Gabriel Boric won the second-round presidential election in December. He will take up his post in mid-March and will face many challenges during his term. The new government will have to deal with a fragmented legislative assembly and high levels of popular expectation. Economic growth is likely to slow as exceptional support measures are gradually withdrawn. Although vaccination levels are high, activity could be weakened by new waves of infection and the accompanying restrictions. Lastly, consolidating public finances whilst fulfilling promises to reform education, healthcare and pensions would seem to be the biggest difficulty.
A tense election
On 19 December 2021, Gabriel Boric, the candidate of a very broad coalition of leftist parties, won the second round of the presidential election from J. Kast, the extreme right-wing candidate. He took 56% of votes cast, with a turnout of 55%, a record high since mandatory voting was ended in 2012. In last November’s first round, the turnout was 46%. The new government will come to power on 11 March.
ForecastsThe task ahead looks particularly challenging for the president-elect, and his difficulties will be amplified by changes in the global health situation. Although the population is well-vaccinated (with 80% having had two jabs and 60% having had a booster shot), the country remains exposed to new potential waves of infection (which would hit domestic demand, the tourist industry and exports).
Moreover, Chile’s political and social stability has deteriorated significantly since the violent demonstrations in the autumn of 2019. Surprising for both their scale and their duration, these demonstrations covered a broad range of claims including frustration with growing inequality and opposition to the Pinera government’s proposed reforms on access to the healthcare system and pensions.
The economic and health crisis has also increased the fragility of the healthcare and social protection systems, which face great difficulties despite the massive support provided by the authorities over the past two years. People’s expectations have nevertheless been raised.
At the same time, the process of writing a new constitution (which should be completed by the end of 2022) and the ensuing debates, focused on the same topics of education, healthcare and so forth, amplifies the pressure on the new government, even before it takes office. The independence of the central bank and its mandate (a growth and/or employment target could be added to the inflation target, in line with the Fed’s mandate) are also being debated.
Unfavourable conditions
The implementation of the new government’s economic and social policy is already looking like a challenge. The make-up of the new Congress (elected at the end of November at the same time as the first presidential round) is not clearly helpful for Mr Boric’s government: there is no majority in the Senate, and the left has only a two-seat advantage in the 155-member Chamber of Deputies.
Such a situation may certainly prevent the radical change in economic policy feared by some analysts (the stock market dropped more than 6% on the day after the election). But it could also prevent any substantial structural reforms, and much negotiation and doubtless compromise will be needed if the government is to push them through. It is highly likely that the political and social climate will remain tense throughout the government’s term, and that in the end changes will be much less radical than predicted.
Meanwhile, economic growth is likely to slow significantly. Real GDP probably grew by nearly 11% in 2021, thanks to the massive support from the authorities (as in 2020) and rising copper prices (in addition to comparison basis effects). However, the authorisation granted (on three occasions) to pension holders to draw against their retirement savings provided an artificial stimulus to consumption, and real GDP is likely to grow by ‘only‘ 2.5% this year, with the gradual withdrawal of exceptional support measures and an uncertain international climate.
It is against this challenging background that the new government will begin its work in March. Details of its programme are not yet known, but the new president wants to find the ‘right balance‘ between the need for reforms to improve social justice and the rebuilding of ‘favourable conditions‘ for investment and growth, whilst remaining ‘fiscally responsible‘.
In other words, Mr Boric would appear to want to respond to the high levels of popular expectation and launch several large-scale reforms to achieve this. But he will also need to maintain the confidence of investors, the rating agencies and the IMF, something that has been undermined by the political crisis and the withdrawals of pensions savings with their medium and long-term economic and fiscal consequences.
It is worth remembering that Chile is one of the few countries to enjoy a flexible credit line with the IMF, providing a precious guarantee that helps boost market confidence in times of rising risk. Chile has had this credit line since May 2020.
