Will newer be better?

Chile overwhelmingly votes for a new constitution but will it solve social and economic challenges?

On the back of severe social unrest, an overwhelming majority of Chileans voted for a new constitution in the recent referendum that cut across the traditional political axes of right and left.

One senior banker is optimistic, “The transversality of the vote stands out, the election was not focused on politics or ideology, contrary to what some politicians had hoped. It was a vote for better economic conditions. Note that participation increased dramatically in the lowest income areas but fell in the wealthiest.”

A Chilean economist believes this presents a risk, “80% voted for a new constitution. A huge proportion of these voters are hoping for better pensions, health and education, but the projected growth for the Chilean economy is low so it will be hard to accommodate increased social spending.”

As a result of this, our sources across the financial industry in Chile do not expect major economic changes under a new constitution, rather a continuation of the upward trend in public spending that started over 10 years ago. The Head of research at a Chilean bank explains, “The upward trend [in public spending] is not expected to radically increase because of the constitutional process but it will continue to grow as before, especially as it seems that the process will be driven by moderates at the Constitutional Assembly.”

“[Public spending] is not expected to radically increase because of the constitutional process but it will continue to grow as before.”

Head of research, Chilean bank

A Senator who campaigned against the reforms shared his view, “The most extreme political actors, such as ‘Frente Amplio’, are in the minority. Therefore, it is unlikely that the new constitution will be a threat to private property or the autonomy of the Central Bank, these were the two main concerns for the centre right and the business sector.”

None of our sources expect complications between the Constitutional Assembly and the Congress as the agreement keeps their functions separate. Equally, no violent protests of the scale seen last year are anticipated during the constitutional process although the Chilean Communist Party (PC) have declared that they will always have, “one foot in the street”.

“It is unlikely that the new constitution will be a threat to private property or the autonomy of the Central Bank.”

Chilean Senator opposed to constitutional reform

A political analyst summarises, “[PC] will make a lot of noise but it will be difficult for them to achieve their aspirations, the right are more aligned than the left, who could not agree to form a single electoral front and could not even agree on the arrangement for the photo on the night of referendum!”

Our in-country sources believe Chile will continue to have a stable investment environment but once the new constitution is in place, investors should be sensitive to signs of social discontent and the effects of increased social spending on state finances.

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