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2021 Elections or the Constitution: what worries the Chilean market?

Chile's upcoming presidential election is the most divisive since the country's transition to democracy, but the real 'wild card' for the market is the new Constitution

Chilean presidential candidate Gabriel Boric speaks during his closing campaign rally in Santiago, Chile, December 16, 2021. Photo: REUTERS/Rodrigo Garrido/File Photo

Chile‘s presidential election, the tensest in decades, has given markets the wobbles. But there may be a silver lining for investors within the stark divides: buffers from a split Congress and candidates’ moderating stances to lure key centrist voters.

The Sunday head-to-head sees leftist former student protest leader Gabriel Boric take on far-right Jose Antonio Kast, both from outside the mainstream political parties who have risen on the back of voter anger and demand for change.

READ ALSO: “Vote for the least worst”: Chile experience the most uncertain elections since the country’s return to democracy

Boric has threatened to bury Chile‘s neoliberal economic model that dates to the military dictatorship of Augusto Pinochet. Kast, oft likened to Brazil‘s Jair Bolsonaro, has joked about having Pinochet over for tea.

Chilean presidential candidate Jose Antonio Kast from the far-right Republican Party takes part in a live radio debate ahead of December 19 second-round presidential elections in Santiago, Chile, December 10, 2021. Photo: REUTERS/Ivan Alvarado/File Photo

But both candidates have moderated as the race has tightened to win over key moderate votes. Congress, elected in November, is split down the middle between left and right, creating a likely brake on radical reform.

Nonetheless, the uncertainty has hit Chile‘s assets hard. The peso has tumbled 16% this year versus the dollar, among the weakest emerging markets currencies. The dollar-denominated Chile MSCI stock index is down 14%.

Wary Chileans have been pulling assets out of the country over the last two years, partly because of the pandemic, partly because of the social unrest breakout in 2019 and the current constitutional reform process.

READ ALSO: Pinochet: Bolsonaro’s idol is the author of the Chilean 9/11

Some $10 billion in household and company wealth has flowed out of Chile this year, according to central bank data through November, on top of the $12 billion that exited last year. The number was closer to $2 billion in 2018 and 2019.

“These capital outflows, so far, have been quite similar to those that occurred during the financial crisis of 2008 and 2009,” Marcel said. “They are important numbers, no doubt.”

The real ”wild car’ for the Chilean market

The election – currently too close to call with some polls showing a dead heat – will see Chileans choose from two very different visions of the future for the world’s top copper producer and a bastion of stability in volatile Latin America.

But for many, the constitutional redraft, which will see a national referendum on the new text next year, poses even larger risks. If approved it would likely shift away somewhat from the market-driven Pinochet era text, which underpinned Chile‘s economic model penned by the so-called Chicago Boys.

“The wild card in Chile is the constituent assembly and the new constitution,” said Carlos de Sousa, emerging market debt strategist at Vontobel Asset Management in Zurich.

READ ALSO: Annual inflation in Chile reaches its highest level since 2008

Mining could be central to that. Areas like taxation are coming under scrutiny as are environmental protections, which could impact copper and lithium, an ultra-light battery metal in big demand due to the shift to electric vehicles.

“The Constitutional Convention and presidential election have put mining investments on hold,” said Alvaro Merino, chief of studies at the National Mining Association (Sonami).

READ ALSO: Colombia, Chile and Peru stock exchanges approve merger

He said Chile has a portfolio of $69 billion in investments over the next 10 years, which needed regulations that provide legal certainty, stability and do not compromise competitiveness. “We need to clear up uncertainties so that mining investment is deployed with full force,” he said.

A tough external factor for Chile is the outlook for emerging markets as developed economies move to abandon years of loose monetary policy. The prospect of higher interest rates in the United States has already dried portfolio flows into some EMs.

Vontobel’s de Sousa said Chilean assets could be worth a bet because the peso was so weak right now, but rising political risks would give him pause for thought. “Strategically, on a long-term perspective, we don’t like Chile much right now,” he said.

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