Event

Former President Michele Bachelet of the center-left Nueva Mayoría coalition convincingly won the second round of the presidential election. She prevailed over Evelyn Matthei, who failed to secure another term in office for the center-right Alianza por Chile of incumbent President Sebastián Piñera. Despite delivering on the economic level – GDP growth averaged more than 5% over the past four years, inflation is under control near the low end of the 2-4% target range, there is almost full employment and the poverty rate is at a historic low – the ruling coalition seems to have suffered more than the opposition from popular discontent with political institutions’ seeming inability of effectively addressing long-standing social issues. Fulfilling public expectations will prove difficult however. After all, the Nueva Mayoría coalition controls the majority in congress which should allow Bachelet to implement the proposed tax system and labour market reforms,  but it forces her to seek Alianza support to attain the 67% needed for constitutional change (to allow consecutive re-election and increase the power of the legislative) and the necessary 57% to pass education reform. The latter has been a cornerstone of the Nueva Mayoría election campaign and the principal causes of social unrest and large-scale student protests that have occurred periodically since August 2011.

Impact on country risk

A crucial challenge for Bachelet will be to reduce social inequality while fostering solid macro-economic policies and business confidence amid economic slowdown (expected average GDP growth for the two  years ahead is 4,5%) due to weaker demand from China, affecting copper exports on which the country relies, and less accommodative monetary policy in the US, weighing on external financing conditions. Furthermore, Chilean growth prospects depend on resolving deficient energy generation and distribution.   Yet investment growth in energy projects is subdued due to environmentally inspired popular opposition. Here, a pragmatic government approach would entail furthering transparency and efficiency of the regulatory framework (simplifying concession procedures and speeding up the resolution of legal challenges against projects), while strictly adhering to the rule of law to protect the environment.

Analyst: Sebastian Vanderlinden, s.vanderlinden@credendogroup.com