Chile’s constitutional vote: What happened and what’s next?

A second attempt to rewrite Chile’s constitution took a stride forward.

On Sunday, voters chose the 51 people who will form the constitutional council, the body tasked with debating and approving a new magna carta. 

Councilors will not be starting from scratch: a committee of 24 ‘experts’ appointed by congress has already been tasked with devising a draft framework for them.

The country’s right-wing Republican party, helmed by former presidential candidate José Antonio Kast, performed strongest, scooping 23 council seats, followed by President Gabriel Boric’s left of center coalition, which landed 16.

Critically, Chile’s center-right coalition, which excludes the Republicans, secured 11 seats, meaning that right and center-right together have control in terms of approval of new norms and incorporating their own proposals, which require the green light from three-fifths of members. Sunday’s results – combined with poll ratings – indicate that as things stand Chile's next president may well come from the right. Amid an economic slowdown, high inflation and concerns over crime, among other factors, Boric's popularity has tumbled.  

Investment bank JP Morgan, in a note to clients, said: “The control of the right, if well managed, could allow the country to move forward with a minimalist constitution, which would be capex positive in our view.”

Sunday’s outcome is a virtual polar opposite to that of the election held in 2021 to choose the 155 members who put together the first draft, which was considered a progressive yet woolly document which was rejected by voters in an exit plebiscite last September. The 155 were chiefly left of center. Various proposals were put forward at the time, including one on resource nationalization which gave investors the jitters.

Councilors, meanwhile, will have four months from June 7 to submit their proposal. An exit plebiscite is planned for December. 

Overall, concern over far-reaching changes has ebbed, and the once-powerful clamor for reform seems to have slackened amid a sense of fatigue and economic stress facing households, but latent demands for a bigger state – voiced loudly during the social unrest in 2019 and 2020 – remain.

The big question now surrounds the openness of the dominant political forces to negotiate and the shape of the draft document that eventually emerges.

JP Morgan added: “While political strategies ahead could offer surprises, our central scenario assumes the institutional design of the new constitution process is to help offer a minimalist new constitution so to gain enough popular support in December and be approved.”

If the draft is rejected, the current 1980 constitution, written during the dictatorship but which has since undergone various amendments, would remain in force.

Rating agency Moody’s commented on the process: “We believe the new constitutional reform process will limit the scope of such changes compared with the prior draft proposal, and we see broad political support for preserving key elements of Chile’s economic model. The next attempt at constitutional reform is likely to be more narrowly focused.”

Moody’s added that overall investment sentiment was likely to remain subdued without a better understanding of the outcomes and clarity concerning mining royalties – under discussion in congress. 

Chile’s lithium industry is also under the spotlight after the government announced a new strategy. A key proposal involves the State taking a majority stake in any mixed ownership projects deemed “strategic.”

To find about more about Sunday’s results and what investors should know, BNamericas conducted an email interview with lawyer and academic Eugenio Evans of local law firm Grupo Evans. 

BNamericas: Regarding Sunday’s results, what are the main takeaways?

Evans: It is very difficult to draw firm conclusions. The Chilean voter gives the impression of behaving in a bipolar manner, since two years ago the majority voted for the extreme left; today it does so – also with a majority – for the extreme right. 

In my opinion, this situation is very worrying. The conclusion, the most accurate in my view, is that the behavior of voters is very fluctuating, they do not have ideological positions to which they can commit firmly, and that is bad for the stability of the country.

BNamericas: What would be your main messages to investors monitoring the process?

Evans: My main recommendation, in the short and medium term, is caution and wait for the results of the constituent process – that is, in December 2023. The worst thing that could happen is that Chile continues with the current constitution and that the public discussion about the validity and reliability of the country's institutions persists. 

That, in addition to the primacy of extreme political positions, forces investors to look at the country with caution. Notwithstanding this, there are investors who, due to the type of project, look to the long term. For example, those who are taking strategic positions in places with potential for green hydrogen, “no matter what.” To them, I would say that Chile is a strategically interesting country and I would tell them to overweigh their options for the country. 

There are other investors who have different views, related to their growth strategies on the continent. These may also have a way of betting on a less conjunctural country, for example, seeing what could be for sale in the future, derived from this short-term situation. 

It is the moment to window shop for opportunities, provided that the current context and the end of the year are considered, and one looks at a 3-5 year timeframe.

BNamericas: Economist Sebastián Edwards was reported as saying that big global businesses are paying more attention to the issue of lithium and/or the future status of water, among other matters, than to the constitutional process. What do you think about this comment?

Evans: Edwards may be right – and there are certainly opportunities in terms of desalination, since the scarcity of water comes from climate change, a fact worldwide and with a certain and intense impact for Chile – but instability is not good for any investor, nor uncertainty. 

There are urgent issues to be resolved and whose delay is justified because there are many political actors in the constitutional lack of definition. The political system is experiencing a deep crisis, especially due to the fragmentation that it causes at the level of parliamentary representation. This must be resolved, since the counterpart of the mining investor – or of anyone who risks capital in Chile – is the State, so its predictability and institutional seriousness are key.