By Rodrigo Campos and Fabian Cambero

NEW YORK/SANTIAGO – Markets are experiencing wobbles following Chile’s most polarized presidential election in years. Investors may find a silver lining within these stark divisions. They have buffers from the split Congress, and can also take a more moderate stance to attract key centrist voters.

On Sunday, Gabriel Boric (leftist student protest leader) will face Jose Antonio Kast (right-leaning politician from the fringes of the main political parties). Both are backed by voter anger and a demand for change.

Boric has threatened Chile’s neoliberal economic system that dates back to Augusto Pinochet’s military dictatorship. Kast has been compared to Brazil’s Jair Bolsonaro. He joked about having Pinochet over as tea.

Both candidates are now more moderate. They have been able to secure key moderate votes by tightening the race. The Congress was elected in November and is divided between right-leaning and left-leaning, which could be a stumbling block to radical reform.

Mario Marcel (Chile’s president of the central bank) said that both candidates had made major changes to their programmes and introduced ideas of prudence as well as realism. He also added that this would provide a valuable source for investors.

J.P. Morgan said in a report that it observed “a turning to moderation” from both candidates. According to it, Congress would temper Boric’s policies if the candidate wins. However, a left-leaning Assembly would rewrite the constitution and put pressure on Kast.

However, Chile’s assets have been hard hit by the uncertainty. The weakest currency in emerging markets, the peso fell 16% against the dollar this year. The Chile MSCI stock index, which is denominated in dollars, has fallen 14%.

Chileans who are wary of their country have begun to withdraw assets over the past two decades, in part due to the pandemic effect, but also uncertainty caused by social unrest that broke out in 2019 as well as the ongoing constitutional reform.

Central bank data for November shows that Chile saw $10 billion of household wealth and $12 billion of company wealth leave the country this year. In 2018 and 2019, the number was close to $2 billion.

Marcel explained that these capital outflows have so far been very similar to the ones during 2008 and 2009. These are very important numbers.

‘WILD CARD’

Chileans have two options for choosing the future of their country’s largest producer, and the refuge of stability in volatile Latin America.

Standard Chartered Bank (OTC:) Bank stated in a note that Chile’s upcoming election for the presidency is “the most divisive since Chile’s transition into democracy”. This was in reference to 1990’s end to dictatorship.

Many see the risk of the constitution redraft as even more dangerous. Next year will be a referendum in the country on it. It would be a departure from the Pinochet-era text that governed Chile’s economy, as well as the one written by the Chicago Boys.

Carlos de Sousa from Vontobel Asset Management, Zurich said that Chile’s wildcard is its constituent assembly and new constitution.

This could have a central role for mining. Taxation and environmental protections are under review. This could have an impact on copper or lithium.

Alvaro Merino from the National Mining Association (Sonami), said that mining investments have been put on hold by both the Constitutional Convention of President Obama.

According to him, Chile’s portfolio includes $69 billion of investments in the next decade. Therefore, regulations must provide stability, legal certainty and competitiveness.

He stated that “we need to remove all uncertainties in order for mining investment to be deployed fully forcefully.”

Chile’s outlook on emerging markets, as many developed nations abandon decades of loose monetary policy, is an external challenge. Portfolio flows to some EMs have already been affected by the possibility of rising interest rates in the USA.

Vontobel’s de Sousa suggested that Chilean assets may be worth considering because the peso is so weak at this time, but rising political risk would make him think.

He said, “Strategically, from a long-term view, we don’t like Chile very much right now.”