Chile Investors Brace for Debate Over New Constitution
(Bloomberg) -- Chileans voted overwhelmingly to change their constitution Sunday, triggering a wave of celebrations across the country and ushering in as much as two years of debate over the new charter.
Many will hope the vote marks the end of the protests and violence that have wracked the country for the past year. Others will worry it paves the way for renewed controversy and ultimately, a more interventionist state.
The current constitution was drawn up under the military dictatorship of Augusto Pinochet and enshrines the free-market policies that have fueled more than 30 years of growth -- and steep inequalities. In April, Chileans will return to the polls to elect a constitutional convention to write the new charter.
That vote will be the “true litmus test” of how much Chile is going to change, according to Fernan Gonzalez, an analyst at Citigroup Global Markets Inc.
Here is what analysts had to say about yesterday’s vote:
Ariane Ortiz-Bollin and Nina Delhomme, analysts at Moody’s Investors Service
- A desire to keep key elements of Chile’s economic model while drafting a new constitution, such as free markets and central bank independence, mean that the risk is low for major institutional changes
- A new constitution will have to reflect the majority’s views because at least two-thirds of drafting members must approve it
- “Drafting of a new constitution channels social discontent in an institutional way and should help to address demands that have been the source of persistent protests”
- Still, it poses risks as process stoked some uncertainty until the drafting concludes in June 2022
Emily Weis, a macro strategist at State Street Corp. in Boston:
- The vote “introduced a good deal of uncertainty into the outlook for local equities, sovereign bonds and FX markets”
- The constitutional convention is likely to resemble the current make up of Congress and every clause of the new charter will require approval from 2/3 of delegates, limiting the scope for radical change
- “Other market factors will take over in the shorter term until the referendum comes back in focus in April 2021”
- “If there was no re-write, many of the grievances around inequality in education, health-care, and public investments would remain unaddressed. Thus the re-write is necessary to address these issues now”
Federico Kaune, the New York-based head of emerging markets fixed income at UBS Asset Management:
- The vote showed the “desire for broad and profound changes toward a more progressive and socially inclusive constitution”
- “The process is likely to take a couple of years and could end up weakening the pillars of Chile’s economic success of the past four decades”
- “Investors will likely focus on the new constitution’s rules and incentives and their potential impact on long- term growth and fiscal sustainability”
Patrick Esteruelas, head of research at Emso Asset Management in New York:
- A narrower margin of victory “could have potentially fueled more protests and been more destabilizing”
- There are a couple of features that could limit the possibility of wholesale change
- Current established political parties will likely dominate in the new Constituent Assembly,
- A new constitution will require two-thirds majority support
Gonzalez at Citigroup:
- The “convention should reflect the ideology Chileans have and should therefore be more balanced,” he wrote in a note
- Markets priced in this result, and any negative reaction may be short-lived given the absence of violence
- Valuations in Chile are still attractive
BBVA strategists Mario Castro and Alejandro Cuadrado:
- “Markets could stay cautious ahead of such a possibility, as it opens up a broader debate on the country’s political and economic structures and could be seen as a bigger fiscal drag,” they wrote in a note
- “Chile is likely to migrate toward a welfare-state constitution in which the government guarantees access to key public services, such as education, health care and pensions”
- Sunday’s vote is likely to steepen the rates curve on the outlook for more fiscal spending, and put a floor under local rates
- It should also act as a “more permanent drag on the CLP”
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