Chile's Fiscal Crisis Deepens as Mega-Reform Battles Legislature

The week opens in Chile with an uncomfortable truth that markets, technical agencies and the political class can no longer dodge: the country's public finances are deteriorating at a pace that outstrips the government's capacity to respond, while the economic reconstruction project meant to correct that trajectory faces legislative resistance that threatens to leave it dead on arrival before its first general vote.

The Consejo Fiscal Autónomo was categorical in its semiannual report released on Monday: public debt could reach 48% of GDP by the early next decade, reflecting what the body describes as "a persistent deterioration of the structural balance" rooted in spending commitments adopted under revenue assumptions that ultimately proved excessively optimistic. Dipres projects a structural deficit of 2.8% of GDP for 2026 —already under the new calculation methodology— still above the 2.6% target announced by the Ministry of Finance. In parallel, the June edition of the Consensus Forecast, which surveys 28 local and foreign agents, revised its GDP growth projections for this year downward and corrected its fiscal deficit estimates upward, aligning with Finance's more cautious view. Pablo Cruz, chief economist at BTG Pactual Chile, expects activity will not accelerate to 3% before 2027, driven only then by a pickup in investment, and does not rule out a rate cut toward year-end if inflation —which he sees converging to the 2.3%-2.5% range by next May— continues to moderate.

It is precisely against this backdrop that the government of President José Antonio Kast is fighting its most crucial legislative battle. The so-called mega-reform —the National Reconstruction bill, which includes, among other measures, corporate tax reductions, property tax exemptions for seniors and new municipal financing rules— faces its general vote in the Senate on Wednesday, although the timetable could be extended. The president of the upper chamber, Paulina Núñez, opened the door to widening the timeline: "If building an agreement and securing a majority means taking a few more days, I'm willing to allow that space," she said. Both the Partido Socialista and the Frente Amplio went to La Moneda on Monday to deliver alternative proposals to ministers Claudio Alvarado and Jorge Quiroz, although the opposition failed to articulate a common document. The Interior bi-minister was receptive in form but constrained in substance: any incorporation of opposition proposals must stay "in line with the guiding ideas of the bill." SOFOFA, meanwhile, published analysis quantifying the impact of a four-percentage-point cut in the first-category tax —from 27% to 23%—, estimating between 80,800 and 210,000 additional jobs over four years, arguing that "investing in Chile has become too expensive and too complex." The CUT, by contrast, rejected the government's labor agenda, branding the concepts of flexibility and adaptability as synonyms for "precariousness."

In markets, the session unfolded with restraint. The IPSA closed with a slight gain above 10,900 points, while the dollar posted a minor uptick, attuned to the rates outlook in the United States. Kevin Warsh's debut at the helm of the Federal Reserve last week cemented expectations that the U.S. central bank will raise rates 25 basis points in September, with another similar adjustment before March 2027, according to Diario Financiero. Brent crude fell nearly 3% to US$78.2 per barrel after the Treasury Department's announcement allowing Iran to sell crude during the 60-day window of talks over its nuclear program. In the neighborhood, the electoral victory of right-wing candidate Abelardo de la Espriella in Colombia drove an appreciation of the Colombian peso and a rally in the country's sovereign bonds, with analysts at Capitaria noting that the market reads the result as "a new stage with a more favorable approach toward private investment." According to La Tercera, some international managers are beginning to position Colombia above Chile in their regional allocations, adding pressure on the local risk premium.

On the corporate front, Juan Pablo del Río sold Falabella shares worth US$20 million in a high-liquidity session for the retailer, which traded over US$110 million in operations. Alza AGF bet on the real estate sector with private loans to Socovesa and Eurocorp totaling more than US$20 million. The rescue plan for Edyce, which bills itself as the country's largest metal structures manufacturer, contemplates a potential change of control; its administrator warns that in a liquidation scenario barely 76% of secured claims would be covered. Embotelladora Andina, by contrast, projects investments of US$260 million through 2030, with CEO José Luis Solórzano stating bluntly: "I don't feel the crisis." In the agricultural sector, Chile's hazelnut industry is on track to reach US$1.2 billion in revenues, with Jorge Mohr of Nefuen projecting that the crop will displace walnuts as the country's leading nut export. Meanwhile, Arica tomatoes are consolidating their foothold in Argentina with shipments already reaching 8.53 million kilos so far in 2025, equivalent to 450 truckloads.

The week's focus will be on the general vote of the mega-reform in the Senate —and whether the government cedes enough ground to build a majority without dismantling the core of the bill—, on the constitutional impeachment against former minister Nicolás Grau, whose outcome looks tight within the ruling coalition, and on Fed signals that will set the floor for the local dollar. Over the medium term, the fiscal clock is ticking: without permanent corrective measures, the Consejo Fiscal Autónomo warns, the debt trajectory will remain incompatible with the macroeconomic stability Chile needs to attract the investment everyone says they want, but that few seem willing to finance with the right incentives.