Chilean Election Possible Financial Impact

The most polarized election in Chile since 1989 sees a massive political shift, but what does this mean for the country and its economy?

1989 was a massive year for Chile as it marked the end of the military regime that had been in place since 1973. After 15 years, the country finally returned to democracy, making this one of the most polarized and significant elections in modern history.

Fast forward to 2021, and Chile has just woken up to the results of another hugely significant election. Campaigns have been going on throughout the year as Chileans headed to the polls earlier in November. What made this election extra interesting was the fact it came at the same time as a rewrite of the country’s constitution. Additionally, the eventual winner – Gabriel Boric – became the youngest ever president of the country. It symbolized a radical shift in politics for the nation, with the previous government’s candidate defeated in the first round and the Boric beating the right wing candidate by almost 10 points. From a center-right government, Chile is now in the hands of the far-left .

Naturally, many questions present themselves after such a huge change. With that in mind, there will always be worries and queries as to the possible financial impact of this election. What does the new President mean for the Chilean economy, and how could things change in the coming weeks, months, and years?

Potential Drops For Chilean Stocks

Over the course of the election, Chilean assets have performed horrendously on the stock market. The peso and stocks have been some of the worst performers in the world, experiencing radical drops over the last six months.

Unfortunately, these drops seem set to continue for the near future. Reports out of Chile after the election results saw the peso fall over 3%, and one of the largest mining firms in the country fell by more than 10%. This means that, since May, the peso is down by a whopping 21%, and many are concerned as to whether or not this will continue. Only time will tell, but it certainly looks as though more dips and drops can be expected in the coming weeks.

Overall, Chile’s stock exchange dropped 5.3% when it opened on Monday, a significant drop that will have many people alarmed. All facts and figures were taken by a Reuters report on Monday following the Chilean election results.

Problems For Critical Business SectorsOne of the reasons this election is so significant is that Boric has made a number of promises that seemingly go against everything Chile is known for. Until now, Chile has been operating under a free market economy with low levels of government intervention. It has enabled many key sectors to thrive across the country, helping the economy grow. With Boric being announced as president, many of his promises involve shifting to a more regulated economy – with a focus on social spending.

Some of his promises include:

  • Free university education.
  • Universal health care and the removal of the private system.
  • Increased efforts against tax evasion.
  • Further taxation on industry and business.
  • A universal public pension and remove the private pension system.

While all of these ideals may be good in theory, there is concern over the logistics of how they can work and who will pay for them. By allowing for free university education and improved health services, Boric has already stated that he’ll increase mining royalties, and make further adjustments to how businesses are taxed.

The issue with this is that it can spell big problems for critical business sectors in the Chilean economy. For instance, Chile is a country that relies on mining to help its economy thrive. Indeed, the industry sector contributes to 41.8% of the GDP, making it one of the largest sectors for the economy. Increasing mining royalties will mean that these companies are suddenly paying more tax than ever before. Yes, it may help to fund some of the projects outlined by Boric, but what does it mean for these companies that are already considered to be uncompetitive on a global stage?

There are growing fears that mining companies – and many other big companies in Chile’s key sectors – will start to suffer under the new regime. As a consequence, this could have devastating effects on the economy, with a possible recession predicted IF the big sectors struggle to adapt.

In conclusion, the potential financial impact of the Chilean election is a serious concern. There is no clarity about the future financial impact when the new president takes control in March, but a new direction is underway. Chile is a parliamentary democracy, and this will have a a stabilizing effect with a hung parliament. However, the stock market has already suffered a blow in Chile, and the peso continues to fall. If the new government chooses to disrupt the free market and introduce new tax regulations, there are worries that an economic situation that is already suffering under an inflation rate of over 7% and effects of a global pandemic will suffer further.

by Steven Gillespie- Investment Advisor