Stocks plunge, bonds hold steady after Chilean elections

Stocks plunge, bonds hold steady after Chilean elections

Corporate & Sovereign Strategy Bonds Equity Debt Fixed Income IPO Chile Capital Markets

The stock market in Santiago sank more than 6% on Monday but bond prices fared better after left-wing candidate Gabriel Boric cruised to victory in the presidential run-off election on Sunday, highlighting concerns that proposed tax increases will chip away at profits, sources told LatinFinance.

"Most people could see the election result coming. So, if they wanted underweight exposure to Chile, they probably would not wait until this holiday week to try to trade," said Roger Horn, emerging markets strategist at SMBC Nikko Securities.

Boric, a one-time student leader at the head of the Apruebo Dignidad coalition, won 55.9% of the vote in a run-off election to beat far-right candidate José Antonio Kast. Boric had stated repeatedly during the campaign that he would increase corporate taxes to pay for wider social programs.

The S&P IPSA on the Bolsa de Santiago fell 6.18% to 4,088 points on Monday, while Chile's 10-year sovereign yields dropped to 6.07%, according to data from Refinitiv. 

But for Boric to implement his agenda, he has to forge a relationship with a newly elected Congress that is evenly split between a center-right coalition led by Podemos Más and various left-wing parties, Fitch Ratings said on Monday.

Fitch also said Boric's tax plans "may fail to yield the desired results" and "could have negative impact on growth." 

With Boric's victory, social spending will likely rise higher than budgeted for 2022, "although winding down pandemic response measures will see the headline deficit drop by nearly three percentage points to 4.3% of GDP," Fitch said.

In the meantime, a constitutional convention is drafting a new constitution that will be subject to a vote in August next year.

The new constitution could usher in a "more interventionist state" and widen the social safety net in Chile, which "would put further pressure on the fiscal and debt dynamics," Alberto Ramos, head of research for Latin America at Goldman Sachs, said in a note on Monday.

"The tri-partite cohabitation of a new president, a divided Congress and a constitutional convention could prove challenging for governability," Ramos said.

Boric takes office on March 11 next year.