Chile is emerging as a green finance hub with increased borrowing in sustainability-related bonds and a big renewable industry build-up, according to Mario Marcel, the country’s minister of finance.
On the eve of a conference in Santiago on asset and risk management organised by Banco Central de Chile, OMFIF and the World Bank, Marcel spoke to OMFIF regarding plans to increase lithium production, a key ingredient in future-orientated technologies, as well as boosting renewable energy and green hydrogen output.
A less positive feature is the sporadic controversy attached to Chile’s ‘green’ expansion. Production and processing of copper and lithium – minerals in great demand for the high-tech decarbonisation drive – can be highly polluting. The country’s politicians have also been criticised by the business community for slow progress on settling the legal and environmental framework for mining concessions and royalties.
‘We are looking to expand the local market further,’ Marcel said. He wishes to increase speciality debt issuance and the size and depth of the local capital market. The finance ministry’s aim is to have 80% of Chile’s sovereign debt in local borrowing and 20% through international issues.
Chile is seeking to expand green bonds and debt linked to environmental, social and governance investments, including facilitating green bond offerings by the private sector. The country is seen as a pioneer in sustainability issuance, launching the world’s first sustainability-linked bond by a sovereign issuer in 2022. Only one other sovereign has since followed up with an SLB transaction in Uruguay, but more sovereigns from the Latin America region and the wider emerging markets are looking closely at the product too. Marcel added, ‘We need to develop a green taxonomy and benchmarks. We have $2bn of green transactions remaining this year. Our aim is to increase the share of thematic bonds in borrowing from 30% to 50% by 2026.’
Figure 1. Chile’s ‘productive diversification’
*Cochilco: Chilean Copper Commission
Source: Mario Marcel
Prediction of ‘violence, strife and even less international co-operation’
Commitment to using financial markets to help counter the catastrophic effects of climate change was underscored by ElÃas Albagli, chief economist, Banco Central de Chile. At the conference, he outlined a future where meteorological extremes would constrain the world’s population to living only within the latitude bands of 30 to 60 degrees.
Albagli predicted forced migration and ‘violence, strife and even less international co-operation’ as he called upon central banks to publish forecasts of future social conditions as well as inflation. In view of a coming ‘social and political tipping point’, he asserted that projections of continued economic and population growth were wholly incompatible with planned reductions in carbon emissions and limits on temperature rises.
On Chile’s borrowing plans, Marcel put funding needs next year at around $15-$16bn, maintaining an 80/20 domestic/international split. ‘Around 10-40% of local bonds are bought by foreigners, one of the highest proportions in Latin America.’ In a further boost to the Chilean market’s internationalisation, Marcel said local bonds would be brought into the continuous linked settlement system by the end of the year, enabling more efficient settlement of foreign exchange transactions.
Chile’s position in raw materials can play large role in decarbonisation efforts
New investment was expected to increase Chile’s copper production 20% to around 6m tonnes by 2026. Copper output – where Chile is the world’s number one producer – had been stagnant over the last five years and was declining this year. ‘Demand is increasing partly due to the move towards electric mobility [in auto fleets]. The price of copper should be lower because of the weakening economy in China. However, we foresee increasing demand which is why the price is holding up.’
Lithium demand – where Chile is one of the world’s top three producers (Figure 2), along with Australia and Argentina – is also rising rapidly. Out of around 30 lithium deposit areas, with two currently in production, Chile hopes to have another three or four on stream by 2026.
Figure 2. Chile among top global producers of lithium
Source: Mario Marcel
Chile’s solar and wind resources provide potential competitive advantages for green hydrogen production, with 10-12 green hydrogen pilot projects in development across northern and southern Chile. ‘We are making progress in processing and transforming green hydrogen for export and domestic use. A $1bn funding facility is being considered to accelerate green hydrogen and broader green energy development.’
International investment and trans-Pacific trade ties
Marcel emphasised the importance of international investors participating in the green hydrogen industry in Chile. ‘In response to the US Inflation Reduction Act, we are exploring potential tax credits to incentivise green hydrogen production.’
In a speech to the conference, Marcel set out the industrial and political challenges of the green energy and raw materials drive. He emphasised the country’s potential to ‘grow and diversify clean products for the rest of the world’, as well as outlining efforts to speed up environmental impact assessments. The aim was to recommend ‘legal, regulatory, administrative, managerial and budgetary measures to reduce by a third the aggregate processing time of the procedures for an investment project to be approved, while maintaining protection standards.’
Regarding a domestic constitutional process on the central bank’s quantitative easing authority [allowing it to purchase bonds on the secondary market, in exceptional circumstances] Marcel said: ‘Having this monetary policy tool available is advantageous. The central bank governor [Rosanna Costa] and I agree this capability should be retained as an option, even if it is not presently used.’
As a small, open economy, Marcel said Chile faces ‘significant external trade and economic pressures’. Yet, he highlighted the impact of trans-Pacific trade and investment ties. ‘Participation in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership connects us to like-minded countries pursuing open and rules-based trade.’
David Marsh is Chairman of OMFIF and Ben Rands is Director of Events and Marketing of OMFIF.