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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%.
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.
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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