As the seventh largest economy in the Western Hemisphere, Chile has historically enjoyed levels of stability and prosperity among the highest in the region. In October 2019, widespread civil unrest broke out in Chile in response to perceived systemic economic inequality. The unrest had a significant impact on Chile’s economy and some U.S. businesses operating in Chile. Pursuant to a political accord in response to the civil unrest, Chile plans to hold a plebiscite in October 2020 on whether or not to draft a new constitution. Chile’s solid macroeconomic policy framework has provided the fiscal space to respond to the economic effects of the social unrest and the COVID-19 pandemic through an economic stimulus package of about USD16.75 billion, which is expected to increase the fiscal deficit to 8 percent in 2020. Chile boasts one of the strongest sovereign bond ratings in Latin America. The country’s economy grew 1.1 percent in 2019, and the Chilean Central Bank forecasts Chile’s economic growth in 2020 will be in the range of -1.5 to -2.5 percent due to the impact of the COVID-19 pandemic.
Chile has successfully attracted Foreign Direct Investment (FDI) despite its relatively small domestic market. The country’s market-oriented policies have created significant opportunities for foreign investors to participate in the country’s economic growth. Chile has a sound legal framework and there is general respect for private property rights. Sectors that attract significant FDI include mining, finance/insurance, chemical manufacturing, and wholesale trade. Mineral, hydrocarbon, and fossil fuel deposits within Chilean territory are restricted from foreign ownership, but companies may enter into contracts with the government to extract these resources. Corruption exists in Chile but on a much smaller scale than in most Latin American countries, ranking of 26 out of 180 countries worldwide and second Latin America in Transparency International’s 2019 Corruption Perceptions Index.
Although Chile is an attractive destination for foreign investment, challenges remain. Legislative and constitutional reforms proposed in response to the social unrest and the pandemic have generated concern about the potential impact on investments in the energy, healthcare, insurance, and pension sectors. Despite a general respect for intellectual property (IP) rights, Chile has not fully complied with its IP obligations set forth in the U.S.-Chile FTA. Environmental permitting processes, indigenous consultation requirements, and cumbersome court proceedings have made large project approvals increasingly time consuming and unpredictable, especially in cases with political sensitivities. The current administration prioritizes attracting foreign investment and continues to implement measures to streamline the process.
The Government of Ecuador under President Moreno has taken a distinct path from the policies of his predecessor, focusing on reducing the size of the public sector and its influence on the economy and seeking instead private sector investment to drive economic growth. Facing serious budget deficits, the Moreno Administration is rationalizing the size of government, merging ministries, and planning a reduction in the number of state-owned enterprises. Other cost cutting measures include reducing fuel subsidies and mandatory reductions in the number of public employees. Still, Ecuador is saddled with a very large public sector, and Moreno has committed to continue government spending on social welfare programs. To fund these programs and continue reforms, the Ecuadorian government reached in March 2019 an agreement with the International Monetary Fund (IMF) and international financial institutions for financial assistance totaling USD 10.2 billion over three years. The IMF program is in line with the government’s efforts to correct fiscal imbalances and to improve transparency and efficiency in public finance. While the March 2019 IMF program has been cancelled, the Moreno administration has opened negotiations with the IMF for a new agreement, expected to be reached in August 2020.
To increase private sector engagement in the economy and attract Foreign Direct Investment (FDI), the Ecuadorian government passed a Productive Development Law in 2018 to spur investment, has in recent years changed tax and regulatory policies for mining, and seeks to develop a Public-Private Partnership law to increase private investment in infrastructure projects. Ecuador is a dollarized economy that has few limits on foreign investment or repatriation of profits, with the exception of a five percent capital exit tax, and is actively seeking foreign investors. It has a population that views the United States positively, and the Moreno Administration has expanded bilateral ties and significantly increased cooperation with the United States on a broad range of economic, security, political, and cultural issues.
Despite these efforts, FDI inflow to Ecuador has remained very low compared to other countries in the region, due to a number of problems, most notably corruption. Ecuador is ranked in the bottom third of countries surveyed for Transparency International’s Corruption Perceptions Index. Two high-profile cases of official corruption involving the state-owned petroleum company PetroEcuador and Brazilian construction firm Odebrecht exemplify challenges that confront investors. Numerous officials have been charged for corruption related offenses, and several have been convicted, including former Vice President Jorge Glas, who was sentenced to six years in prison in December 2017. In addition, economic, commercial, and investment policies are subject to frequent changes and can increase the risks and costs of doing business in Ecuador.
