As the COVID-19 pandemic thrust financial markets around the world into chaos last year, Chile and Peru looked at their peers and issued a firm “hold my pisco.” Beyond being stuck in the epicenter of the global coronavirus outbreak, both countries saw an intensification of political and social unrest stemming from 2019, an aggravating disorder in the western South American neighbors.
However, with the advent of 2021, the salvation for Chile and Peru could come from a familiar source: commodities.
In comparison to Brazil, markets in Chile and Peru took longer to recover as a result of political upheaval. In Chile, the constitutional referendum and new protests kept investors wary, while Peru’s political situation turned into a veritable dumpster fire, with corruption allegations against former President Martín Vizcarra leading the country to have three presidents in the space of just seven days. Now, as incumbent President Francisco Sagasti tries to appease the country until elections on April 11, political and social movements in Peru are seeking to emulate their neighbors and demand their own constitutional referendum.
Politics have also created room for economic populism. In Chile, demands for reform and criticism for the country’s model of austere liberalism came from the country’s Congress, which approved not one but two rounds of withdrawals from Chileans’ pension accounts. With plunging popularity and little influence, President Sebastian Piñera could only look on as citizens were allowed to take out 10% of their pension fund balances on two occasions. Over 20% of holders emptied their accounts during the first round alone.
As Congress mulls over a third round of withdrawals, long-term doubts arise over whether Chile could be throwing an entire generation of senior citizens into economic misery.
Peru is going through a similar process, with President Sagasti attempting to block a second pension fund withdrawal scheme via the country’s Supreme Court. As the measure applies to the publicly held pension system, the move could cost the government approximately USD 4.45 billion.
A silver lining for Chile and Peru
Despite the turmoil, Oanda stocks analyst Ed Moya has a positive outlook for both Chile and Peru. In his view, their status as commodities producers give them every chance to benefit from a global economic recovery brought about by coronavirus vaccination.
“You’ll see this trend pretty steady across all commodity-led economies. You’ll see the demand for copper and gold extremely elevated and this will force those companies to bring back jobs,” he tells The Brazilian Report.
This would be particularly advantageous for Peru. Highly dependent on mining, the country saw unemployment triple to 9.6% in the third quarter of 2020, as nearly 55% of mining jobs vanished amid social isolation measures.
Indeed, any recovery is highly dependent on the performance of China, which has emerged from COVID-19 quicker than any other nation and is seeing growth boosted by stimulus packages now is watching stimuli package pushing forward its growth, a move that is particularly strong in copper — of which Chile and Peru are the world’s two largest producers. Moya’s views echo those of several experts consulted by Market Watch, who believe that China’s increased appetite will continue into 2021.
While politics are still set to be a source of instability until new governments are elected, Moya believes investors may shrug off uncertainties in search of profitability.
Investors’ tolerance should extend to the region’s agenda for social reform.
The demand for structural change has been seen all over Latin America, not only in Peru and Chile. Argentina, for example, recently approved a tax on the wealthiest share of the population to afford COVID-19 expenses, while protests erupt in Colombia against police violence.
While markets have always treated such environments as overly risky, Moya believes investors could be more adaptable to these scenarios.“The demand for change is extremely strong. You have a new wave in all of Latin America and even in the U.S. to deliver more socialist policies. We are likely to see the end of dictatorships and more socially acceptable policies in place. I think that everyone is anticipating that change will come.”