‘Broad continuity' in macro policy expected if Chile opts for new constitution

S&P expects “broad continuity in macroeconomic policies” in Chile under a possible new constitution.

As things stand, Chileans will be asked in a referendum on October 25 whether they want a new constitution although questions remain about the logistical aspects of the vote, given sanitary restrictions in place.

Scrapping the 1980 constitution was a key demand voiced during last year’s social protests.

“We think that these [potential constitutional] changes could significantly affect social policies but we expect broad continuity in macroeconomic policies, and with Chile’s tradition of having an open economy,” S&P managing director Joydeep Mukherji told a webcast hosted by the rating agency.

“This is an important factor in the long term, but it is not necessarily weighing on the rating today; but it is a question mark about the future.”

S&P rates Chile ‘A+/AA-’ with a negative outlook, reflecting concerns over the growth rate on a trend basis and the country's overall financial profile from 2021 onwards.

Analysts have said uncertainty surrounding the constitutional reform question may dampen investment over the next few years. FDI, however, has remained resilient so far. 

Those in favor of a new constitution argue the existing one lacks legitimacy – as it was written during the dictatorship – and is a factor behind Chile’s social safety net, which is weak by European standards, and high levels of inequality. 

Those against, meanwhile, argue the current document has been key to the country’s solid growth and stability, which has pulled millions of people out of poverty. They also say it can be reformed, as it has been since the return to democracy in 1990.

If a new constitution is drawn up, it would need approval by two-thirds of an ad hoc assembly that would draft it and then by the wider population in an exit plebiscite. 

Chile’s small, open economy plunged in the second quarter, contracting 14.1% year-on-year, reflecting the impact of sanitary measures implemented to combat the spread of the coronavirus.

The government has outlined a US$34bn investment push to help spur the economy and get people back into work.

Swiss private bank Julius Baer expects Chile to contract 7.0% this year and grow 5.0% next.