Chile: Estimating the social unrest FX risk premium

As a result of the recent Chilean social unrest, the CLP depreciated markedly. The CLP depreciated 17% over the period from October 18 th (the start of the protests; level: 710) to November 28 th (level: 828, which is the weakest level since the crisis erupted). In fact, this shock is roughly half to that experienced during the Global Financial Crisis when the CLP depreciated 35% (between June and November of 2008). In other words, a sharp increase in the political risk premium led to a significant FX shock. In this note, we provide a method for approximating the FX risk premium which is due to the social unrest. These protests forcefully halted economic activity. The monthly GDP proxy for October contracted 3.5% YoY. More recently however, the mood seems to have improved in Chile. The political establishment agreed to a process allowing for a new constitution to be promulgated. In addition, government spending in 2020 will increase 9.8% versus 2019. The BCCh announced USD$20bn intervention program to curb the FX depreciati on . We have estimated that at the height of the protests, the social unrest premium reached 55 pesos, but this unrest premium currently points to around 20 pesos. While the social unrest FX premium is decreasing, we believe that it will not entirely evaporate because it will take time for the government programs to assuage social unrest and amend ing the constitution will only be completed sometime in 2021.