Chile election puts free-market model at mercy of angry voters

A politically polarised Chile holds presidential elections on Sunday, with voters set to either overthrow an economic model installed during the dictatorship of Augusto Pinochet or double down on its free-market ethos.

The vote is shaping up to be a battle between two candidates from opposite ends of the political spectrum – conservative José Antonio Kast and leftist Gabriel Boric. While Kast wants to slash taxes and government spending, Boric envisions a bigger state to tackle inequality while raising levies on corporations.

“Never before in elections have we seen such opposing economic views on how to address Chile’s challenges,” said Sergio Lehmann, chief economist at Banco de Credito e Inversiones in Santiago. “Compared to other elections, the search for consensus and agreements is relatively absent. Therefore, there’s more tension and more uncertainty.”

If no candidate receives more than 50 percent of the vote, a runoff will be held December 19. Chileans will also elect new deputies for the 155-member lower house and about half of the Senate. The outcome will be closely watched in the region ahead of major elections in Brazil and Colombia next year.

Investors are also on alert as one of Latin America’s richest nations weathers unprecedented uncertainty and higher social demands. Chile is also in the process of rewriting its Constitution drawn up under Pinochet that has underpinned three decades of growth but fuelled inequality.

Financial markets have swung wildly in recent months as Chile debates the future of an economic model drawn up in the 1970s and 1980s by the so-called Chicago Boys, disciples of University of Chicago professor Milton Friedman who advocated for open market policies including deregulation and privatisation.

Chilean stocks plunged earlier this year on the outcome of a vote to select members of the Constituent Assembly only to surge a few months later after a leading presidential hopeful from the Communist Party was ousted in a primary.

The peso has dropped 3.8 percent this week alone, and is down 14.5% this year, trailing only Turkey and Argentina for the worst currency in emerging markets.

Older voters

Centrist candidates Senator Yasna Provoste and former Social Development Minister Sebastián Sichel are backed by traditional coalitions that have fallen out of favour with voters after ruling the country for the past three decades. While they trail in the polls, they can’t be counted out.

Both have shown willingness to form broad alliances in Congress, a gesture that should resonate among voters, said Pamela Figueroa, a political scientist at Universidad de Santiago. Moreover, this year’s polls are less reliable after the pandemic forced some surveys to be conducted by phone instead of in-person.

“Other data is more relevant,” Figueroa said. “In elections in 2020 and 2021, many people over 55 didn’t vote. If that segment participates in this election, there will be more voters inclined to back centrist candidates.”

Kast and Boric also have serious shortcomings among voters and high rejection rates.

“Kast’s trickle-down free market beliefs appear out of kilter with the public mood,” Nicholas Watson, Managing Director at Teneo, wrote in a November 11 research note. Meanwhile, Boric’s “tax-and-spend” plans may also be out of step given high inflation, he said.

Looming challenges

Regardless of Sunday’s results, Chile’s next president will face a slew of challenges.

Economic growth will slow to near two percent next year from roughly 11 percent in 2021, according to the central bank. Analysts including BCI’s Lehmann warn that higher interest rates and an end to emergency stimulus will lead to recession later in 2022.

Such a sharp slowdown could revive social unrest. Massive protests first broke out in October 2019 when demonstrations over a subway fare hike ballooned into a broader movement demanding better services from healthcare to pensions. The two-year anniversary of that uprising was marked by violent protests that left two people dead.

This week, President Sebastián Piñera survived a second impeachment attempt in as many years with votes that were split along coalition lines. It was a fresh sign of the polarisation and tensions permeating Chilean society, which should also result in a fragmented new congress.

“It’s governability that’s at stake in this Sunday’s elections,” said Marco Moreno, director of the school of government at Universidad Central. “That’s the dilemma that many people still don’t understand clearly.”