Aftermath of Chile’s election: Boric and what comes next

December 20, 2021

Jorge Amato

Head of Latin America Investment Strategy

SUMMARY

The recent outcome of Chile’s election will pose several challenges for the country with a divided Congress and left-leaning President presiding over constitutional and taxation changes. We believe 2022 is likely to be a volatile and highly politically sensitive year for Chilean markets.

Chileans went to the polls on December 19 for the second round of presidential elections. Left-leaning Gabriel Boric won the runoff to be the next president of Chile with 55.9% of the votes. In the end, voter turnout, specifically young voters, decided the outcome. This race had the highest level of voter turnout since voting became voluntary in Chile, reaffirming the high level of public discontent with growing income and wealth inequality as we saw during the social protests that erupted in 2019.

Boric’s victory will likely be unwelcomed by investors. The fact that the uncertainty over the presidency is over could bring some respite to markets in the coming weeks. However, he will have to prove himself by consistently sending the right signals if he wants to avoid the consequences of a potential market driven negative spiral in the economy.

The re-write of the Constitution will be a key driver of uncertainty in 2022. A draft is expected around mid-year. A mandatory referendum will follow for final approval (or rejection). The importance of the shape of this new document cannot be understated as it lays the basic rules of governance, rights and principles of the country.

Chile’s Congress remains highly divided. Boric’s more extreme proposals are unlikely to become reality. Attempts at major changes in legislation could get stuck in congress, especially until after the new constitution is approved.

The country’s higher fiscal spending and debt burden, the drawdown in pension fund saving accounts combined with political uncertainty provide a highly uncertain and challenging backdrop for the economy. A sharp economic slowdown is expected in 2022 to around 3-4% relative to the strong 12% rebound of 2021. Inflation should also retrace to around 3.5% from close to 7% in 2021.

Markets have been pricing in risks. The Chilean peso, unable to benefit from favorable terms of trade, is trading above 850 CLP/USD and is the worst performing in the region, down around 17% year-to-date (YTD). The equity market is down nearly 25% YTD in USD terms and trades at around 11x 2022 forward price-earnings, a 2x standard deviation move below its long-term average.

We expect Chilean markets, despite their historical attractiveness, to trade with a high degree of volatility and sensitivity to political uncertainty and economic data in 2022. It is a market that has the potential to be at either extreme of the performance range, depending on their response and policy choices, somewhat of a digital outcome proposition and not the most palatable for asset allocators.