Chile: Moderate market-friendly reform under Piñera?

January 12, 2018

Latin News

Chile’s political pendulum has swung back to the right again. Sebastían Piñera won the second round of the country’s presidential election on 17 December, defeating centre-left candidate Alejandro Guiller by 54.57% to 45.43%, a better margin than had been expected. The way is now clear for Piñera, who takes office on 11 March, to push for the market friendly reforms he has promise to deliver economic recovery (Piñera says his aim is to double the annual GDP growth rate from 2% to 4% during his term in office). But as he lacks a congressional majority, his approach is likely to be quite cautious.

For over a decade two alternating presidents have set Chile’s economic policies. Michele Bachelet, on the centre-left, was in office from 2006-2010; Piñera, on the centre-right, succeeded her from 2010-2014; Bachelet then returned for a second presidential term from 2014-2018; and now Piñera has also won a second term, which will run through 2018-2022. Inevitably, the two have been almost constantly judging how much of their predecessor’s work to accept, criticise, unwind or amend: in short, to decide how vigorously to swing the policy pendulum back towards their own ideological home. Now it is Piñera’s turn to make that judgement. Although he won with a convincing nine-point margin, it is likely that he will move with a degree of caution and moderation.

This is because his Chile Vamos coalition will lack an overall majority in either house of congress. It will be the largest group in both the lower chamber (with 73 of 155 seats) and in the senate (with 19 of 43 seats). To achieve a simple majority Piñera will therefore need to attract another five votes in the chamber of deputies and another three in the senate: this points to detailed issue-by-issue negotiations, and to give-and-take compromises.

Piñera’s advisers say his ministerial team is likely to be finalised by the end of January. The incoming president has at least three important priorities. One is to boost mining investment and production: he has promised to reduce red tape, relax complex environmental permits, and cut corporate tax rates. Bachelet had increased corporate tax rates from 20% to 25% in 2013; Piñera says he wants to get them back down to the OECD average of 22%. Another priority is to reverse a multi-year fall in private investment. The third priority is to reverse the trend of widening fiscal deficits (in five years, from a balanced budget in 2012, Chile has seen the fiscal deficit widen to around 3.0% of GDP in 2017). This last priority is the one where some kind of cross-party deal will look most likely, given that various parties in Guiller’s defeated coalition had acknowledged the need for fiscal consolidation. Piñera is likely to use his election pledge of a US$14bn government-spending plan across the four years of his term in office as the basis for negotiations with other parties.

It looks as if Piñera will not seek to reverse one of Bachelet’s big reforms, the introduction of free university-level education: between the first and second rounds of the presidential ballot, to win over centre and moderate left wing voters, he made a pledge to keep universal free education. He can however be expected to tinker with the labour reforms introduced by Bachelet and to seek changes to the existing public-private pension system. Chile was a pioneer in introducing private pension funds back in 1981 (known as Administradoras de Fondos de Pensiones or AFPs) but they have been criticised for high management costs, and for providing relatively low benefit levels. The new government is expected to support the AFP industry, but to look at ways of raising pension benefits and, given the problems posed by an ageing population, seeking to incentivise later retirement.

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Latin American Newsletters (LatinNews) was founded in London in 1967 to provide expert political, economic, and security analysis on Latin America and the Caribbean. For nearly 50 years, it has been acknowledged as the foremost authority on the region.

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