JULY-2-PRIMARIES-THE OUTCOME
Country Risk Chile analyzes the voting results of July-2-primary elections in Chile. Against macro-level constraints and micro-level pressures, what are the risks and opportunities each candidate will face if elected President in November?
The warm-up:
Sunday, July 2 seemed to be a particularly difficult day to call on citizens to cast their votes and that way “democratize” the selection of coalitions winners. On Sunday, July 2, Chileans were getting ready to watch the final match between Germany vs Chile held in Russia for the Confederations Cup. Chile was aiming to beat the Germans to obtain the world’s title.
La Roja national team had gained momentum and threatened to further alienate voters, against efforts to invigorate an already ailing participation in the ballots. The traditional center- right coalition Chile Vamos (CV) feared low participation and expressed serious concerns about their ability to rally supporters. The newly - created radical left coalition Frente Amplio (FA) looked forward to testing the impact of their ideas via increased turnout in order to claim political leverage. Both La Roja and Political Coalitions had waited for over 20/25 years to see this unprecedented day come true but in different areas. Both seemed to stand as rivals in the way Chileans would show their allegiance. Would it be a passion for football, or would it be the rational thinking to cast a vote? In the end, despite a brilliant match, Chile's "plus belle sélection du monde" lost the game in a 90-minute breath-taking match. Germans' only goal sent a big blow to Chile's national pride. Against all odds and contrary to all fears, Chileans did show up to cast their vote for the sake of national interest nonetheless. In total, 1.812.077 voters turned out.
Back in June, Country Risk Chile had analyzed the risks and opportunities ahead of elections and explained the reasons for the absence of pre-candidates from the governing center-left coalition Nueva Mayoria (NM). Persistent efforts to bring in Carolina Goic representing NM's Christian Democracy (Democracia Cristiana, DC party) and independent Alejandro Guillier representing the NM’s socialist wing did not come to fruition. In the end, DC Goic did not back down from her plea to run in the November presidential elections. The reasons? What seems to be an insurmountable gap with the extreme left in the NM Coalition on issues of principle-oriented relevance for DC, and the widening of ideological differences. Such issues include a stronger condemnation over Venezuela’s Maduro and/or Cuba’s entry denial to DC Mariana Aylwin just recently, among others.
DC gradualist reformers are standing firm on their principled-positioning aimed at “getting back the political center”.
What did the NM Coalition come to lose? Due to stringent legislation passed in 2016 to upgrade campaign financing and party formation, primary candidates would each be given a free TV spot to air their programs. Candidates were invited to extensive debates on TV and radio programs to explain and debate their ideas in panels, forums, and talk shows. The Governing centre-left NM Coalition stood to lose visibility and possibilities to present their program and the robustness of their programmatic ideas. Primaries tested candidates knowledge on world’s affairs with the pressure of presenting solid numbers and data during the cross-examination by the public and the media and for TV viewers. Debates demanded rigorous answers on budget allocation and confronted the utopia spells as well as dystopian phantoms.
The outcome:
As expected from data from different opinion polls (Cadem, Cerc Mori, Cep, Adimark), ex-President Sebastián Piñera has become the official Candidate for the Chile Vamos Coalition to run for the Presidential seat in November elections. Right-wing turnout was around 1.418.138 votes in line with the expected response to the polarization of political offers: a center-right program versus a radical left appeal (with the absence of NM candidates). In total, RN Piñera obtained 827.434 votes, ex-RN Manuel Jose Ossandón obtained 372.215 (roughly what the Frente Amplio’s 2 candidates obtained together) while Evopoli’s Felipe Kast obtained 268.849.
Frente Amplio’s journalist Beatriz Sánchez obtained 221.416 votes beating sociologist Alberto Mayol, with only 106.300. Thus Sánchez has become the official FA candidate to run in the presidential elections in November. In total 327.716 Frente Amplio voters turned out. (SERVEL official data).
It is worth noting that FA’s 327.716 votes in the primaries July 2 show the bottom-up surge to grasp 20% of transnationals, call for a General Assembly to write a new Constitution, and to repeal the current pension system (AFP) has not moved beyond the initial constituency (social movement leaders, the students' movement, anti-AFP leaders).
Making sense of the numbers:
Market Reaction. The right-wing turnout of almost 1.500.000 voters has triggered a boost in shares. The IPSA index reacted positively to ex-President Piñera’s lead in the primary elections. Expectations for a comeback of a decisively pro-growth candidate has been well received by the market. The stock rally points to the belief that a growth-focus rather than a reform drive is likely to reassure the confidence “sentiment” of investors planning or thinking of transferring their capital to Chile. Locally, economic stakeholders believe Piñera’s lead is sending a strong message to global markets, one in which Chile has finally put the reformist agenda behind and it is moving to boost the economy back to the great days of annual 5% GDP. BMI research group estimates Piñera will be elected on a second round.
