Chile
Analysis

At a critical juncture, Chile prepares to vote

Bnamericas
At a critical juncture, Chile prepares to vote

Chile’s economy has bounced back strongly from the pandemic, with sizzling growth data over the past few months reflecting the impact of fiscal and monetary stimulus measures, pension savings drawdowns, favorable commodity prices and statistical base effects.

But the outlook for next year is less auspicious. The impact of stimulus measures is tapering off, debt metrics have weakened, rainy-day funds have depleted, inflation has ticked up and, amid political uncertainty surrounding Sunday’s presidential elections and the process to rewrite the constitution, the overall outlook for private investment is subdued. Uncertainty has prompted some firms to adopt a wait and see approach.

Political risk – also impacted by populism in congress – has ticked up, capital has trickled out, and the peso has weakened. Bright spots are public investment and resilience in mining and energy investment.

One of Chile's biggest banks, Bci, expects the country to slide into recession in the second half of next year.

Whether the trends wax or wane depends much on who lands the nation’s top job. While congress would arguably resist any potential radical economic policy push, the country would nevertheless sustain reputational damage at a critical juncture.    

Chile’s economic fortunes and, in turn, that of its citizens are acutely linked to politics this time around. Observers will await signals of how the next administration will act: adopting pragmatism and shunning populism – or the reverse.

Whoever takes the helm next March will face pressure for higher social spending. Key is how this is funded and how sustainable revenue flows are. Boosting growth prospects is critical.

Among those in the running and leading in recent polls are right-wing José Antonio Kast of the Frente Social Cristiano coalition and left-wing Gabriel Boric of the Apruebo Dignidad alliance, reflecting a degree of political polarization. Occupying the central zone of the spectrum are fellow frontrunners center-right Sebastián Sichel – an independent participating under the banner of the Chile Podemos Más coalition – and center-left Yasna Provoste of the Nuevo Pacto Social coalition.

Other candidates are the populist Franco Parisi, residing outside Chile, and Marco Enríquez-Ominami and Eduardo Artes, both left of center and both trailing in the polls.

Sichel, Provoste and Kast are arguably the most investor-friendly candidates. Boric – whose coalition includes the Communist Party – is a relatively unknown quantity and a big question mark hangs over the influence wielded by the hard-left factions of his political alliance. In terms of Kast, doubts have been raised about the impact of his planned tax cuts, a potentially difficult policy to get through congress, on economic growth.

Candidates have tax in their crosshairs, including plans to amend rates (Boric is eying a wealth tax and Kast business tax and VAT cuts) and combat evasion and avoidance. Since 2014, Chile has been in tax reform mode. 

Meanwhile, around 86% of those likely to vote have already decided who they will opt for, according to research company Activa. A runoff will be held on December 19 in the event no candidate secures an absolute majority. 

On Sunday, the electorate will also vote for 27 of 50 senators and all 155 seats in the lower house. The current government, of center-right Sebastián Piñera, does not enjoy a majority in either house. Another question is whether the outcome of the election will reflect a trend of growing political fragmentation, seen in the composition of the 155-member constituent convention elected to rewrite the country’s constitution. Due to present its draft magna carta around the middle of 2022, the body chiefly comprises left of center members and those identifying as independent.

Pictured, from left: Chile’s four leading presidential candidates Gabriel Boric, Sebastián Sichel, José Antonio Kast and Yasna Provoste. (CREDIT: Claudio Reyes/AFP)

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