Election Results Signal That Shift To The Left Will Be Moderate

We believe that former Chilean President Michelle Bachelet, head of the opposition Nueva Mayoría (NM) bloc, remains on track to return to her former post in 2014 following a first-round national election victory on November 17. Preliminary results indicate that Bachelet received 46.7% of the vote, far ahead of the 25.0% won by her nearest competitor, former labour minister Evelyn Matthei of the ruling centre-right Coalición por el Cambio (CPC) bloc. Marco Enríquez-Ominami of the leftist Partido Progresista came in third with 11.0%, while Franco Parisi Fernández, a populist economist who ran an independent campaign, came in fourth with 10.1%. While Bachelet's failure to win an absolute majority means that she will face Matthei in a run-off election on December 15, we believe she is well positioned to win, based on polling data that has consistently given her a 25-30% margin of victory in a hypothetical head-to-head match-up with Matthei.

Bachelet's coalition (which includes the far-left Partido Comunista) also made moderate gains in legislative elections held on November 17. According to current projections, the NM is set to hold 67 of the 120 seats in Chile's lower chamber, up from 50 in the prior congress. In the senate, the NM will have 21 out of 38 seats, up from 20.

We believe that the election results signal a broad victory for the centre in Chilean politics, and are likely to see moderate policies remain at the fore of the Chilean policymaking. Indeed, the NM's failure to secure larger legislative majorities will force policymakers on the centre-left to seek compromises with opposition groups on the major issues in their platform - namely, a proposal to raise the corporate tax rate by 5% to 25%, and a plan to gradually phase out for-profit education in Chile, which both require a four-sevenths majority to pass. Moreover, the NM's structural reform ideas - electoral reform, which requires a three-fifths majority, and a new constitution, which requires a two-thirds majority - are likely to be shelved for the time being. On the right, the Unión Demócrata Independiente (UDI), the most conservative party in the CPC, suffered major losses, and will see its share of deputies in the lower chamber fall to 29 from 38. However, despite a shit to the left, we maintain our long-held view that the country's business-friendly policies are not likely to markedly change as a result of the elections ( see 'Elections Unlikely To Alter Business-Friendly Policies,' October 4).

Bachelet In Strong Position For The Run-Off
Chile - Nov. 17 First-Round Presidential Election Results, %

Election Results Signal That Shift To The Left Will Be Moderate

We believe that former Chilean President Michelle Bachelet, head of the opposition Nueva Mayoría (NM) bloc, remains on track to return to her former post in 2014 following a first-round national election victory on November 17. Preliminary results indicate that Bachelet received 46.7% of the vote, far ahead of the 25.0% won by her nearest competitor, former labour minister Evelyn Matthei of the ruling centre-right Coalición por el Cambio (CPC) bloc. Marco Enríquez-Ominami of the leftist Partido Progresista came in third with 11.0%, while Franco Parisi Fernández, a populist economist who ran an independent campaign, came in fourth with 10.1%. While Bachelet's failure to win an absolute majority means that she will face Matthei in a run-off election on December 15, we believe she is well positioned to win, based on polling data that has consistently given her a 25-30% margin of victory in a hypothetical head-to-head match-up with Matthei.

Bachelet In Strong Position For The Run-Off
Chile - Nov. 17 First-Round Presidential Election Results, %

Bachelet's coalition (which includes the far-left Partido Comunista) also made moderate gains in legislative elections held on November 17. According to current projections, the NM is set to hold 67 of the 120 seats in Chile's lower chamber, up from 50 in the prior congress. In the senate, the NM will have 21 out of 38 seats, up from 20.

We believe that the election results signal a broad victory for the centre in Chilean politics, and are likely to see moderate policies remain at the fore of the Chilean policymaking. Indeed, the NM's failure to secure larger legislative majorities will force policymakers on the centre-left to seek compromises with opposition groups on the major issues in their platform - namely, a proposal to raise the corporate tax rate by 5% to 25%, and a plan to gradually phase out for-profit education in Chile, which both require a four-sevenths majority to pass. Moreover, the NM's structural reform ideas - electoral reform, which requires a three-fifths majority, and a new constitution, which requires a two-thirds majority - are likely to be shelved for the time being. On the right, the Unión Demócrata Independiente (UDI), the most conservative party in the CPC, suffered major losses, and will see its share of deputies in the lower chamber fall to 29 from 38. However, despite a shit to the left, we maintain our long-held view that the country's business-friendly policies are not likely to markedly change as a result of the elections ( see 'Elections Unlikely To Alter Business-Friendly Policies,' October 4).

Markets Unafraid Of The Centre-Left
Chile - US$ Global 2022 Government Bond Yield, %

Sovereign Credit Profile To Remain Robust

We have long viewed Chile as among the best markets in Latin America in terms of risk, as reflected in its strong standing in our proprietary political and business environment ratings. While we believe that the election of a centre-left government, combined with a growing impetus to stimulate the economy in the face of a weak external environment, will usher in a more liberal spending agenda, the aforementioned legislative dynamics are likely to prevent a significant deterioration of the country's fiscal accounts - and sovereign credit profile - going forward. Indeed, we also note that government expenditures as a percentage of GDP averaged 16.1% during Bachelet's first term, lower than 18.0% under the current administration of President Sebastián Piñera. As such, the spectre of the centre-left's return to power following a four-year absence has done little to affect Chile's strong sovereign credit profile, with the yield on Chile's US$ Global 2022 government bond compressing slightly by 3 basis points on November 18, and political factors remain unlikely to drive a spike in yields in the coming months.

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