(Bloomberg) -- Chileans rejected a new constitution in a referendum Sunday, dealing a major blow to a three-year campaign to overhaul politics and temper free-market policies while handing a stinging defeat to the presidency of Gabriel Boric.
With 99% of ballots counted, 62% voted against the proposed charter drawn up over the past year by a popularly-elected convention, with just 38% in favor. While polls anticipated that the current more business-friendly framework would be kept in place, they failed to predict the landslide result. Chilean markets are likely to rally Monday.
The vote was meant to be the culmination of a movement that started with mass protests against inequality in late 2019. Instead, it’s the campaign’s first major defeat and a rebuke to Boric, 36, who was relying on the new charter to help reform the tax, pension and labor systems, boost social services and reduce inequality. The current constitution dates to the military dictatorship of Augusto Pinochet even if it had experienced changes over the years under democracy.
“Boric is left severely weakened,” said Cristobal Huneeus, founder of DecideChile and director of Data Science at Unholster. “No one thought there would be a difference of 20 percentage points. It’s a historic and resounding defeat.”
The fact that more than 85% of the electorate participated and that the “No” vote won even in urban centers like Santiago, a stronghold for the left, made the loss all the more resounding for the six-month-old government.
In televised remarks following the vote, Boric reiterated his commitment to changing the constitution and emphasized that the country’s congress would play a leading role. The president will meet Monday with the leaders of both houses and will hold talks with other political leaders during the week. He remains determined to find a way for Chile to come up with a constitution that can meet with broad popular support, he said.
“I’m sure all this effort won’t have been in vain, because this is how countries advance best, learning from experience and, when necessary, turning back on their tracks to find a new route forward,” the president said.
Rejection paves the way for Chile’s IPSA stock index to rise more than 10% in coming weeks, with the peso strengthening beyond 850 to the dollar, Leonardo Suarez, director of research at LarrainVial, wrote last week. In the fixed-income market, investors are likely to shift to riskier corporate bonds and longer-maturity Treasury notes, according to a Bloomberg survey.
Chile’s giant copper and lithium industries will also garner some relief given the proposed charter signaled tougher environmental and community rules.
“The ‘Reject’ victory was bigger than polls had been forecasting,” said Sergio Godoy, an economist at STF Capital. “The market had been pricing this result, but not completely.”
According to Godoy, the peso could rally as far as 810-820 per dollar on Monday. But for it to stay there, the country needs to move toward a new constitution that is capable of garnering more widespread support, he said.
The defeat will also likely lead to cabinet changes in the short term in an attempt to strengthen not only the new constitutional process but also Boric’s agenda in congress, Eurasia analysts led by Maria Luisa Puig said.
“The president is likely to announce changes in his team in the coming days, which would probably include a greater presence of center-left parties in a bid to boost public support and political leverage,” they wrote.
Still, all is not lost for Boric’s administration. The social movement behind the new constitution has convinced parties across the political spectrum that change is needed -- if not the one proposed in this charter.
“The two positions have moved toward the center,” said Kenneth Bunker, political analyst at Santiago-based consulting firm Politico Tech Global. Now, “we are no longer talking about approving or rejecting the proposed constitution, but on how to reform the current charter. There is a growing political center that is likely to reach a solution after the vote.”
Lawmakers passed a bill in August that makes it easier to amend the current constitution, lowering the required legislative majority.
Why Chile’s Draft Constitution Has Come Under Attack: QuickTake
Just 16 months ago, left-wingers and environmental activists dominated the election for the Constitutional Convention. Then, in December, Chileans voted in Boric, their most left-wing president in half a century, maintaining the push for change. That momentum is now ebbing away less than six months since Boric’s inauguration on March 11.
In the months prior to the vote, the draft was criticized not only by parties on the political right, but also by key figures from the center-left governments that ruled the country for two decades after the dictatorship ended in 1990.
Critics said the proposed charter would damp investment and growth, erode essential checks and balances on power and lead to a surge in fiscal spending. Those in favor applauded the inclusion of a swath of social rights, enhanced environmental protection and increased representation for women and indigenous groups.
“This is a very significant political, ideological and strategic defeat for President Boric,” said Mauricio Morales, a professor of political science at Chile’s Universidad de Talca. “It will inevitably fracture the governing coalition.”
(Updates with participation data in fifth paragraph, analysts comment from 12th paragraph.)
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