Home Research Bank of America With Chile Choosing a President in Weeks, BofA Sees a ‘Twilight Zone’ Post-Election Scenario of Rising Debt and Low Growth

With Chile Choosing a President in Weeks, BofA Sees a ‘Twilight Zone’ Post-Election Scenario of Rising Debt and Low Growth

With Chile Choosing a President in Weeks, BofA Sees a ‘Twilight Zone’ Post-Election Scenario of Rising Debt and Low Growth
Santiago, Chile. Courtesy of Pixabay.com

NEW YORK — Bank of America is sounding the alarm on a country which used to be Latin America’s poster child. With Chile preparing for the first round of general elections on November 21, the financial institution is flagging concerns about the short-term future. And the outlook is complex.

In a research note titled “Chile: The Twilight Zone” the bank sees a post-election scenario marred by a weak macroeconomic environment and debt built-up. “We are negative on macro and institutions outlook”, eight analysts wrote in the report dated October 27, “given social tensions, political fragmentation, challenging starting fiscal situation and constitution/elections uncertainty.” And the macro deterioration will likely come with “rising debt, downgrades and low growth,” for the next presidential period, the timeframe of the three scenarios discussed in the note.

“We see a significant debt build up and risks of credit downgrades in most likely scenarios with debt-to-GDP ratios rising to between 50-55% of GDP by 2025,” analysts including Jane Brauer, Sebastian RondeauGabriel Tenorio, and Claudio Irigoyen said in the 22-page study. In tandem, “new social spending should slow down fiscal consolidation while tax reform will take time.”

With the elections around the corner, the leftist candidate Gabriel Boric from the Broad Front (Frente Amplio, FA) seems to have the biggest lead in the polls. Still, the far-right José Antonio Kast is also rising fast, and as the center-right begins to crumble, all signs point to a highly polarized contest, Jacobin.com reported Wednesday on its website.

Kast, a former congressman once seen as a fringe candidate, now leads at least one major poll and is second in others, Americas Quarterly reported on Tuesday. While polls suggest Kast would lose in a runoff to Boric, the race has tightened substantially in recent weeks, according to Cadem, the quarterly said. Yasna Provoste (DC – Nuevo Pacto Social), Sebastián Sichel (IND – Chile Podemos Más), Eduardo Artés (Unión Patriota), Marco Enríquez-Ominami (Partido Prograsista) y Franco Parisi (Partido de la Gente) are also running in the contest.

Source: Bank of America, LatAm Economic Viewpoint, 27 October, 2021.

A Challenging Fiscal Starting Point

The new government will take office in March and the elected president “will face a challenging starting point and policy dilemmas,” according to Bank of America. “The constitutional process and the pandemic put protests on hold for a while, but underlying social tensions and inequality remain. Most candidates are proposing higher social spending and tax burdens, starting from a complex fiscal deficit situation and an overheated economy. The constitution draft process adds further risks to the economic model and investment outlook,” the analysts said in the report.

Chile’s fiscal deficit situation “is extremely fragile due to a bad starting point and spending pressures,” the note says. Fiscal deficit may reach 8.2% of GDP this year, partly due to the pandemic, and the nation’s revenue is projected to drop close to 2% of GDP due to extraordinary income in 2021, one-offs and cyclically high consumption. This will leaving the new administration with a starting point of a deficit around 10% of GDP in 2022, according to the report.

Following the protests erupted on October 2019 the government will continue to deal with spending measures from the population. “Chile’s political instability and social demands are putting heavy pressure on the new government to increase spending permanently (vs pre-pandemic). We expect the new constitution draft to include details on social spending that could make the budget more rigid.”

In addition, government debt is set to rise substantially, the analysts argue. While government debt is still low vs other Latin American nations, at gross 35% of GDP this year, will rise to 40% in 2022 and as much as 50% of GDP by 2025, when the new presidential term will expire. All that while the government’s reserve cushion is declining, with stabilization funds plummeting to $10bn vs. $23bn in 2019.


Chile’s economy is rebounding after contracting 5.8% in 2020 and Bank of America forecast a 10.6% gross domestic product growth for this year, in line with the 11% expansion recently projected by the International Monetary Fund.

“Policy uncertainty amid the political transition and constitutional draft, as well as a higher tax burden, should reduce potential growth substantially,” in the South American nation, BofA said. For 2002, the bank sees GDP growing 2% with inflation easing its march to an annual rate of 3.6% vs the 5.6% projected by the bank for this year.

The bank expects Chile’s central bank to apply another 75bps rate increase this year to take the policy rate to neutral territory of 3.5% from current level of 2.75%, “though we see risks tilted to a 100-125bp hike if the 4th pension withdrawal passes congress.”

Source: Bank of America, LatAm Economic Viewpoint, 27 October, 2021.

Also relevant:
* Who’s Who in Chile’s 2021 Presidential Race: AS/COA
* Chile, an Overview: CRS Reports U.S. Congress
* Left-Wing Rage Threatens a Wall Street Haven in Latin America
* Chile Elects Left-Leaning Assembly to Replace Dictatorship-Era Constitution


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