Home Politics Markets Approve as Chile Set to Swing Right in November

Markets Approve as Chile Set to Swing Right in November

by fffp12

Written By: Pedro Santiago – Forex Focus

Long-considered Latin America’s most stable economy, Chile will elect a new parliament and president on November 19, 2017. As the first major economy entering the region’s extended elections cycle, the result of Chile’s election will serve as a signal to how popular attitudes will unfold in 2018. The Chilean electorate has largely grown tired of current left-of-centre President Michelle Bachelet and her party’s social platform. Economic underperformance is seen as due to Bachelet’s copper-dependent economic model. Increased public spending in the face of weak economic growth has yielded poor performance from Latin America’s perennial star.

The trouble started when copper prices nosedived in 2014 and 2015, primarily because of a drop in Chinese demand. Refined copper and copper ore represent 44 percent of Chile’s exports—totalling $28.6 billion in 2015. China, by far Chile’s largest trading partner, triggered the price collapse when a drop in construction and demand sparked copper’s decline. This reliance on copper exports highlights Chile’s chief weakness: its sensitivity to fluctuating commodity prices, which contribute to its high income inequality and political unrest. While taking advantage of the commodity super-cycle spurred on by China was beneficial to short-term growth, the lack of diversification from copper induced the poor performance in the medium-term.

Nonetheless, conditions in Chile seem to be improving. External demand and wage growth are on the rise, and the country’s unemployment rate seems to be stabilizing. Structural reforms introduced by Bachelet have bolstered public spending on health and education, while also improving competition in the investment and export sectors. While Chile is set to grow between 2-2.8 percent in 2017, this is a far cry from the 7-percent growth in gross domestic product (GDP) witnessed in 2004. A growing fiscal deficit—fuelled by increased public spending in the face of anemic growth—has also exhausted the country’s monetary options to continue supporting economic activity. All of these frustrations will come to a head on the November 19 election.

Currently, three independent candidates backed by leading coalitions lead the polls. Sebastián Piñera, a former president and businessman worth approximately $2.7 billion, maintains a comfortable lead over his presidential rivals. He recently breezed into the primary victory for his coalition, Chile Vamos, which comprises four political parties in the right-of-centre camp. Recent polls indicate Piñera would garner 26 percent of the vote; not enough to meet the 50-percent threshold to stave off a second round of elections but enough to maintain a comfortable lead. His policies advocating for a more diversified economy, with less reliance on copper exports, and improved private competition ring true to the recommendations made by the Organisation for Economic Co-operation and Development (OECD). His public criticism of President Bachelet appears to have endeared him to much of her opposition craving a change from the direction her government has taken in the past four years.

Piñera faces a divided centre-left and leftist bloc in these upcoming elections. The recently chosen candidate for Bachelet’s Nueva Mayoría coalition, Senator Alejandro Guillier, seems to be Piñera’s closest rival, with 12.8 percent of the vote in early polls. While running as an independent under the Partido Radical, the Nueva Mayoría coalition opted to back him when a more capable candidate failed to appear in their ranks. He echoes many, if not most, of Bachelet’s views, and would largely be seen as a continuation of the current administration.

A separate poll conducted by Criteria Research, however, recorded Guillier’s support at 19 percent—trailing the 21 percent garnered by leftist journalist Beatriz Sánchez, running for the Frente Amplio coalition. Sánchez’s platform focuses on social policy and would steer the country further toward the direction from which Bachelet had recently departed. While many are dissatisfied with the socialist aspect of Bachelet’s government, those affected by the high unemployment and income disparity are wont to support her rhetoric. Simulations of a run-off election show that Sánchez would fare better than Guillier against Piñera, garnering 42 percent of the vote compared to Guillier’s 40 percent.

While the same poll attributes 41 percent of the vote to Piñera in a run-off with either candidate, he is most likely to win in November. Setting aside Latin America’s penchant for electing former presidents, Guillier and Sánchez will likely split the leftist vote and siphon support from each other. Moreover, with a unified right and centre-right electoral base, Piñera has maintained a comfortable lead and is the undoubted frontrunner. While it is unlikely that Chile Vamos will also win a majority in the 178-member parliament, individual members of the opposition will likely be willing to cooperate with policies introduced by Piñera’s government.

Piñera’s election will be a boon to foreign investment and improved credit ratings. Though Chile’s performance has been on the decline in recent years, its low country risk and sound macroeconomic policies have sustained an appetite for the country’s debt. With a Aa3 rating from Moody’s, a AA- rating from S&P and an A+ rating from Fitch, Chile stands head and shoulders above its Latin American counterparts for its investment and business environment. Improved competition and diversification resultant from Piñera’s proposed reforms would boost the investment atmosphere as the country steers away from the volatility-plagued raw-materials markets. Ultimately, an expected drop in unemployment and income inequality will yield an end to the public protests currently tormenting Bachelet and her Nueva Mayoría. Some concerns abound, however.

A Piñera presidency would mark 16 years of Chilean leadership dominated by just two candidates: Piñera and Bachelet. With indefinite re-election of presidents in non-consecutive terms, this could be a future pattern developing in the Chilean government that subverts democracy. It is still to be seen how this could affect the country’s investment profile. Moreover, many of the issues bedevilling the Bachelet government are externally motivated. It is unclear if Piñera will have all the answers to counteract and maneuver the complicated global conditions that have beset Chile’s export market. Nonetheless, Piñera would join Argentina’s Mauricio Macri and Peru’s Pedro Pablo Kuczynski as another centre-right Latin American president with an extensive background in business. Markets are rarely unhappy about that.

 

Related Articles

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.