Chile markets plunge after government hammered in constitution vote
The copper-producing country's bonds, currency and stocks all sank as jitters spread amongst investors, fearful that Chile's market-friendly constitution, dating from the dictatorship of Augusto Pinochet, could face a major overhaul. "This was a clear rejection of established political parties," said Nathalie Marshik, who focuses on Latin America at brokerage and investment banking firm Stifel.
Chile's markets plunged on Monday after voters propelled leftist and independent groups to victory in an election over who will draft a planned new constitution, a major blow to the center-right ruling coalition that fared far worse than expected. The copper-producing country's bonds, currency and stocks all sank as jitters spread amongst investors, fearful that Chile's market-friendly constitution, dating from the dictatorship of Augusto Pinochet, could face a major overhaul.
"This was a clear rejection of established political parties," said Nathalie Marshik, who focuses on Latin America at brokerage and investment banking firm Stifel. The center-right conservative parties failed to secure a critical one-third of seats in the body that will draft the new constitution over the next year, meaning they could not veto more radical proposals without other allies.
With 90% of votes counted on Sunday, results showed candidates backed by President Sebastian Pinera's Chile Vamos coalition had won only a fifth of seats, while independents picked up the most votes. The IPSA stock index tumbled nearly 10% before recouping some losses to trade down around 8%, still its biggest daily drop since the COVID-19 pandemic ripped through global financial markets in March 2020.
Chile's peso weakened as much as 3.6% to touch a 1-1/2-month low before clawing back some ground. Dollar-denominated sovereign bonds suffered, with some longer-dated issues dropping more than 1 cent in the dollar. The premium demanded by investors to hold Chilean debt over U.S. Treasuries widened.
Chile 5-year credit default swaps, which reflect the cost to insure against a sovereign default, jumped by 7 basis points to 61 bps, the highest since October, Refinitiv data showed. 'DECISIVE BREAK'
The weekend vote to pick 155 citizens to rewrite the constitution was borne from fierce protests that erupted over inequality and elitism in October 2019, with the current constitution widely perceived to favor big business over the rights of ordinary citizens. "It is clear that Chileans want to make a decisive break with the Pinochet-era constitution, which is a great idea, but it is not quite clear where Chileans want to go," said Jan Dehn, head of research at asset manager Ashmore Group.
"The only thing that looks likely is that Chile will have a larger welfare state. Chile can afford this." Goldman Sachs said in a note the center-right coalition had been "politically debilitated" and that it expected the new constitution to be in favor of a "larger, more interventionist state and the broadening of the social safety net".
"This would add further pressure on the already deteriorating fiscal/debt dynamics, and a potential shift away from hitherto investment-friendly policies and institutions could weigh on medium-term macroeconomic performance," it added. New proposals - which could include potential changes to private land and water rights as well as employment legislation - will require two-thirds approval and without a third of the delegates, the government will struggle to block changes.
JPMorgan's Diego Pereira wrote in a note to clients that the outcome suggested "a regime of heightened uncertainty ahead". Pinera said his government and other traditional political parties should heed the "loud and clear" message that they had not adequately responded to the needs of citizens. Chile, one of the wealthiest, most stable democracies in Latin America, will hold a general election in November.
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