After large-scale and violent protests erupted in 2019 as we discussed here, recognition of discontent and demand for change led to a referendum on a new constitution.
Since the 1970s, Chile has operated under the liberal constitution adopted by late dictator Augusto Pinochet. From an economic perspective, free markets and strong protection of private-sector rights delivered decades of strong growth, making Chile one of the highest-income emerging markets today. However, this came at the cost of high inequalities and limited provision of state services; the intention was that a new constitution would address these issues.
After almost a year of deliberation, Chile’s constitutional assembly delivered an expansive, maximalist draft. Key proposed changes included:
- Weakening the upper house of congress’ ability to act as a check and balance against the lower house
- Increasing congressional capacity to spend fiscal revenues
- Decentralising fiscal spending by giving more power to regions
- Giving additional rights to minorities
The first point was a particular concern; as we noted in our earlier piece, the right and centre-right’s strong performance in the late-2021 congressional election created an important buffer against radical/economically damaging policy, which would have been weakened by the proposed constitution. Fortunately, in the recent (4 September) referendum, Chile’s electorate rejected the draft by a wider margin than many market participants expected (more than 20 percentage points), reflecting a broad range of concerns.
Implications of the rejection of the new constitutional proposal
By soundly rejecting the new constitutional proposal, the electorate has made clear its opposition to a radical departure from Chile’s current model. However, polls show that a majority still wants a new constitution, just not the one proposed. So, we expect another attempt to devise a new charter, as President Boric has already announced. But the process will be different, with more representation from congress and fewer reserved seats for indigenous representatives, who tended to have radical agendas; this should result in less controversial changes being proposed.
The rejection of the proposed draft is a positive for markets as its adoption would have implied a significant long-term deterioration in Chile’s traditionally strong fiscal position. However, with the issue remaining unresolved, uncertainty will continue to hinder investment, especially foreign investment, at a time when Chile is recording very large current account deficits on the back of excessive stimulus measures implemented during the pandemic. In recent months, this uncertainty has sparked a sharp rise in the volatility of Chilean assets, especially the peso, which triggered the central bank to intervene.
While the referendum result is positive, we think continued uncertainty, rising volatility and a general deterioration in policymaking should maintain some premium in Chilean asset prices.
Signposts to look out for
We will be watching for signposts along the long road of the constitutional rewrite. Notably, we would be encouraged if future discussions dropped plans to decentralise fiscal spending and retained the current structure of checks and balances in congress.