Objects in the mirror larger than they may appear. The absence of NM candidates produces the effect of objects in the mirror larger than they appear. As explained, the centre-left governing coalition NM didnot participate in the primaries. Nueva Mayoria's Alejandro Guillier and DC Carolina Goic will be running in the Presidential elections in November along with independent ME-O (Marco Enríquez Ominami, Pro), independent Jose Antonio Kast (UDI). On the sidelines, and as with what is a trend in voluntary voting in capitalist democracies today, apathy has been running high and Chile is not an exception. Low confidence in political parties and on political institutions reached a crisis with the cases of tax fraud and illegal campaign financing in 2016 (a tiny bit compared to Brazil’s corruption cases according to Bloomberg).
It is still fresh in citizens’ minds, the 2016 cases which brought one former Piñera’s cabinet member and right-wing UDI's iconic leader, either indicted or under investigation. Issues of ethical significance at a time of political parties’ attrition affecting the whole of the political spectrum, and in particular, the controversy over Piñera’s off-shore companies, has been used by Ossandon as ammunition to rally anti-establishment sentiments over the issue of money and politics and conflict of interest. Thus, the programmatic debates between Ossandon, Kast, and Piñera on TV, has provided Ossandon's anti-elite rhetoric, with the opportunity to go after Piñera’s Achilles’s heel. Only in 2016, stringent legislation upgrading ethical standards, austerity in campaigns and banning private companies from donating to candidates was enacted as part of Bachelet’s package of reforms. Hence, the revived interest in fixing the debate on the issues of ethics and expectations for strong condemnation on fraud cases. Ossandon’s 372.215 votes may well be construed as a punishment vote against the establishment and may well cross from the right to the center of the spectrum, even capturing NM’s disillusioned grassroots. DC Goic's decision to skip primary elections and go straight to the November elections also left her candidacy out of the visibility that primaries supplied, but in the wake of July 2 results, Goic has made a public appeal to Ossandon's supporters to join her campaign. Goic claims Ossandon's 372.215 voters capture the center of the political spectrum because they did not vote for Piñera. According to CEP pollster, around 25% of Ossandon voters in the first round would swing allegiances to NM’s Guillier in the second round (and 56,3% of Sanchez's voters would vote for NM's Guillier on the second round). Ossandon has explicitly stated he wishes for a “face to face” meeting with Piñera to negotiate his votes, not through Piñera's spokesman, and that once they meet, his final decision will be delivered.
Going for a second round. NM’s Guillier (NM's socialist wing: PS, PPD, PR, PC) is expected to run against CV’s Piñera in the second round. But some recent polls show FA’s Sanchez might be jumping to the second round rather than Guillier, who missed the opportunity to present his programmatic proposal to citizens during the primaries. On July 3 Cerc-Mori projected a slim advantage for Guillier as the most competitive candidate to beat Sebastian Piñera, but with a 46% "perception" that Piñera will be the next President of Chile.
RISKS & OPPORTUNITIES
Macro-level constraints:
Growth concerns. Chile is experiencing a record-low GDP, barely reaching 1.5% this year, according to the latest projection based on IMACEC figures. The end of the super commodity cycle has taken its toll on growth levels. The ambitious NM Reform Agenda has somehow contributed to affect investors’ sentiment (IMF) and copper revenues have inflicted a limited fiscal expenditure. Despite the 2008 and 2009 financial crisis, Chile has shown resilience thanks to counter-cyclical measures and the fiscal rule in place. The difficult task of combining fiscal expenditure on social demands (free access to university students coming from the lowest quintiles of society) and complying with fiscal austerity in times of low-record copper prices has put extra pressure on Government's adherence to the fiscal rule. In December 2016, S&P changed the outlook from stable to negative for Chile, so did Fitch Ratings, and just recently came the announcement they might downgrade Chilean financial resilience from its current ratings (S&P from AA- to A+, then Fitch from A+ to A, then Moody's from Aa3 to A1). Chilean economist and former Central Bank President, José De Gregorio highlights Chilean institutions’ concerns with the country’s fiscal reputation voiced on the media, as a political asset, to get Chile on the move for solutions but also points to structural problems behind low investment levels and not only due to the effects of the reforms agenda. In that line, Coface Chile Country Report 2016 - 2017 points to heavy dependence on copper revenues as a major risk.
However, this would be a downgrade not seen in 20/25 years in Chile. How serious could that be? According to specialists in the banking sectors, a downgrade speaks for the difficulties they see in Chilean efforts to trigger growth and balance fiscal revenues versus social demands. Central Bank’s President Mario Marcel refers to the present situation and underscores the importance of keeping our ratings unaltered. Marcel and Finance Minister, Rodrigo Valdés, point to strong institutions in Chile as an indicator of stability and growth projection, regardless of who wins the presidential elections. Marcel recognizes a projected GDP recovery in 2018 is due to external factors such as greater import capacity from social partners, but it will be in the realms of public policy where efficiency and quality of policies have the greatest impact. Former Finance Minister, Andres Velasco argues the boom of commodities is "unlikely to return", and that Chile and Latin America need "new export products". In words of Velasco, "a bit of modern, unorthodox, industrial policy could prove useful". In other words, the heavy dependence on copper revenues should give way to new pools of development to foster growth, one that triggers innovation.
