How Chile social unrest is hitting the economy where it hurts most

The social unrest in recent weeks in Chile is already having an impact on the economy, but particularly on small and medium enterprises, which are the backbone of employment.

On Wednesday, protests moved up town to Santiago’s well-heeled Providencia district. TV images showed violent clashes between Carabineros police and protesters in front of Costanera Center, owned by retail holding Cencosud, one of Chile’s most recognizable commercial complexes with a 300m tower, the tallest in Latin America, and a six-floor shopping mall.

Costanera Center symbolizes Chile’s economic success in recent decades, but for many Chileans it is also a reminder of inequality, which is most likely why it was targeted.

Chile has one of the largest income gaps of all member states of the OECD.

Social unrest spread nationwide starting October 18. It was triggered by a student protest against a 3% increase in metro fares, which belied more widespread social discontent with the current neoliberal economic model put in place during the Pinochet military dictatorship. At least 20 people have died in the protests and hundreds left with bullet wounds, with dozens blinded after having been hit in the eyes.

Protest marches have taken place almost daily with a broad scope of demands ranging from improved pensions to higher salaries and lower costs of public services like water, electricity, highways and public transport, much of which was privatized by successive governments.

RETAIL IMPACTED

Retail has been the sector most affected by protests both directly, through looting and vandalism, and indirectly because of the disruption to transport, supply chains and logistics.

Much of Providencia is populated by small stores and multi-story strip malls, which, like many other stores, are forced to shut early when there are protests and are affected by interruption to the subway, which has also been a target for vandalism.

“Services and manufacturing companies have been hit the hardest. Restaurants are selling 20% and manufacturing companies 30% of what they normally sell in a normal month,” Germán Dastre, president of SME association Conapyme, told BNamericas.

According to Dastre, some 40,000 small businesses have been affected by the protests.

SMEs in Chile represent only 15% of GDP, compared to 44% in the US, according to Conapyme. However, these companies represent 98.5% of total enterprises and 50% of jobs, meaning that the socio-economic impact is greater.

According to the Santiago Chamber of Commerce (CCS), citing statistics of banking transactions processor Transbank, retail sales have fallen 10% since October 18 and tourism and entertainment is down 36%. From October 1-17, bank transactions for goods, services and tourism/entertainment purchases had increased 12%, 26% and 6%, respectively, year-on-year, but fell 10%, 19% and 36% in the October 18-27 period.

On November 4, Chile’s finance ministry revised down its expectations for GDP growth to 1.8-2.2% from 2.4-2.9%.

Such was the level of unrest, that the government was forced to cancel its hosting of the Asia-Pacific Economic Cooperation (APEC) summit slated for November and the UN Climate Change Conference (COP25) in December, and organizers of the Copa Libertadores South American club soccer competition decided to move the venue of the November 23 final from Santiago to Lima. These three decisions will clearly have an impact on the local economy.

GOVERNMENT MEASURES

Chile’s government has been caught off guard by the intensity of the protests that are showing few signs of slowing down. Trending topics on social media and signs used at marches have illustrated an increasing lack of trust in politicians, public institutions and the security forces and called for the resignation of President Sebastián Piñera and the writing of a new constitution.

Legislative steps taken so far to address demands have included the passing in the lower house a bill to reduce the working week to 40 hours from 45 and the sending to congress of a bill to increase the guaranteed minimum wage to 350,000 pesos (US$467) a month gross from the current 301,000 pesos.

However, these and other measures have been widely perceived as falling way short of what is required.

Union confederation CUT said the minimum wage should be at least 500,000 pesos, while Conapyme said that cutting the working week would hurt SMEs more as large shopping malls can remain open longer hours and pay overtime.

ACTION NEEDED

In response to the damage to the economy, Piñera met this week with representatives of small and medium business organizations to discuss their demands.

Proposed measures include granting tax benefits to SMEs as well as accelerating approval of a bill that would force large buyers to pay their small suppliers within 30 days. Currently, many large retailers, like supermarkets, can take as long as 90 days to pay a supplier, which SMEs say puts them in a constantly precarious position to cover their monthly fixed costs.

According to Conapyme, in Chile, SMES are considered according to the following criteria: micro companies 0-70mn pesos (US$93,000) in annual revenue, small (70-700mn pesos) and medium (700-2.1bn pesos).

But, with no end in sight to the protests, many SMEs are taking measures themselves and some larger companies have been helping.

Several large retailers have said they would speed up payments to SMEs this month while some banks have announced the extension of credit lines and new loans at preferential rates.

In addition, Latin American SME organization Pymela launched on November 5 a campaign to hold a free workshop for small-time entrepreneurs on how to grow their businesses.

Pymela’s president Alberto de la Fuente pointed to Colombia where the government this year said it would waive income tax on entrepreneurs for their first seven years of a business.

De La Fuente said that due to the forced closure of their physical stores, many SMEs are increasingly using social networks and e-commerce sites to promote their products.

“Everything is going digital today and that is more relevant in this context than ever. Just like if you’re not on Facebook, fewer people wish you happy birthday, if you’re an SME and not on social networks, it’s a lot harder,” de la Fuente told BNamericas.

OUR DAILY BREAD

One industry that had to react immediately to the disruption caused by the protests is Chile’s fresh bread industry. With annual per capita consumption of 90kg, Chile is the second largest bread consumer in the world after Turkey, according to the International Bakery Association.

Some 80% of total production comes from SMEs, which is the opposite to most other countries, José Carreño, head of Chilean bakery association Indupan told BNamericas, who added that bread is the ninth largest manufacturing industry in terms of contribution to GDP.

According to Carreño, much like what happened after the 8.8 earthquake in 2010, the association had to rapidly coordinate with flour suppliers to ensure supply was not interrupted, and, he says, they managed to keep bread prices from going up.

“Like with the earthquake, the first hours of the protests were critical. Employees didn’t show up for work, due to problems with public transport. It was a major shock.”

Due to looting, many supermarkets were closed during the first days of protests, which theoretically benefitted the small corner stores. However, distribution was a problem. 

 “It wasn’t so much a problem with production, but that much of the distribution network was also closed,” Carreño said.

As 75% of wheat flour is imported, what Carreño fears most is the protests extending to the ports.

“If there is a problem with the ports, where wheat cannot reach the suppliers, that would drive up prices and be a major problem. The same goes if there is a fuel shortage, given that bread-making ovens are fuel intensive, a price rise in fuel will immediately impact prices.”

Picture: Riot police in front of Costanera Center