What Happens in Chile Doesn’t Stay in Chile: Will the ‘Boric Effect’ Spread Across LatAm?

Gabriel Boric’s victory has sown doubts and caused volatility among Latin American currencies. Will the effect be only temporary?

Gabriel Boric, Chile's president-elect
December 20, 2021 | 09:03 PM

The triumph of left-wing politician Gabriel Boric in Chile, who will be sworn-in as president in March, has heightened the uncertainty among foreign investors, who are evaluating how easily the president-elect’s announcements will translate into reality to decide the future of their investments.

In Colombia, for example, the Gilinski family on Monday morning cast doubts on the viability of purchasing Grupo Sura, a transaction that has been in process for a number of weeks. Bloomberg Línea was able to confirm with various sources close to the bankers that if the family does not manage to acquire 25.34% of the company they will not buy it. In addition to the high premium they are paying, Boric’s triumph in Chile, and who during his campaign had expressed his willingness to eliminate private pension funds, has shifted the goalposts. The Colombian family with investments across the continent also has significant investments in Chile, in Hábitat.

Read More: Chile Assets Tumble After Left-Wing Boric’s Presidential Win

Boric said during his campaign that he would push for an increase in social expenditure financed with greater taxation of 8% of GDP, and put an end to the private pension system. In the run-up to the second round however, he moderated some of his proposals, among them a more gradual increase in taxes.


Fitch Ratings pointed out that, for the new government, Congress will determine whether his proposals become a reality, and Boric does not have a majority in Congress, which is divided among left and right.

“We see fiscal risks in Boric’s platform, which seeks to increase tax revenues, including a tax on the rich, increased taxation on mining royalties, and the reduction of exemptions to increase spending where that can be difficult to achieve. The improvements sought by Boric in tax administration (an increase of 2.5 percentage points) may not achieve the desired results. Furthermore, the sharp tax increases that Boric seeks could have a negative impact on growth,” Fitch said.

These have not been easy hours for Chilean markets. Around midday Monday in Santiago, the S&P IPSA had registered a drop of 3.40% to 4,209.60 points, with a trend toward moderation during the day after shedding 7.7% at opening.


The effects have also been felt on the exchange market. The price of the U.S. dollar has shot up to record levels, rising by around 30 Chilean pesos to $872 and, according to analysts, with a rising trend that could touch $900.

Other Latin American markets have also had an irregular day. The Colombian peso, for example, dropped 0.6% against the dollar and was trading above 4,000 pesos, while the Peruvian sol weakened around midday by 0.2%.

The question being asked in the markets is whether the uncertainty surrounding Boric’s election in Chile could extend to other countries, with the Chilean economy having been among the Latin American economies to experience the strongest growth since the pandemic. Chile’s central bank expects GDP to expand by 12% this year.

Analysts consulted in diverse countries of Latin America express varied opinions, especially regarding how long the uncertainty may last, and whether it will contaminate other markets.


“Although it is an idiosyncratic risk, I don’t expect it to spread across the region. It is normal to see volatility amid the region’s electoral processes, but going forward it will become more moderate as the changes proposed by the new government must find consensus in Congress. We are seeing the Chilean peso almost reach the highest levels of March 2020 when the pandemic was just taking hold around the world, which means the country’s currency has already suffered excessively,” said Wilson Tovar, head of economic research at Acciones y Valores in Colombia.

Nevertheless, there are those who see a regional contagion, albeit temporary. “Initially, it’s clear that there will be a depreciation in Chile as the first announcement regarding the pension system will generate withdrawals because much of those savings are invested from abroad. On the risk side, there will surely be some contagion, and that could be faster. What will not happen is a flight of dollars, but there will be some noise,” Munir Jalil, of BTG Pactual in Colombia, said.

Read More: Left-Wing Rage Threatens a Wall Street Haven in Latin America


For his part, Juan David Ballén of Casa de Bolsa in Colombia, said: “One expected there would be a lower opening, and it’s down 3%, but we still don’t know who will be in his cabinet and what their positions will be, although we know there will be a lot of changes in comparison with traditional politics. Over time we will see this reflected in the exchange rate, and if they are extremists there will be a more punished exchange rate, and if they are more moderate, as has happened in other countries of the region, there will be a less pressured rate. It’s interesting that it is a more moderate fall, but it’s only just the beginning”.

What Do They Say in Mexico and Argentina?

Bloomberg Línea also spoke to analysts in Argentina and Mexico. Javier Marcus, who holds a master’s degree in economics from the Universidad de Buenos Aires and is business and international relations manager at Southern Trust, said the situation is very similar to when Lula was elected president of Brazil. “There was an initial fear that then dissipated, and this seems to be much clearer in the Chilean context where the institutions are much stronger, and which was seen in the message from the current president and in the acknowledgement of defeat by Boric’s opponent, with both making calls for unity and dialogue”, Marcus said.

He also said the uncertainty in the markets will not have a big impact on Argentina. “In the case of Argentina, even though the Chilean exchange rate could affect us, in the context of the crisis and the renegotiation with the IMF, there are other factors that are substantially more important and decisive, and it initially only seems to be a very short-term noise”, he said.

As regards Mexico, he said the result of the Chilean presidential elections began to be felt on the Mexican peso since Sunday, as a currency that is traded 24 hours, unlike the Chilean peso.


The Mexican peso began to depreciate and edged toward the technical level of 21 pesos to the dollar, a trend that began to reverse once the Chilean peso began trading. “That nervousness that emerged overnight was due in part to what was happening in Chile,” Gabriela Siller, director of economic analysis at Grupo Financiero BASE, told Bloomberg Línea.

Some analysts also pointed to the fact that the market volatility could continue amid the uncertainty surrounding the future economic policy of the new Chilean government. ”This kind of uncertainty means that we need, more than anything, a prompt message so that we can know what to expect”, Jorge Molina, an academic at Mexico’s Instituto Tecnológico de Estudios Superiores de Monterrey (ITESM), said. “These hikes and falls in the exchange rate and the stock exchange will continue, and are not good for anyone”.

According to Molina, due to the free market tradition in Chile, a potential shift toward more left-wing or populist policies will have an effect on its main trading partners, such as Argentina, Brazil, Colombia, Peru and Ecuador.