Political and Economic Overview

2021 is another pivotal year for Chilean mining with a new Constitution and general elections to navigate

As the first Latin American country to become a member of the Organisation for Economic Co-operation and Development (OECD), Chile is the commercial and economic success story of the continent. Since free market reforms began in 1975, Chile has consistently outperformed its neighbours in multiple indices of economic development, freedom and democracy. From 1980 to 2019, GDP per capita quintupled, enabling the country to dramatically reduce the share of the population living in poverty from 30% in 2000 to 3.7% in 2017, according to the World Bank, and to create a large middle class,. The opening up of the economy encouraged foreign direct investment (FDI) into the country since the 1990s, facilitating the growth of capital-intensive activities such as mining, which today accounts for 10.1% of GDP, according to Chile’s Central Bank and Cochilco.

Chile's dependence on copper has allowed for significant development, but leaves the country exposed to price fluctuations and demand from China. Furthermore, productivity is slowing down as a result of decreasing ore grades. Throughout 2020, however, the copper industry remained a bright spot in Chile's otherwise exhausted economy, which contracted by 14% in April 2020 year-on-year, according to Chile's Central Bank, as Covid-19 ravaged the economy in the midst of tensions over socioeconomic inequality.


According to the IMF, throughout 2020, Chile underwent a deep recession that saw national income decrease between 4.5% and 5.5%. To attempt to mitigate the impact of the outbreak, the government injected stimulus into the healthcare system, used tax measures to provide support to SMEs, and the central bank decreased fiscal policy interest rates to 0.5% while relaxing regulatory credit requirements.

Fortunately, sovereign debt risk remains minimal due to sound regulations, while the banking sector has proven its resilience. Fiscal and monetary policy measures and the gradual opening of the economy should underpin growth in 2021 as vaccination rates increase. Real GDP growth for 2021 and 2022 is expected at 5.3% and 3.2%, respectively, according to the IMF. This, however, is conditional on the political fate of the nation –Chile is to elect a new government this year whilst undergoing a process of constitutional reform– and on the possible resurgence of new virus strains.


“It is difficult to conclude whether the impact of rewriting the constitution will be positive or negative. The process is complicated because it carries very high expectations.”

Juan Carlos Guajardo, Founder and Executive Director, Plus Mining

Drafting a new future

In the near term, Chile's political climate will be defined by the forging of a new constitution. "The government's swift response to allow a referendum to rewrite the constitution, and the subsequent results of the referendum, are a testament to Chile's maturity and stability," highlighted Timothy Beale, director of CSE-listed Pampa Metals, a junior mining company with interests in Chile. "The country appears to be on a peaceful and positive democratic path that has not affected the ability of the country in general, and businesses in particular, to continue and progress," he added.

Nonetheless, as Chilean citizens voted overwhelmingly to rewrite the constitution, they set the stage for a dramatic reassessment of the country's relationship with the environment, public healthcare and national security. Diego Hernández, president of Sonami (Chile's National Mining Society), told Reuters: "Hardly any project of a very large magnitude will be carried out in the next two years until there is clarity around the new constitution."

Analysts foresee investment lagging until the new constitution is approved by late 2022. The process may also defer capex, already constrained due to Covid-19 restrictions, until investors see more clarity. According to Juan Carlos Guajardo, founder and executive director of Plus Mining, a mining intelligence provider in Chile: “The new constitution will mainly tackle the role of the state in the economy and is likely to reshape it to a welfare state.”


"There is no indication that basic property rights will be altered," highlighted Christoff Janse, investment promotion officer at InvestChile, a government agency. "The country's fiscal strength and its low level of debt as a percentage of GDP provide a financial buffer with which the government can address social demands without risking its credit rating in the short and medium-term or affecting the long-entrenched favorable base conditions for investing."

Presidential and legislative elections scheduled for November of 2021 add to the uncertainty. If the left-wing Frente Amplio wins the election, it could significantly increase the role of the state and may promote the nationalization of natural resources. The risk for radical changes decreases and interests of the private sector are protected if Chile Vamos, the ruling coalition, wins.

"Legal definitions will be essential; the definition of concepts such as glaciers are imperative to determine if projects will be allowed to develop or if they will face restrictions."

Fernanda Santoro, Environmental Engineer, Montt Group

Glaciers, water and taxes

The new constitution is unlikely to introduce radical changes regarding mining due to the immense negative impact this would have on investment into an industry that is vital to Chile. However, the questions concern how the new constitution will pronounce itself regarding issues such as environmental regulation, strategic metals, indigenous and collective bargaining rights, and worker benefits.

Under environmental regulation, the new constitution is likely to address changes to the water code and glacier protection. The debated glacier protection law has been stuck in Congress since October 2019, and calls for a better definitions of glaciers. If approved, it will prohibit mining in glacial areas, hindering the construction of large mining projects by Codelco's El Teniente and Andina. The lack of a clear definition of glaciers already resulted in the controversy of Pascua Lama, an open-pit gold, silver and copper project advanced by Barrick on the Chilean-Argentine border that was forced to halt activities in 2013 following a Chilean court order.

Water rights are also likely to be considered. “The government is drafting policies regarding water to consider giving water rights a temporary character and restricting some uses, which will affect mining operators if implemented,” higlighted Iván Rayo, general manager of JRI Ingeniería, a local multidisciplinary engineering consultancy.

In addition to water rights and glaciers, the constitutional process will tackle lithium, currently labelled a strategic metal since 1979. The subject overlaps with water rights since lithium is found in brine pools and requires extensive amounts of water to extract. Advocates are promoting the classification of brine as water so as to grant local communities more authority over the resources, since indigenous people own water.

Another likely topic to be considered is mining royalties and how to guarantee financial benefits for the populations in mining regions. “It is difficult to conclude whether the impact of rewriting the constitution will be positive or negative. The process is complicated because it carries very high expectations that it must meet,” commented Guajardo of Plus Mining. “Mining is a complex activity with multiple stakeholders and of a particular nature when it comes to capex, risk, taxation and impact. It must, therefore, be approached sensitively when addressed under the new constitution.”

Radical changes to the constitution that will result in negative consequences on mining investments are unlikely. “The country is no stranger to democracy and its processes, therefore I am confident it will be a smooth transition of power,” elaborated Eduardo Valente, lead consulting partner at EY Chile. “Mining companies should participate in discussions with the government to ensure their interests are taken into account in the new constitution.”

Image courtesy of Freeport-McMoRan