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Sharp division in the Chilean election offers a glimmer of hope to markets

Chile’s presidential elections, the most polarized in decades, have sent markets reeling, but there may be a positive outlook for investors: Candidates will face a divided Congress and have moderated their positions to attract centrist voters.

Sunday’s elections pit former leftist student leader Gabriel Boric with conservative José Antonio Kast, both from outside the major political parties, who have been the ire of voters demanding change.

Boric has threatened to bury Chile’s neoliberal economic model dating back to the military dictatorship of Augusto Pinochet in the 1970s and 1980s. For his part, Kast, who is often compared to Brazil’s Jair Bolsonaro, joked at one point that he would have liked to have tea with Pinochet.

But both candidates have moderated because the race has required them to contest the votes of the center. Congress, elected in November, is also split in half between the left and the right, creating a likely brake on deep reforms.

Both candidates have been making important adjustments in their programs, they have introduced concepts of prudence and realism”Said this week the president of the Central Bank of Chile, Mario Marcel, adding that this would be valuable to reassure investors.

JP Morgan said in a report that it had noticed “a turn towards moderation”By both candidates. Congress, he said, would moderate Boric’s political plans if he wins, while a left-wing assembly that will reformulate the Constitution would put pressure on Kast.

However, the uncertainty has hit Chilean assets hard.

The peso has fallen 16% this year against the dollar, one of the weakest currencies among emerging markets. The Chilean MSCI stock index, in dollars, is down 14%.

Concerned Chileans have been taking assets out of the country for the past two years, partly due to the effects of the pandemic, but also because of the uncertainty caused by the massive protests against inequality that broke out in October 2019, leaving extensive damage and thirty deaths. . Added to this is the constitutional reform.

Some US $ 10 billion in family and business wealth has left the country, according to central bank data through November, in addition to the US $ 12 billion that left last year, which compares with flows of about US $ 2 billion in 2018 and 2019.

These capital outflows, so far, have been relatively similar to those that occurred during the financial crisis of 2008 and 2009 ″, Marcel added at the time. “These are important figures, there is no doubt.”

“Wildcard”

The election, which some polls show as tied, will see Chileans choosing between two markedly different visions of the future for the world’s leading copper producer and a bastion of stability in volatile Latin America.

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

But for many, the new constitutional wording, which is due for a referendum next year, poses even greater risks. If passed, it would likely deviate to some extent from the Pinochet-era text, which underpinned Chile’s economic model drawn up by the so-called Chicago Boys.

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

Mining could be instrumental in that. Areas like taxes are coming under scrutiny, as are environmental protections, which could affect copper and lithium, an ultralight metal in high demand for use in electric vehicle batteries.

The Constitutional Convention and the presidential election have put a waiting period for mining investment”Said Álvaro Merino, head of studies at the National Mining Society (Sonami).

It is crucial that these regulations provide legal certainty, stability and do not affect Chile’s competitiveness as a mining country.”, He added, recalling that the country has an investment portfolio of US $ 69,000 million for the next ten years.

It is key to clear these uncertainties so that investment in mining is deployed strongly”, He stressed.

A difficult external factor for Chile is the outlook for emerging markets as developed economies move away from years of expansionary monetary policy.

Vontobel’s De Sousa said that Chilean assets could be a bet to consider because the peso was very weak, but that mounting political risks would give him pause.

Strategically, in a long-term perspective, we don’t like Chile very much at the moment”, He declared.

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