THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.
- 18 Jan 2022
- The victory of Gabriel Boric in Chile’s presidential run-off election as well as Chile's ongoing constitutional convention will see elevated uncertainty persist across both the infrastructure and power industries over the near term, posing a challenge to investment.
- We retain a relatively strong growth outlook for infrastructure investment in the market, underpinned by a combination of robust public investment plans and a strong outlook for private investment, with water and power infrastructure among areas likely to benefit from the policy approach of the incoming Boric government.
- Nevertheless, policy uncertainty over the short term poses significant risks to our outlook for infrastructure investment in the market, with plans to make changes to the country’s concessions programme and potentially form a public company to manage and operate infrastructure assets among policy risks.
- Within the power sector, we expect an acceleration in the green transition under the Boric administration, with non-hydro renewables set to receive a substantial boost.
- There remains elevated uncertainty in regards to the mining sector's impact on future electricity demand, project development processes, and electricity prices, all of which could weigh on investor sentiment and project developments over the long term.
The victory of Gabriel Boric in Chile’s presidential run-off election as well as Chile's ongoing constitutional convention will see elevated uncertainty persist across the infrastructure and power industries over the near term, posing a challenge to investment. On December 21, Boric, a left-wing congressman and former student protest leader representing the Apruebo Dignidad (AD) coalition, won 55.9% of the second-round vote, defeating right-wing candidate José Antonio Kast of the Partido Republicano. While a lack of congressional majorities will likely force his government to moderate its agenda to pass legislation, we expect Boric will increase public spending and raise taxes on corporations and the wealthy.
Additionally, our Country Risk team believes that Boric's election will bolster the role of the ongoing constitutional convention and raise expectations for the body's ability to shape policy direction. Notably, as a legislator, Boric was instrumental in forging the compromise between left-leaning parties and current president Sebastian Piñera to call for a constitutional plebiscite, which was held in October 2020. Furthermore, Chileans voted strongly in favour of left-of-centre coalitions and left-leaning independent candidates in the May 2021 convention delegate election, suggesting that the constitutional re-write process will likely push for policies in line with Boric's agenda which is set to be a departure from the orthodox, market-friendly policies advanced by current President Sebastián Piñera and previous governments. In particular for the power and infrastructure sectors a number of changes which could conceivably be made by the constitutional court will be of key importance, including regarding the distribution of powers and competencies between central, regional, and local authorities, regarding potential changes in favour of greater public water rights and stronger environmental protections in the country, as well as regarding other potential changes which could impact private property rights, corporate taxation and the country’s governance model.
In our view, both Boric’s victory and the ongoing constitutional process elevate near-term uncertainty within key industries in the market and present a mix of upside and downside risks to our outlooks for the infrastructure and power sectors. Of particular centrality for both sectors is the outlook for mining investment in Chile, with our Mining Team having highlighted that a Boric Victory could weigh on investment into Chile’s mining sector. Notably, the mining sector represents 10.8% of the country’s economic activity and accounted for 28.6% of global copper production in 2020. In particular, Boric has promised a greater role for the state in extracting Chile’s reserves of metals, and while the policy details have not been made clear, Boric could follow leftist leaders in the region such as Mexico’s President López Obrador by blocking the awarding of new privately-owned mining concessions, or could insist that state mining company Codelco plays a larger role in the sector. We also expect Boric will support and place greater emphasis on community consent for mining operations, will support the proposed legislation on greater royalties and will seek to extract greater revenues from mining operations as a part of his agenda for higher taxation and higher spending. This will weigh on investor sentiment and poses downside risks to our outlooks for mining production, including that of both copper and lithium. Given the large size of the mining sector relative to Chile’s economy and its importance in particular as a driver of both construction investment and power demand, any weakening in mining sector investment would risk weakening investment in the infrastructure and power sectors, posing a significant downside risk to our forecasts for both sectors.
Chilean Mining Industry To Grow Strongly, But Subject To Significant Policy Risks
Chile - Mining Industry Value & Growth
e/f = Fitch Solutions estimate/forecast. Source: BCC, Fitch Solutions
Also of note is the case of the oil and gas sector, as our Oil and Gas team expects that the less-investor friendly perception of Boric will likely scare off any larger investments into Chile’s upstream segment, leaving the decline of production to be managed by existing players in the sector.
Below we consider the potential impacts of Boric's election and the constitutional convention on the infrastructure and power sectors.
Infrastructure: Solid Growth Outlook Though Risks Remain, Particularly Over Shorter Term
Policy uncertainty over the short term poses significant risks to our outlook for infrastructure investment in the market though we retain a relatively strong growth outlook for the market compared to regional peers, underpinned by a combination of robust public investment plans as well as a strong outlook for private infrastructure investment. This strong infrastructure investment outlook underpins our growth forecast for Chile’s construction industry which we expect will grow by 3.3% y-o-y in 2022 and by an annual average of 3.0% y-o-y between 2023 and the end of our ten-year forecast period in 2031.
Infrastructure Investment To Support Construction Growth
Chile - Construction Industry Value And Real Growth
e/f = Fitch Solutions estimate/forecast. Source: Banco Central de Chile, Fitch Solutions
Key to the outlook for investment will be the extent to which Chile’s incoming government continues with the use of concessions to spur infrastructure development, as Chile has in recent decades emerged as a leader within Latin America and globally for the use of infrastructure concessions. Under the incoming Boric administration, we expect concessions to continue to be Chile's main infrastructure investment driver, a view bolstered by President-elect Boric's programme and statements which have noted the importance of concessions and public-private partnerships (PPPs) in Chile. However, we expect the government will look to give greater priority to social and environment factors in project decisions. This view is in line with criticisms by Boric and his programme of the country's current concessions system on grounds that over-prioritises economic factors at the expense of other factors including environmental and social impacts.
The approach taken by Boric will be particularly key given the high concentration of concessions projects currently planned for launch over the coming quarters with the country’s current Concessions Agenda envisioning the launch of 20 concessions to be tendered between 2022-2023, involving a combined estimated investment of USD6.5bn. Among these are eleven road and bridge concessions, four public transit projects, two dams, one airport, one civic centre, and one stadium. While Boric's stance remains unclear over the projects set to be tendered under the current Concessions Agenda in the next two years, in our view Chile’s government will continue to support opportunities broadly for private investment in infrastructure development including via concessions, given the country’s strong precedent for such investments in recent decades, continued interest from firms for new projects as well as the compatability of currently planned concessions projects with Boric's goal of seeing infrastructure investment spread across the country's geography. Driven by such investments across multiple sectors including transport, power and social infrastructure, Chile will continue to see substantial private investment in infrastructure development, underpinning our growth forecast. Nevertheless, we note the possibility of currently-planned projects being reassessed and tender schedules being modified, adding general uncertainty to the market.
Also of significant importance to the concessions programme is a proposal included in Boric’s electoral programme which would see the creation