Macro-level opportunities:
Various consulting firms on business climate, nonetheless, have estimated Chile will see a recovery as of 2018 since Chile's developed commercial partners such as EU and the USA are making a bigger recovery and will start importing more from Chile. Then China’s one road, one belt initiative will imply investment in infrastructure in Asian countries, affecting Chile positively. The four members of the Pacific Alliance (Chile, Peru, Colombia, Mexico) had their XII Summit in Cali, Colombia June 28 -July 1. Chile has been pursuing an agenda with ex-TPP member countries to revive the mega-bloc. Since their meeting in Viña del Mar early this year and as result of Trump's America First precepts, the PA has pushed for a greater role in the Asia-Pacific Rim and against protectionism. Steps towards bridging the structural heterogeneity include mentoring and providing SME's with the tools to enhance their entrepreneurial capabilities. An ambitious agenda to bring the trading bloc to achieve robustness and worldwide economic impact include (1) the creation of "associate members" to incorporate Australia, New Zealand, Singapur and Canada, into the bloc, and (2) the removal of taxes on pension funds to lure investment on infrastructure, thus fulfilling major gains for future-to-be pensioners and boosting development. The Chilean drive also includes a bilateral agreement with Argentina and encouraging the PA trading bloc to reach accords on areas of convergence with MERCOSUR.
The nativist drive in Brexit and in America today give actors the possibility to strive for enhanced cooperation at the service of their populations. That is the case with the PA and the possibility to increase trade in the Asia-Pacific rim.
Micro-level pressures:
Ex-President Piñera's lead in the polls is already building expectations to boost investors' confidence. His pro-investment program and growth-focus agenda will find limitations if it is construed as a radical shift to orthodox neo-liberal precepts. On one hand, students' movements are likely to continue (their goal is to reach universal gratuity as they see education as a social right). Assuming Acemoglu and Robinson (2013) are correct in terms of institutions and "political equilibrium", the Agenda of Reforms carried out during Bachelet's four years in power have contributed to tilt the equilibrium of forces and affected the original distribution of power that the NM Coalition encountered back in 2013. In other words, reversing the path of reforms is likely to cause a backlash, but perfecting technical aspects for the sake of efficiency is the only course of action. Indeed, Country Risk Chile has seen the empirical evidence of these theoretical precepts in action. First Sebastián Piñera announced he would repeal Bachelet's 2nd generation reforms, then he criticized gratuity, he then added that a typical family budget of Ch. $ 600.000 was fit to pay for university fees (roughly pre-graduate tuition fees may well cost around Ch. $ 300.000 to Ch. $ 400.000 and more). Eventually, Piñera announced he would respect gratuity for the 50% most vulnerable students. President Bachelet promised to reach the 60% by 2018. On the other hand, the Pension Fund System will have to be seriously reformed due to structural problems prompted by pensioners' longevity and scarce savings during work life. The "no +AFP" movement (or "repeal the Pension Fund" movement) points to the system's lack of legitimacy and in the current scenario of empowered middle classes, mobilizations will continue to take place.
The Mapuche ethnic cleavage and conflictive relationship in the 9th region will continue to re-appear with episodes of unrest. ENELA's summit July 7 in Temuco enjoyed the participation of candidates DCGoic, ME-O from PRO, and Jose Antonio Kast, UDI, only. It was unfortunate leading candidates were not present to debate on this issue.
A recent-PNUD "Desiguales" research reveals Chile has made considerable progress to beat poverty in 20/25 years of democracy, but the income-gap and segregation still persist pointing to inclusiveness and meritocracy barriers. James Robinson refers to these barriers as "informal institutions", which he described on a visit to Chile in 2013 as harder to dismantle and diffuse as they are invisible.
Micro-level opportunities:
Just recently, key entrepreneurial elite figures (SOFOFA leaders) announced lessons would be learned from recent cases of duopoly cartels and illegal campaign financing affecting the image of entrepreneurs. PNUD's research back in April 2015 pointed to the "politicization" of the Chilean society, underscoring the gap between elite and non-elite actors. Therefore, an inevitable "social axis" (with their "pro-market axis") will necessarily enter the right-wing programmatic offer if they seriously aim to keep stability.
Chilean preoccupation with a downgrade in ratings not seen in 20/25 years has become a great source of anxiety for stakeholders. Therefore, there is a "window of opportunity" to focus on growth, productivity, and innovation in modernizing our economy. The opportunity to reduce the structural heterogeneity through greater incentives and tools for SME's is key. Seizing Bachelet's legacy to align with a worldwide shift to cleaner energy will strengthen the pool of investment in the north, with lithium exploitation tied up to added-value investment, to boost solar power energy and invest in a grid that not only provides the wind, solar energy to the whole country but which can be also exported.
The world of tomorrow does not look any different for Chile than it does for the developed world today. Inclusive, sustainable growth calls on innovative thinking, away from the orthodoxy of market-friendly precepts.
Soledad Soza, July 8, 2017
