Chile: Presidential election victory of far-left Gabriel Boric represents important break from the past, but radical policies are unlikely

Event

Gabriel Boric, a former student leader and leader of the far-left Frente Amplio coalition, won the presidential elections on 19 December 2021 by a wide margin. This election victory represents an important break away from three decades of a two-coalition system with centrist parties.

Originally, Boric’s election campaign promised far-left ideas, declaring to bring the current neoliberal system to the grave. However, the president-elect has already moderated his programme and tone over the past month. Still, his economic agenda includes higher taxes, a bigger role for the government in the economy, strengthening unions and new environmental regulations. Another remarkable policy pledge is the introduction of state pensions and the overhaul of the pension system, which has been relying on private pensions.

Boric represents the more moderate wing of his coalition, but it is unclear how much influence the far left will have when he takes office on 11 March. In any event, the new president will likely struggle to pass radical policies. One main obstacle is that the congress is evenly divided between left and right.

Impact

The Andean country is known for its neoliberal economic policies, which have led to a high level of income (USD 13,470 per capita in 2020), a high level of foreign-investor trust, high openness to trade and fairly low public debt – estimated at 34% of GDP at the end of 2021. This is also reflected in the fact that Chile has the strongest sovereign-bond rating in South America. Nevertheless, Chile’s income inequality is among the worst in the OECD and has been a source of unrest in the past years, especially before the worldwide Covid-19 pandemic. Boric’s plan to increase taxes on high earners and (mining) companies – and in return improve the quality of education and healthcare, while also increasing social spending – could improve this uneven income distribution. Nevertheless, the proposed reforms are expensive while the president-elect promised to adhere to fiscal consolidation after two years of fiscal expansion to tackle the Covid-19 pandemic. Moreover, economic growth in the coming years is expected to be low. In 2022 and 2023, economic growth should be at 2.5% and 1.9% respectively, after an impressive 11% in 2021. Hence, Boric will have difficulties to implement expensive fiscal reforms without deteriorating public finances.

Also the fight against climate change is high on Boric’s agenda. Mainly mining projects could come under scrutiny, as almost half of the 2020 current account revenues came from ores and metal exports. Furthermore, Chile is by far the biggest copper producer in the world and the second-largest lithium producer after Australia. Considering how much the global green transition relies on these metals, Boric’s possible proposals will be closely followed both nationally and internationally in the coming years.

Chile’s short-term political risk – which represents the country’s liquidity – is in the lowest risk category 1/7. The outlook is stable after the recent upgrade in September 2021. Credendo’s MLT political risk is in category 3/7. The biggest downside risks are the volatility of the financial markets and the exchange rate, and foreign investors’ risk aversion, which could put pressure on Chile’s already elevated external debt – estimated at 72% of GDP and about 225% of current account revenues at the end of 2021. If radical policies are introduced, foreign investors’ risk aversion could rise, leading to capital outflows and a depreciation of the Chilean peso. The currency has already lost about 17% vis-à-vis the US dollar year-on-year due to political uncertainty (last observation date: 4 January).

Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com