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Political Risk Map 2021: Mid-Year Update | Chile

Santiago white cityscape

Chile is experiencing a new cycle of protests over environmental issues – potentially impacting business continuity for the country’s vital mining sector as well as the outcome of government elections.

Some 60% of Chile's population live in a permanently water-scarce macro-zone that stretches for 2,000 kilometers. In recent years, water availability has dropped in the south and central-north macro-zones by 20% and 50%, respectively, and glaciers have shrunk by 8% in the last decade.

Large plantations, as well as lithium and copper production, are water-intensive industries increasingly targeted by civil society. The drying-up of water sources for rural drinking water systems and subsistence farmers in the Valparaiso Region stands in stark contrast to the green avocado plantations on the hills, irrigated by deep wells.

In 2018, the government paid to buy back water-use rights from private holders in the town of Petorca to give to local water services. The buy-back indicated some willingness on the part of the authorities to play a more active role in balancing private interests and those of local populations, in a country with a constitution that underscores water rights as private property.

Host indigenous communities are also fighting in court against long-term plans for the expansion of lithium production from the Salar de Atacama, since the extraction of lithium-containing brine from the salt flat is affecting the fragile ecosystem and associated water table. Australian resources company BHP announced in February 2020 that it would stop water extraction from the same salar for its Escondida copper mine, after opposition from indigenous communities. The use of desalinated water by the mining industry is forecast to rise 1.5 times through 2030 to almost half of total water consumption, compared to just one-quarter today. This will represent a significant added cost for miners.

Environmental concerns drive increased risk exposure for contracts.

Environmental developments may be accompanied by a political pluralism not seen for a long time and policy uncertainty. In a preview of the general election scheduled for November 2021, the consultations for the constitutional convention and regional governors in May and June 2021 saw a major rebuke of traditional parties, with President Sebastián Piñera's coalition, Chile Vamos, winning just one governor's post out of 16. This is the first time governors have been elected by popular vote instead of being appointed by the president.

The new authorities took office in July, starting terms that will last four years, with the possibility of one consecutive reelection. Policy discontinuity and changes in secondary legislation are likely, although newly elected governors have limited powers and are not entitled to review contracts or grant concessions, according to current law.

This past May, key mining regions Antofagasta and Atacama chose independent gubernatorial candidates, Ricardo Díaz and Miguel Vargas, respectively. Major mines located in that area include BHP’s Escondida, the world’s largest copper mine, and Codelco’s Chuquicamata. Both new governors are endorsed by left-wing parties, and advocate sustainable mining and protection of natural resources — in particular, water resources. Even though they will have no power to review contracts or cancel concessions, they are likely to become vocal against mega-mining activity, if this is considered to be damaging to the environment or water. This increases the likelihood of challenges in court or popular opposition against projects.

Even more strikingly, the constitutional convention election in May displayed a rejection not only of the center-right government of President Piñera but also of the political establishment in general, with a mere 43% turnout. Moreover, these results suggest that Chile’s next president may not come from either of the two coalitions that have dominated national politics since 1990.

The single largest block of seats – totaling 48 – in the constitutional convention went to left-leaning candidates who ran as independents. The current center-right government coalition obtained just 37 seats out of 155, followed by an alliance between the Communist Party and the Frente Amplio coalition, which secured 28 seats. This center-left coalition that has governed Chile for much of the past 30 years ended up in fourth place, with only 25 seats. The changing balance suggests that privately held water-use rights may come under scrutiny, and stricter regulations and margins for extractive businesses could be introduced.

The political system is showing signals of transition towards diversity and environmental, social, and governmental (ESG) sustainability. A previous electoral reform increased representation within the constitutional convention. Chile's 10 indigenous groups (around 13% of the population), which were not recognized in the 1980 constitution and did not have representation in Congress, were granted 17 reserved seats in the convention, therefore entitling representatives to a national deliberative role for the first time. This presence reinforces the feeling that a reorientation of the convention agenda towards increased environmental protection, regulations, and state control is likely.

Feminist movements also played an important role in the 2019 protests and, thanks to a parity law, half of the convention's delegates are women, as compared to 23% of the Lower House and 28% of the Senate. A gradual transition is also signaled through sovereign bond issuances, with the government being the most active sovereign ESG issuer in the Americas, with four consecutive issuances in the first half of 2021. Through the first half of 2021, ESG debt constituted 16.6% of Chile’s outstanding debt stock.

Between the recent elections and those due in November, Congress is expected to examine several bills that could redistribute money and affect the mining sector. The bills include additional royalties on copper sales, aiming to attract a larger share of price rises to pay for social programs, and limitations over mine operations near glaciers. The latter may put at risk 40% of copper output in these areas, according to the national mining company, Codelco. Furthermore, several key agreements on extractive activities run through 2023 and will likely be reviewed by the next government.

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