Chile's Economic Contraction Deepens as Peso Weakens, Markets Brace

Chile ended the first half of 2026 with an economy in contraction, a deteriorating labor market and a peso unable to find a floor, all against a backdrop of diplomatic outreach to protect its exports and a legislative agenda facing mounting resistance. The picture is the bleakest since the global financial crisis: according to data published by La Tercera, the Imacec has averaged a decline of 0.7% over the first five months of the year — the first time since 2009 that every opening month of a year has posted red numbers. Goods production fell 4.7% year-over-year, mining plunged 11.6% and manufacturing retreated 1.7%, figures that President José Antonio Kast himself acknowledged as warning signals upon wrapping up his tour through Paraguay and Uruguay, where he urged Montevideo-based business leaders to invest in a country that, he insisted, offers the conditions to recover growth.

Against that backdrop, local financial markets accurately mirrored the scale of the problem. The IPSA closed the first half with a gain of just 3.42%, the region's weakest performance according to Diario Financiero, compared with a Peruvian exchange that advanced 33%. At Thursday's close, the benchmark index slipped below 10,800 points, pressured by U.S. employment data that showed payrolls at roughly half the consensus estimate — though the unemployment rate ticked marginally lower, largely on account of declining labor-force participation. Wall Street closed mixed ahead of the U.S. holiday. The dollar, for its part, failed to give up ground and settled at its three-month highs against the Chilean peso: for five consecutive sessions, foreign players in the derivatives market have reinforced their bet against the local currency, taking the net outstanding position to roughly US$13.6 billion at the end of June, according to Diario Financiero. With annual inflation at 3.9% and inflation-linked instruments pricing in 3.6% for year-end, the market has begun to factor in the possibility of a cut to the Monetary Policy Rate before December, with average chamber swap rates pointing to an implicit MPR of 4.284% in December versus current levels.

The policy response is arriving on multiple fronts, though its coherence is still taking shape. Dipres director Gómez, in his debut before an audience of economists, stressed that the Finance Ministry's strategy rests on four pillars: restoring growth, rationalizing spending, improving management of state-owned enterprises and comprehensively managing the Treasury's assets and liabilities. The link between growth and fiscal discipline is explicit: without an expansion in output, the structural deficit will not close. In parallel, the government rolled out 5,000 hiring subsidies — equivalent to 50% of the minimum wage over four months, channeled through Sence — as a first step under an inter-ministerial employment task force. Daniel Mas, dual minister of Economy and Mining, set mid-July as the availability date, though specialists cited by La Tercera called the measure insufficient given the scale of the labor crisis, in a country that ranks as the fourth-highest for unemployment within the OECD.

The week's sharpest fiscal debate played out around the mega-reconstruction and reactivation reform. Finance Minister Jorge Quiroz ultimately agreed to negotiate in a broad-based forum after securing general approval of the bill by a razor-thin margin — 26 in favor, 1 abstention and 23 against. The most immediate dispute centers on the property tax exemption for those over 65 on their primary residence, a measure that would leave municipalities without close to US$70 million annually. Mayors of high-assessed-value districts — Las Condes, Vitacura, Providencia, Lo Barnechea — mobilized alongside municipal associations in search of compensation, while Quiroz closed the door on means-testing and shifted the debate to the Senate. As an alternative financing formula, Quiroz himself proposed that part of the charge for tax invariability contribute to covering the exemption, a solution that Finance Minister Rincón also referenced in pressing for "express" passage of the debt bill in Congress, whose first legislative hurdle will be cleared next Monday.

On the external front, the agenda is equally packed. A public-private delegation led by Sofofa and Subrei is traveling to Washington to make its case before the USTR and prevent the 12.5% tariff imposed by the Trump administration from hitting Chile's main export sectors: salmon, fresh fruit, wine, timber and meat. The tariff threat arrives just as Chile is also seeking to diversify its investment ties: Sofofa held talks with Emirati Trade Minister Thani bin Ahmed Al Zeyoudi to attract UAE capital into critical minerals, energy and ports, while the Chile-Peru Business Council was reactivated after more than three years of dormancy, marking the 20th anniversary of the bilateral FTA. In the power sector, generation grew 5% in the first half — from 43.2 TWh to 45.3 TWh — according to data from the Coordinador Eléctrico Nacional, with solar and wind offsetting an 18% collapse in hydroelectric generation amid a shortfall in rainfall, forcing companies to maintain adequate natural gas reserves to avoid contingencies in the second half.

In the mining sector, Antofagasta — whose shares trade on the London Stock Exchange under the ticker ANTO and which belongs to the Luksic Group — announced it will seek environmental permits to expand exploration at the Encierro and Los Volcanes projects in the fourth quarter, having earmarked US$95 million and US$60 million, respectively, for each initiative. Collective bargaining across the mining industry is proceeding in orderly fashion: of 37 processes slated for 2026, 20 are already closed, though those covering Collahuasi and the supervisors at Escondida remain outstanding, together accounting for 1.7 million tons of annual copper output. On the corporate finance side, Empresas Copec placed bonds totaling up to US$257 million across two series with 10- and 20-year maturities — close to UF 5.8 million in aggregate — to refinance liabilities, a signal that the local debt market remains open to top-tier issuers despite the rate environment. The illicit economy, meanwhile, continued to weigh on the business community's agenda: according to the CPC, it moves US$5.7 billion annually — 1.5% of GDP — with tax losses in excess of US$1.5 billion, driven in large part by the cas