Sectors of Interest to Foreign Investors
Petroleum: Per the 2008 Constitution, all subsurface resources belong to the state, and the petroleum sector is controlled by two state-owned enterprises (SOEs) that cannot be privatized. To improve efficiencies, the government may offer concessions of its refineries and is seeking ways to better target fuel subsidies. An effort to eliminate subsidies in October 2019 sparked violent civil unrest that forced the government to walk back the measure. The Ecuadorian government held a successful public tender for oil production sharing contracts (Intracampos I) in 2019 and reportedly plans to move to production sharing contracts as the standard for future tenders.
Mining: The Ecuadorian government has reduced taxes in the mining sector to attract FDI. Presidential Decree 475, published in October 2014, made minor reductions to the windfall tax and sovereign adjustment calculations. The Organic Law for Production Incentives and Tax Fraud Prevention, passed in December 2014, included provisions to improve tax stability and lower the income tax rate in the mining sector. The previous Correa administration also developed mining sector incentives such as fiscal stability agreements, limited VAT reimbursements, remittance tax exceptions, and mechanisms for companies to recover their investments before certain taxes are applied.
Electricity: The government is seeking to offer concessions to develop wind, solar, hydro and gas fired electrical generation plants to further diversify the energy matrix, as well as improve the electrical transmission connection with Peru. Non-hydro renewable energy projects in Ecuador are eligible for U.S. International Development Finance Corporation (DFC) financing.
Telecommunications: The government seeks to increase national coverage of the 4G network, as well as eventually introduce 5G into Ecuador. It plans to offer a concession of the state-owned telecommunications company CNT, as well as diversify its hardware away from Chinese vendors.
ECommerce: ECommerce sales comprise approximately one percent of Ecuadorian GDP but are a fast growing market. While many Ecuadorians are interested in purchasing online, they are limited in their ability to receive international shipments due to logistics and customs problems upon arrival in Ecuador.
Peru has been one of the fastest growing Latin American economies since 2002 and is known for its prudent fiscal policies. Structural reforms and sound macroeconomic policies created high growth, low inflation, and a greatly reduced poverty rates from 52.2 percent in 2005 to 20.5 percent in 2018. Peru’s Gross Domestic Product (GDP) averaged six percent growth from 2002 through 2013, then slowed to 2.5 to 4 percent, and in 2019 grew by 2.2 percent, significantly higher than the estimated 0.6 percent regional average. The International Monetary Fund (IMF) and the World Bank have estimated that Peru’s GDP will fall between 4.5 and 4.7 percent in 2020 due to the global COVID-19 crisis. To offset the anticipated economic damage, the Government of Peru (GOP) announced a $27 billion stimulus plan to jumpstart the economy, which amounts to 12 percent of GDP. Peru is better placed to recover than others in the region. The IMF projects a rebound in 2021, with estimated 5.2 percent GDP growth, which would be the second highest rate in the region. Peru’s government debt as a percentage of GDP was 26.8 percent in 2019. Its budget deficit was 1.6 percent of GDP with net international reserves of $68.3 billion. Inflation averaged 2.1 percent in 2019. Private investment comprised more than two-thirds of Peru’s total investment in 2019.
Peru is well integrated in the global economy through its multiple free trade agreements, including the United States-Peru Trade Promotion Agreement (PTPA), which entered into force in February 2009. In 2019, trade of goods between the United States and Peru totaled $15.8 billion, up from $9.1 billion in 2009, the year the PTPA entered into force. From 2009 to 2019, Peruvian exports of goods to the United States jumped from $4.2 billion to $6.1 billion (a 45 percent increase) while U.S. exports of goods to Peru jumped from $4.9 billion to $9.6 billion (a 96 percent increase). The United States also enjoys a favorable trade balance in services; exports of services in 2018 to Peru amounted to $3.3 billion and contributed to a $1.2 billion services surplus the same year.
Corruption continues to negatively affect Peru’s investment climate. Transparency International ranked Peru 101st out of 180 countries in its 2019 Corruption Perceptions Index. In 2016, Brazilian company Odebrecht admitted it paid $29 million in bribes in Peru, leading to investigations involving high-level officials of the last four Peruvian administrations and halting progress on major infrastructure projects, which continued through 2019. Odebrecht agreed in December 2018 to pay Peru $180 million in civil reparation. As of December 2019, the Brazilian construction company had paid $24 million in civil reparation.
Social conflicts adversely affect the extractives sector in Peru, which accounts for over 15 percent of Peru’s GDP. According to the Ombudsman, there were 137 active social conflicts in Peru as of March 2020, of which 65 were in the mining sector. Extractive industries are a key draw of foreign investment. According to Peru’s Private Investment Promotion Agency (ProInversion), 23 percent of Foreign Direct Investment (FDI) in 2019 went to the mining sector, 20 percent to the communications sector, and 18 percent to the financial sector. Other destinations for investment included energy (13 percent) and industry (12 percent).