Chile - Boric elected
The president-elect will act boldly, something that will rattle markets next year even if the reforms may be positive for the country long term.
Gabriel Boric won the runoff with over a ten point margin.
José Antonio Kast called to congratulate the president elect. President Sebastian Piñera promised a smooth transition. There was a lot made about how wonderful the concession and smooth transition appear to be in Chile, which is less about Chile and more of a sign of how screwed up democracy has been in the US and much of the rest of the Western Hemisphere in recent years.
More cynically, Kast understands he’s playing a long game. Acting seriously and with respect for democracy is not only the correct thing to do. It gives Kast more leverage in future negotiations as the leader of the opposition and a better chance to improve his results in a future election. Going full Trump or Bolsonaro and contesting the results could have been good for a social media boost and some credit among the most radical of his base, but would have sunk his future political fortunes among the moderates of the country.
That said, one really positive sign for Chile’s democracy was the voter turnout increasing over the first round and running at its highest level in years. Voters turned out when they saw a clear choice between supporting a leader who would follow through the reform efforts of recent years including the constitutional assembly or a leader who would clash with those reforms and backtrack on them. In addition, as I noted on Twitter, Chile’s efficient vote counting process remains a model to be admired and emulated.
Boric will act as if he has a mandate because nearly all presidents do after being elected no matter the margin. A ten point victory is nice, but Boric would have gone full speed on his agenda even if he won by half a point (as would have Kast).
Whether Boric’s mandate is accepted by the public or the Congress will be determined by how the early months of his administration go economically. Chile is likely to face booming economic growth balanced by relatively high inflation. Boric’s big challenge is figuring out how the benefits of the economic boom can be spread out across society without stimulating the economy further, something that would just lead to more inflation.
We can wonder whether Boric’s winning margin would have been as large against Sichel, Lavin or another candidate on the center-right who was not as extreme as Kast. Basic median voter theorem says that is of course true. Alternatively, Kast activated a segment of the population that was anti-incumbent and disillusioned with politics who likely would not have supported the lukewarm conservatives that were more closely aligned with Piñera.
The most important aspect of the Boric win is that it places the president and constitutional assembly largely in line with each other. We’re going to have a friendly negotiation and implementation rather than a potential clash of institutional powers that would have occurred under Kast.
Chile’s Congress is far more moderate than its president, with a centrist coalition that will limit some of Boric’s agenda. At the same time, a large majority of Chile’s public is in favor of some critical aspects of Boric’s economic agenda including pension reform. Boric knows this and has political space to push for reforms that have been portrayed as radical by some domestic political opponents and outside observers but actually fall right near the center of Chile’s political spectrum based on public opinion polling. I also believe he is a pragmatic enough politician to accept compromises as they occur and to avoid reforms that are so radical that they would sink the economy and his presidency.
Markets will shake next year
The drop in Chile’s currency and stock market on Monday wasn’t surprising given concerns about Boric’s and the constitutional assembly’s spending agenda. Chile is likely to see additional market concerns next year, even as the economy remains relatively strong. The elimination of Chile’s current private pension system is going to remove money from the local markets, even if Boric and the Congress structure the reform in a reasonable and pragmatic way (which I think they will). The plethora of new spending initiatives and mandates coming out of both the Boric government and the constitutional assembly have to be paid for. Even if Chile can afford the new spending (and I think it can) and that spending is a solid investment in Chile’s future, markets are going to drop due to concerns about the higher taxes and questions about fiscal sustainability.
I would argue that Chile’s markets are undervalued in the long term and that the drop in Chile’s stock over the last two years overstates the risks and does’t take seriously enough the potential positive reforms that can occur. However, the market’s short term concerns don’t care about my long term view on the situation. Chile’s stocks and bonds will very likely take further hits in 2022 as markets worry more about Boric and his economic agenda (please note, I don’t officially make any investing recommendations, just offering my opinion here).
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