Jan 18, 2023
Chile Experts Warn of Unforeseen Risks in Constitution Rewrite
(Bloomberg) -- Chile investors who breathed a sigh of relief when voters rejected a new constitution last year should brace for more months of political grandstanding and bickering as the process kicks off once again, two of the country’s top legal experts said.
The latest version will be outlined initially by a committee of experts and then adapted and approved by an elected assembly, with a potential power struggle between the two bodies, said Gaston Gomez and Francisco Zuniga, who are law professors at Universidad de Chile and have advised presidents and political parties.
“Success is by no means guaranteed,” said Gomez. “Problems can be very near and very serious.”
That means the rebound in bonds and the peso at the end of last year following September’s referendum may prove premature, at least in part. While the new charter is unlikely to include any of the radical rewrites that the first draft involved, such as regional autonomy for indigenous groups, it will prove contentious. Moreover, Chileans have already rejected two constitutions in referendums — the current one that was written in 1980 and last year’s — and they are quite capable of rejecting a third.
At stake is an 19% surge in the peso in the past three months, the best performance of 23 emerging-market currencies tracked by Bloomberg.
The committee of experts will be chosen by congress and may be stacked with political operators instead of the nation’s most brilliant minds, Zuniga and Gomez said in a round-table interview at Bloomberg’s Santiago office. They could then clash with the elected council that will take over the process in June.
“Despite the broad agreement reached by the main political parties for this new process, the pact has risks, such as being perceived as elitist by the public,” said Zuniga.
The design of the constitutional process is already generating skepticism even before writing starts. About 51% of Chileans support the new structure of elected members and experts, while 46% reject it, according to a Cadem survey from December.
Investors will find some reassurance in the guiding principles established in lawmakers’ agreement in December to relaunch the constitutional process, both Gomez and Zuniga said. Those ideals — including respect for private property, central bank autonomy and a two-house congress — will be mandatory in the proposed new charter.
Unlike in the prior attempt, which called for eliminating the senate and making water rights revocable, the guidelines clear the way for a balance between a free-market economy and a “democratic and social state of law,” according to Gomez.
“There won’t be any relevant changes in terms of property, but there will be clauses about royalties on the extraction of public resources in order to finance public spending,” Zuniga said.
At the same time, Gomez and Zuniga cautioned that the guiding principles remain broad and open to multiple interpretations.
The constitutional rewrite is also a chance to improve the presidential system and implement stricter thresholds for congressional representation, they said.
“We have fragmentation in congress that prevents any government or coalition from functioning,” Gomez said. “The president has to agree with more than 15 parties to advance policies, and doesn’t have a majority. These deficiencies in the political system have serious, practical consequences for the country.”
Any surprises or tension during the rewrite stand to catch markets off-guard, as political concerns have been subsiding in the eyes of Chile investors. In November, no analyst cited politics as the driving force behind bond moves for the first time since Bloomberg’s monthly Chile fixed income survey started in April 2021.
The latest poll shows traders paying closer attention to other factors such as President Gabriel Boric’s proposed reforms and a potential debate over new pension withdrawals, rather than the new constitution process.
Efforts to replace the current charter, which dates from the Augusto Pinochet dictatorship, came in response to social unrest in 2019.
--With assistance from Eduardo Thomson.
©2023 Bloomberg L.P.
BNN Bloomberg Picks
What happens if you mistakenly get a larger tax refund?
Is your retirement portfolio ready for what's to come?
Canadians are staring a recession in the face: David Rosenberg
Canadians' wages kept growing in February: StatsCan
Travel stocks: Three hot picks from Michael Bellisario
What mortgage owners need to know about the Bank of Canada's rate pause