Chile Says No to A New Constitution in Blow to Leftist Leader

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Bloomberg — Chileans rejected a new constitution in a referendum Sunday, dealing a major blow to a three-year campaign to overhaul politics and temper free-market policies that made the deeply unequal society an investor darling.

With 99% of the ballots counted, 62% voted against the proposed charter drawn up over the past year by a popularly-elected convention, compared with just 38% for its approval. Chilean markets are likely to rally Monday. While polls had anticipated that the current more business-friendly framework would be kept in place, they underestimated the landslide result.

The vote was meant to be the culmination of a movement that started with mass protests against inequality in late 2019. Instead, it’s the campaign’s first major defeat and a blow to President Gabriel Boric, 36, who was relying on the new charter to help reform the tax, pension and labor systems, boost social services and cut inequality. The current constitution dates back to the military dictatorship of Augusto Pinochet.

“Boric is left severely weakened,” said Cristobal Huneeus, founder of DecideChile and director of Data Science at Unholster. “No one thought there would be a difference of 20 percentage points. It’s a historic and resounding defeat.”

In televised remarks following the vote, Boric reiterated his commitment to changing the constitution and emphasized that the country’s congress would play a leading role. The president will meet tomorrow with the leaders of both houses and will hold talks with other political leaders during the week. He remains determined to find a way for Chile to come up with a constitution that can meet with wide popular support, he said.

“I’m sure all this effort won’t have been in vain, because this is how countries advance best, learning from experience and, when necessary, turning back on their tracks to find a new route forward,” the president said.

Risk On

Rejection paves the way for Chile’s IPSA stock index to rise more than 10% in coming weeks, while the peso strengthens beyond 850 to the dollar, Leonardo Suarez, director of research at LarrainVial, wrote last week. In fixed income, investors are now likely to shift to riskier corporate bonds and longer-maturity Treasury notes, according to a Bloomberg survey.

Chile’s giant copper and lithium industries will also garner some relief given the proposed charter signaled tougher environmental and community rules.

“The ‘Reject’ victory was bigger than polls had been forecasting,” Sergio Godoy, an economist at STF Capital, said most of the votes had been counted. “The market had been pricing this result, but not completely.”

According to Godoy, the peso could rally as far as 810-82 per dollar on Monday. But for it to stay there, the country needs to move toward a new constitution that is capable of garnering more widespread popular support, he said.

All is not lost for Boric’s administration. The social movement behind the new constitution has convinced parties across the political spectrum that change is needed -- if not the one proposed in this charter.

“The two positions have moved toward the center,” said Kenneth Bunker, political analyst at Santiago-based consulting firm Politico Tech Global. Now, “we are no longer talking about approving or rejecting the proposed constitution, but on how to reform the current charter. There is a growing political center that is likely to reach a solution after the vote.”

Next Steps

Lawmakers passed a bill in August that makes it easier to amend the current constitution, lowering the required legislative majority.

Read More: Boric Faces Big Leadership Test in Chile Constitution Vote

Just 16 months ago, left-wingers and environmental activists dominated the election for the Constitutional Convention. Then, in December, Chileans voted in their most left-wing president in half a century, maintaining the push for change. That momentum is now ebbing away.

In the months prior to the vote, the draft was criticized not only by parties in the political right, but also by key figures from the center-left governments that ruled the country for two decades after the dictatorship ended in 1990.

Critics said the new charter would damp investment and growth, erode essential checks and balances on power and lead to a surge in fiscal spending. Those in favor applauded the inclusion of a swath of social rights, enhanced environmental protection and increased representation for women and indigenous groups.

“This is a very significant political, ideological and strategic defeat for President Boric,” said Mauricio Morales, a professor of political science at Chile’s Universidad de Talca. “It will inevitably fracture the governing coalition.”