit. The Chilean government received USD135 million in lithium mining royalties in Q1 2024, a sharp decrease from the USD1 billion recorded in the same period last year.?

The Chilean government’s “conservative forecasting” for lithium production predicts that the country will more than double its output by 2035. This would largely come from the joint venture between state-run Codelco and Chile’s largest private conglomerate SQM, which is partially owned by China’s Tianqi Lithium.

In April 2023, President Boric launched his flagship industrial policy initiative to guarantee that some lithium mined in Chilean territory would be processed there, too. Those who favor a government-led industrial policy in the lithium value chain argue that Chile will create better jobs by establishing manufacturing that uses part of the lithium extracted from the country’s northern desert region. On the other hand, the right-wing opposition fears that Chile is missing out on the global lithium boom due to overregulation, especially compared with the market-friendly approach of neighboring Argentina.

Mining activities are expected to account for more than half of the USD37.1 billion in new investments that Chile plans to see through 2027, according to official figures. Public infrastructure projects, real estate, and energy are also expected to attract large sums of capital over the next few years.

Finally, some business opportunities stem from the Boric administration's climate change mitigation plan, which sets the target of net-zero carbon emissions by 2050. The mining and manufacturing industries combined account for roughly 15% of Chile’s carbon emissions. The government has just started a public consultation process on incorporating more sustainable operational processes in the mining sector. Other industries such as green hydrogen and renewable energies are also set to be winners in this scenario.

Still, Chile has a decision to make when weighing its climate plan against economic growth. While environmental regulations are necessary to protect health, biodiversity, and the environment, they could become a burden entrepreneurs do not want to carry. If it cannot find a middle ground, Chile will likely continue being a middle-income country unable to achieve sustainable, long-term economic growth.

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