Bank of America Expects ‘Friendly Investment Framework’ in Chile’s New Constitution

Bank of America (BofA) has delved into Chile’s current economic landscape, offering insights into the nation’s impending political and economic strategies. The bank said the forthcoming constitutional reform text is likely to adopt a more moderate stance compared to the prior version, which was rejected in a national referendum.

Furthermore, BofA expects that the pension reform will not take an extreme route, a concern that had once loomed in the market.

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Constitutional Reform in Chile

“We expect a constitution text substantially more moderate than the rejected proposal, including a more friendly investment framework,” BofA analysts wrote.

The bank envisions that the revised text will feature “more precise language for mining concessions, water rights regime, and more explicit protection of property rights.”

A fresh constitutional draft is currently in the works under the supervision of an elected Constitutional Council, which is being advised by a committee of experts. BofA highlighted that right-leaning parties wield a dominant presence in the Council.

The country’s fresh constitutional proposal will face a for-or-against vote on December 17. Polls conducted by Cadem currently indicate a substantial inclination toward rejection.

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Prospects for Pension Reform

The government is currently actively engaged in negotiations for a fiscal pact, one that, according to BofA, would encompass a “watered-down” tax reform in conjunction with spending priorities. The bank emphasized that the government intends to introduce green taxes in the third quarter and is currently brokering an income-based tax reform, which includes contentious elements such as a wealth tax .

“The right parties have been reluctant to approve an increase in the tax burden,” Bank of America wrote.

On a separate note, the document states, “pension reform is also unlikely to pass in its original form and negotiations of key items are being delayed.”

The reform consists of an individual capitalization framework, offers the choice between private pension fund investments or a new public fund, introduces a novel mixed fund with an additional 6% employer contribution, and raisses universal pension benefits.

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“We note that the government is open to negotiating alterations (enhanced private sector involvement) to garner support,” noted BofA analysts.

No Growth, No Downturn

BofA’s analysts have forecast zero growth for the Chilean economy in 2023, a more moderate outlook compared to the contraction projected by other private entities and organizations.

In addition, the bank’s analysts anticipate GDP growth will rebound to 2.1% in 2024. “Fiscal policy is trending toward expansion, while reduced political uncertainty is buttressing economic activity. However, lingering uncertainty is expected due to ongoing discussions on structural reforms, fiscal pressures, and mining policies (particularly those linked to lithium).”

Projections for Interest Rates “We anticipate a reduction in the monetary policy rate to 8.25% in 2023 from the current 10.25% (further lowering to 5.5% in 2024), with a pace of reduction slower than market expectations. This is attributed to a more gradual decline in underlying inflation and relatively resilient economic activity, bolstered by a favorable production environment,” clarified BofA.

“Our inflation outlook for this year is 4.6%, easing to 3.8% in 2024,” the document concluded concerning price indices.