Today, there are two proposals from the opposition to:

1. Temporarily increase corporate taxes from 27% to 30% for companies with annual sales exceeding US$41 million (in 2021-22), (ii) a 2.5% wealth tax for the wealthy (those with more than US$22 million – net of debt), and (iii) eliminate some tax exemptions (i.e., temporarily eliminate – 2021-22 – tax exemptions on capital gains).
2. Approve a third withdrawal from the AFP.

Although both bills could be rejected by the Constitutional Court, the truth is that they have been gaining momentum, thanks to the support of multilateral organizations for increasing tax collection to address the effects of the pandemic on public spending and because the third 10% withdrawal from the AFPs has already been approved by the Chamber of Deputies by a large majority, now moving on to the Senate, which will discuss and vote on it next week.

Chile has deployed a powerful fiscal response, placing itself at the forefront of both the region's economies and emerging countries globally. (see chart)

Whether or not the third withdrawal of pension funds or other alternatives currently on the table, such as the withdrawal of unemployment insurance funds, are ultimately approved, and with quarantines being extended for longer, it is likely that the government will have to make an even greater fiscal effort anyway, thereby strengthening an already abundant liquidity environment.

1. Consumers now have excess liquidity totaling US$12.7 billion (4.5% of GDP) from AFP withdrawals. (see table)
2. The government granted additional subsidies of US$6 billion (2.1% of GDP).

What is the practical effect of this increased liquidity on local assets, at least in the short term?

Overall, it is good for consumption (positive for retail companies), it can continue to improve asset quality as people pay off their debts with excess liquidity (positive for banks) , and it has the potential to generate higher inflation (positive for accrual of funds in UF).

In the long term, if the additional liquidity comes from another withdrawal from the AFPs, it could be interpreted as an indirect increase in government debt, which could continue to put pressure on long-term market rates.

Fiscal stimulus 2020–2021 (% of GDP)

Liquidity of US$12.7 billion in consumer current accounts (4.5% of GDP)