With the sixth largest GDP per capita in the Western Hemisphere, Chile has historically enjoyed levels of stability and prosperity among the highest in the region. Widespread civil unrest broke out in 2019, however, in response to perceived systemic economic inequality. Pursuant to a political accord, Chile held a plebiscite in October 2020 in which citizens chose to redraft the constitution. Uncertainty about the outcome may impact investment. Chile’s solid macroeconomic policy framework the country boasts one of the strongest sovereign bond ratings in Latin America has provided the fiscal space to respond to the economic effects of the COVID-19 pandemic through economic relief and stimulus packages and other measures. After a 5.8 percent contraction in 2020, the Chilean Central Bank forecasts Chile’s economic growth in 2021 will be in the range of 6.0 to 7.0 percent.
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 general respect for private property rights. Sectors that attract significant FDI include mining, finance/insurance, energy, telecommunications, 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 25 – along with the United States – out of 170 countries worldwide and second in Latin America in Transparency International’s 2020 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 mining, energy, healthcare, insurance, and pension sectors. Importantly, the legislation enabling the constitutional reform process requires that the new constitution must respect Chile’s character as a democratic republic, its judicial sentences, and its international treaties (including the U.S.-Chile Free Trade Agreement). 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 implemented measures to streamline the process.
The government of Ecuador under President Moreno has focused on reducing the size of the public sector and its influence on the economy and sought private sector investment to drive economic growth. Facing serious budget deficits and the economic fallout from the COVID-19 pandemic, the Moreno Administration rationalized the size of government, merged ministries, and reduced the number of state-owned enterprises. Other cost-cutting measures include reducing fuel subsidies and reducing 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. In September 2020, the International Monetary Fund approved a $6.5 billion, 27-month Extended Fund Facility for Ecuador, and has already disbursed $4 billion to aid in economic stabilization and reform. The IMF program is in line with the government’s efforts to correct fiscal imbalances and to improve transparency and efficiency in public finance. The economy will likely be slow to recover as the Central Bank estimates an 8.8 percent GDP contraction in 2020 and 3.1 percent projected growth in 2021. By the end of 2020, only 34 percent of the eligible working age population was fully employed.
To increase private sector engagement in the economy and attract Foreign Direct Investment (FDI), the Ecuadorian government passed a Productive Development Law containing tax incentives in 2018 to spur investment, changed tax and regulatory policies for mining, and issued new Public-Private Partnership regulations 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 currency 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 Perceptions of Corruption Index. President Moreno declared the fight against corruption as a top priority. The independent judicial branch prosecuted government officials, including two of Moreno’s former vice presidents, as well as individuals involved in the Odebrecht and other corruption scandals. Ecuador’s highest court upheld convictions against former President Rafael Correa and 19 others in 2020 for a bribery scheme involving contributions by private companies to finance his political party illegally. 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 dominated by one state-owned enterprise (SOE) that cannot be privatized. To improve efficiencies, the government may offer concessions of its refineries and issue production-sharing contracts for oil exploration and exploitation. The government has gradually reduced its consumer fuel subsidies since May 2020 by aligning domestic fuel prices with international prices. 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, reduced 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 plans to offer concessions to develop wind, solar, hydro, biomass, biogas, geothermal, biofuel, combined cycle, and gas fired electrical generation plants to further diversify the energy matrix. It is also exploring possibilities to connect to the electrical grid the oil and shrimp sectors, which largely use independent generation capacity, and improve the cross-border 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 is finalizing the valuation model for 4G bands (700 and 2.5ghz) following consultations with the International Telecommunications Union and the U.S. Federal Communications Commission. Ecuador’s telecommunications regulator Arcotel plans to publish the new valuation model as well as an updated fee schedule for telecommunications services by the end of April 2021. The spectrum auctions for the 4G bands will take place under the new administration as well as any 5G valuation model, deployment, and commercial rollout. The current government is considering a concession of the state-owned telecommunications company CNT, as well as diversification of its core network hardware away from Chinese vendors.
E–Commerce: In 2020, ECommerce sales comprised approximately two percent of Ecuadorian GDP – one percentage point higher than in 2019. The COVID-19 pandemic provoked an overnight digital transformation in the country changing consumer habits and business strategies. 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. The Ministry of Production launched the National E-Commerce Strategy in 2021, establishing a framework for facilitating the digital transformation in the country. The strategy focuses on strengthening the current legal framework, capacity building for small and medium enterprises (SMEs), and improving logistics and payment gateway capabilities.
The government of Peru (GOP)’s sound fiscal management and support of macroeconomic fundamentals contributed to the country’s region-leading economic growth since 2002. However, the COVID-19 pandemic caused a severe economic contraction of over 11 percent in 2020. In response, the GOP implemented a $39.5 billion stimulus plan in July 2020, which amounted to 19 percent of GDP. To finance the increased spending, the annual deficit grew to 8.9 percent of GDP in 2020, but the Ministry of Economy and Finance (MEF) projects that it will stabilize to 4.8 percent of GDP in 2021. GOP’s debt as a percentage of GDP increased from 26.8 percent in 2019 to 35 percent in 2020. Peru’s COVID-19 response and the perseverance of its macroeconomic stability led the IMF to project that Peru will grow its GDP by 8.5 percent in 2021, the highest growth forecast in the region. Net international reserves remained strong at $73.9 billion and inflation averaged 1.8 percent in 2020. Private sector investment comprised more than two-thirds of Peru’s total investment in 2020.
Peru fosters an open investment environment, which includes strong protections for contractual rights and property. Peru is well integrated in the global economy including with the United States-Peru Trade Promotion Agreement (PTPA), which entered into force in 2009. Through its investment promotion agency ProInversion, Peru seeks foreign investment in its infrastructure sector and free trade zones. Prospective investors would benefit from seeking local legal counsel in navigating Peru’s complex bureaucracy.
Corruption, social conflict, and congressional populist measures negatively affects Peru’s investment climate. Transparency International ranked Peru 94th out of 180 countries in its 2020 Corruption Perceptions Index. In 2020, Peru’s health minister and foreign minister resigned after admitting they irregularly received Sinopharm trial vaccines, along with former president Vizcarra. Social conflicts also adversely affect the investment climate. According to the Ombudsman, there were 145 active social conflicts in Peru as of January 2021 of which 66 were in the mining sector. Citing, in part, a recent congressional passage of populist measures, and the possibility of future executive-legislative tension, Fitch Ratings revised the rating outlook on Peru’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to negative from stable in December of 2020.