How Chile's Shifting Political Tectonic Plates Baffled Markets

(Bloomberg) -- For quarter of a century in Chile the same political coalitions proposed the same policies and the markets looked on with indifference. Not any longer.

Volatility in Chilean assets is the highest in five years as the country prepares for a second round of elections this weekend -- the first time since the return of democracy in 1990 that politics has had such an impact on markets. In Sunday’s vote, billionaire and one-time president Sebastian Pinera is facing off against Alejandro Guillier, a former television personality whose coalition includes parties from the center to the hard left.

Pinera had been widely favored to win, until the results of the first-round showed that polling companies had badly misread the situation. Investors are spooked. The country’s benchmark stock index has fallen as much as 9 percent, while the currency weakened as much as 4.4 percent, before rallying the most in the world in the last few days. No-one knows who is going to win.

So what went wrong in Latin America’s most predictable country? The first is the move from obligatory to voluntary voting, which makes it more difficult to predict who will vote, let alone who they will vote for. The second is the declining vote share of the main political parties. Since 2005, the six main parties combined have lost 1.8 million voters, or about a third of their support, in congressional elections.

How Chile's Shifting Political Tectonic Plates Baffled Markets

Most of the decline can be attributed to the Christian Democrats. Once the dominant force and now a shadow of its former self. Just 617,000 Chileans voted for its candidates in November, down 1.2 million from its 1993 peak, while a meager 388,000 backed its presidential candidate Carolina Goic.

How Chile's Shifting Political Tectonic Plates Baffled Markets

The next biggest loser is the Party for Democracy, or PPD, which was set up in the late 80s as an alternative to the then-banned Socialist Party and, under the leadership of President Ricardo Lagos, became one of the largest parties in the country by 2005.

Instead, left-wing voters have turned to a conglomeration of parties known as the Frente Amplio, or broad front. Frente Amplio, competing for the first time, won 16 percent of votes for the lower house and 20 percent in the presidential poll on a platform of expanded social security and reducing the role of the market in health and pension provision. That is radical by Chilean standards.

The alliance looks set to become a major force in Chilean politics -- taking with it the country’s reputation for predictability.

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