Chile to Scrap Pinochet-Era Constitution in Landslide Referendum

Chile voted overwhelmingly on Sunday to draft a new constitution, launching a two-year struggle over first principles expected to blunt the neo-liberalism that has made it an investor favorite but plunged it into riots over inequality.

A larger-than-expected 78.3% backed a fresh charter, a key demand of protesters who took to the streets last year in the largest civil unrest in decades. The current document dates back to the dictatorship of Augusto Pinochet.

Chile to Scrap Pinochet-Era Constitution in Landslide Referendum

Thousands celebrated the result late into the night in Plaza Italia, the Santiago square that has become the symbolic center of the year-long protest movement, and across the country. Still, many investors fear a new constitution means Chile will do away with the pro-business rules and fiscal discipline they say created one of Latin America’s most stable and prosperous economies. Demonstrators say that model -- enshrined in the current charter -- has left millions grappling with low wages, poor social services and injustices.

“This plebiscite is not the end, it is the start of a road that we must travel together to agree a new constitution for Chile,” President Sebastian Pinera said in a national address Sunday evening.

The peso fell 0.6% to 781.22 per dollar in early trading on Monday. Financial markets are likely to remain cautious as the overwhelming support for a new constitution may strengthen the political left’s hand in writing the new charter, BBVA strategists Mario Castro and Alejandro Cuadrado 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,” they wrote.

‘Huge Challenge’

Protests erupted in October last year when demonstrations against a subway fare increase spiraled into a broader social movement with grievances ranging from pensions to education. While pandemic-fighting lockdowns kept a lid on tensions most of this year, violent protests flared up again in recent weeks.

Chile to Scrap Pinochet-Era Constitution in Landslide Referendum

About 79% of voters also backed a constitutional convention of newly elected representatives to write up the charter, rather than a mixed convention with 50% of existing lawmakers.

“This isn’t a triumph for political parties,” Paulina Astroza, a political analyst from Universidad de Concepcion, said via Twitter. “Parties will have a huge challenge: they must modernize, clean up, be transparent, allow new leaderships and end with” their strongman tactics.

After renewed violence in the run-up to the referendum, voting was peaceful and orderly, with many people lining up for hours to cast their ballot despite the on-going coronavirus outbreak. Roughly 51% of the 14.8 million eligible voters cast ballots, according to the country’s election body, Servel.

“Until now the constitution has divided us,” Pinera said. “As of today, we must all collaborate so that the new constitution be a great framework for unity, stability and the future.”

Two Thirds

Chileans will vote again in April to elect delegates to the assembly in charge of writing the new text, and that body will have as much as a year to complete its work. To avoid more radical viewpoints from making it into the constitution, legislators agreed on a clause that all articles must be approved by two-thirds of the assembly members.

That stipulation means that the new constitution will be “relatively moderate and brief,” Finance Minister Ignacio Briones said on Monday in an interview on the radio show Pauta Bloomberg. The referendum result was already priced in by financial markets, and the process of drafting a new charter will follow well-known rules, he said.

Chile to Scrap Pinochet-Era Constitution in Landslide Referendum

Amid the constitutional process, Chile will also hold a presidential election in November 2021. With the center-left opposition deeply divided and the current government unpopular, the outcome is far from clear.

On expectations that a peaceful vote may quell some of the unrest, some investors have started to bet again on the Chilean market.

“While the medium-term political uncertainty on the back of the constitutional process and presidential election in 2021 might continue to cap market performance, we do believe that the momentum for the Chilean market is positive,” JPMorgan analyst Diego Celedon said in a note last week.

©2020 Bloomberg L.P.

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