Written By: Pedro Santiago – Forex Focus
Chile stands to join the ranks of Latin American countries swinging back to the political right after a prolonged period on the left. As the Pink Tide recedes, pro-business leaders have taken hold in Argentina, Brazil, Peru and Paraguay. With Chile next to join the ranks of business-friendly leaders, stock markets are teeming with anticipation to see what the region’s top performer can do under this new environment.
The return of Chile’s former billionaire president, Sebastián Piñera, gives foreign investors reason to smile. Under his previous government, Chile saw a period of growth averaging 5 percent annually. The exceptional growth statistics saw Chilean stocks rise as he facilitated a staunchly pro-business environment. Much of his success stems from the commodities super cycle—a prolonged period during which commodity goods traded at an exceptionally high price—which saw copper prices soar on international markets.
Chile is the world’s largest copper exporter, and the metal accounts for nearly half of the country’s exports. Though a single-commodity economy would typically lend itself to rentier tendencies, Chile’s responsible fiscal and monetary policies have allowed it to sustain growth in the face of chronically low commodity prices. Consistently one of the Latin American region’s top performers, Chile’s history of prudent economic policy and political stability have garnered it consistently good credit ratings and investment profiles. Investors believe this is largely due to some of the measures taken by Piñera in his last presidential stint. His platform centered on slashing red tape and generating economic activity through a business-friendly environment in Chile. As copper prices struggle to make any significant price gain, investors looking to reinvest in Latin America’s best markets heavily back Piñera’s victory.
Chile boasts excellent credit ratings and economic growth that surpasses the regional average. Moreover, Piñera’s victory would give investors exactly the national government they want to foster financial gains in the short-term. Piñera’s past as an airline mogul means he understands well the needs of the Chilean business community. Foreign investors, however, have yet to jump in with two feet. Just as Chile’s reputation for prudent policymaking pervades its outward perception, investors appear to take a similar approach when investing in the country.
Piñera is expected to console investors who have been spooked by the reform-happy government of President Michelle Bachelet and the Partido Socialista de Chile (PS). Bachelet’s most recent presidency (2014-2017) saw some of the most radical reforms in the country’s history. Amongst her reforms were packages such as increased power for labour unions and higher corporate taxes. Over the past four years, investors have, understandably, opted to hold off on large-scale investing until they can come in from the cold. But Bachelet’s socialist platform is not alone in the country’s anemic economic growth over the past five years. Criticism has been directed at her economic policy, which has been unresponsive to the global recovery—which itself has yet to gain considerable momentum.
Party unity has crumbled in the ruling coalition, which was unable to reach a consensus on which candidate to field in the 2017 presidential elections. The result was a selection of PS candidates running—effectively splitting the vote and poaching support from each other. This type of intraparty fighting has been the narrative for much of Bachelet’s second term in office. Her economic cabinet infamously walked out when she unexpectedly cancelled a $2.5 billion mining project.
Disappointing and underwhelming economic growth has been the hallmark of the Bachelet government these past few years. Much has to do with the end of copper’s bull run. For almost a decade, copper was trading at record-high prices. Fuelling global demand for the metal, Chile’s copper market grew fat on the Chinese appetite during its construction boom. But, just as for many countries in Latin America, Chile’s exports dropped off significantly once Chinese demand petered out. During his last term in office, Piñera was able to maintain sufficient levels of business activity despite a similar fall in copper exports; though this fall was, admittedly, smaller than that experienced under Bachelet. Nonetheless, Bachelet’s inability to hold her ruling coalition or to achieve political consensus saw confidence in her ability to steer the economy drop.
This stands to reason as her platform is primarily focused on social issues and union-empowering policies that shifted bargaining power away from businesses. While low turnout seems to have helped Piñera’s frontrunner status, the Chilean population seems largely ready for the change in public management he will re-introduce. While Piñera has expressed his intention to avoid drastic policy reform in the same vein as Bachelet’s, he has made it evident that he plans to tweak all polices just enough to create the positive conditions the business community expects. While the central bank announced that they expect investment to fall 1.6 percent in 2017, the run-up to Piñera’s victory has seen stock indexes reach record heights. The IPSA (Indice de Precio Selectivo de Acciones), for instance, has undergone a 20-percent rally since his candidacy’s announcement in March 2017.
While foreign investors have largely missed out on this rally, another wave is likely on the horizon for Chilean stocks. With corporate taxes likely to drop under his government, corporate profits will increase. Coupled with higher economic growth and greater investor confidence, profit growth will also be on the rise. The run-up to the election has seen confidence in the Chilean market balloon as Piñera’s victory has been all but foretold.
Facing a dearth of candidates, Piñera’s main opposition has been far too fractured to mount a proper offensive. This has split the vote amongst socialist voters who swept Bachelet into power for two separate terms. Although a large sector of the population holds staunchly negative views of the billionaire, their inability to coalesce into a single voting base allowed for him to rush to the front of the pack. More importantly, the low voter turnout benefits him enormously as it allows for concentrated voter bases to work more effectively.
His main rival, Partido Radical Socialdemócrata (PRSD) candidate Alejandro Guillier, was unsuccessful in closing the gap in Piñera’s lead enough to beat him in a runoff. With Piñera comfortably leading the polls, his breeze to victory seemed inevitable even months out.
But other threats now linger over his presidency. During his last term in office, Piñera faced severe public backlash from students and unions. His cuts to social policy and education led to daily street demonstrations that gave him the reputation as one of Chile’s least popular presidents. A potential repeat of that political instability could dilute investors’ willingness to dive back into Chilean markets over the next few years. While Chilean stocks are on a record-breaking rally, they are expected to continue climbing; much depends on the political stability of the country and the strength of Chilean copper prices. As the country’s largest export, copper is integral to whatever economic plan the country pursues. However commodities, and metals in particular, are down, and they don’t seem to be set to bounce back in the near future.
Piñera’s platform suggests that he will focus on attracting foreign investment quickly, but will have few answers for long-term, depressed copper prices. Thus, the short-term should see a spike in Chilean stock activity with a quick but steady decline, as political unrest takes hold amid an unresponsive copper market.