Analysis-In Chile’s polarized election, stark divides offer investors a silver lining

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6 mins read
FILE PHOTO: Gabriel Boric closing campaign rally in Santiago

By Rodrigo Campos and Fabian Cambero

NEW YORK/SANTIAGO – Chile’s presidential election, the most polarized 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.

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.

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.

“Both candidates have been making major adjustments to their programs, they have introduced concepts of prudence and realism,” Chile’s central bank president, Mario Marcel, said this week, adding that would be valuable reassuring investors.

J.P. Morgan in a report said it had noted “a turn to moderation” by both candidates. Congress, it said, would temper Boric’s policy plans if he were to win, while a left-leaning assembly redrafting the constitution would pressure Kast.

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%.

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Wary Chileans have been pulling assets out of the country over the last two years, partly the effect of the pandemic, but uncertainty was also sparked by a social unrest breakout in 2019 and the current constitutional reform process.


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.”

‘WILD CARD’

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.

“Chile’s upcoming presidential election is the most divisive since the country’s transition to democracy,” Standard Chartered Bank said in a note, referring to the end of the dictatorship in 1990.

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.

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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).


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.

(Reporting by Rodrigo Campos in New York and Fabian Cambero in Santiago; Editing by Adam Jourdan and Leslie Adler)

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