Fynsa
Following several reports, particularly the one published by the international news agency Bloomberg, a debate has begun over whether Chile has once again become the region’s safest economy in which to invest.
The arguments include some absolute statements, but also quite a few relative ones. In this regard, the decline in country risk is a key indicator, especially after having shown a significant increase in recent times, even compared to other countries in the region that have experienced political and social instability.
In addition, local financial markets were affected by this increased uncertainty, which was evident in the equity, fixed-income, and foreign exchange markets. These markets experienced significant declines but subsequently did not show the normalization seen in other countries, which, according to various analyses, was due to idiosyncratic factors.
In any case, as the publication points out, both the fixed-income and foreign exchange markets have shown signs of normalization—a trend that at one point might even have been considered excessive.
Within this heightened perception of local risk, we find that the information provided by the Daily Economic Uncertainty Index—compiled by the Central Bank—and the Economic Uncertainty Index (IEC) and Political Uncertainty Index (EPU)—developed by CLAPES UC—is extremely relevant. All three had shown a significant spike following the social crisis, a trend that was exacerbated by the pandemic.
However, what was most interesting was that it seemed a new baseline level of uncertainty had emerged in the country, one that was even higher than any other economic and/or financial crisis in recent history.
Simply put, Chile was no longer perceived as temporarily less safe, but rather as permanently less safe. In this regard, it is noteworthy that the Central Bank’s index stood, as of January, at its lowest level since October 2019, while CLAPES’s indices, although still high, are below the average for the period following the social crisis.
With all this on the table, it’s worth asking whether this makes Chile the safest economy in the region for investment—but we’re talking about investment other than portfolio or short-term investment. It’s true that the factors I mentioned in the previous paragraphs cannot be overlooked, and the availability of funds is important, especially following the decline in the local financial market after the withdrawals from pension funds.
However, the conditions that make an economy reliable (or “safe”) for investment have to do with the rules of the game—legal, tax, and regulatory certainty, among others—that is, institutions. Focusing our efforts on strengthening the institutions that work and building lasting consensus on those we want to work properly is vital to creating the stability that potential investors require, but also so that those of us who live in the country can see improvements in our well-being. That is what a safe country is.
