Chile’s next president will have to deal with a fragmented Congress and negotiate agreements to move forward with bills, after neither the right nor the left won a majority in Sunday’s elections.
The divided result in the Legislature could represent an obstacle to the pro-growth and crime-fighting agenda of conservative presidential candidate José Antonio Kast, favorite to win the December 14 runoff against communist rival Jeannette Jara.
Still, markets reacted positively on Monday with expectations that Kast will take over as the South American nation’s next leader in March. The Chilean peso rose as much as 1.8%, while the IPSA stock index advanced 2.8%.
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In the vote, right-wing coalitions won 76 of the 155 seats in the Chamber of Deputies, but can secure a majority on key issues if they can win support from like-minded parliamentarians. A likely block of votes would come from the populist Partido de la Gente (PDG), which shares the same vision on fighting crime and restricting immigration. PDG won 14 seats.
In the Senate, the right took 25 of the 50 seats.
“Crucially, the right-wing acronyms were unable to achieve legislative majorities in both houses of Congress, which complicates the advancement of their agenda and requires negotiation and consensus building with left-wing opponents,” BTG Pactual analysts wrote in a note to clients this Monday (17). “Still, it constitutes a relative setback.”
The growing fragmentation in the Chilean Congress has made governability increasingly difficult. Current president Gabriel Boric was unable to approve important reforms that were pillars of his campaign, as his coalition did not obtain a majority. Kast would face similar obstacles.
In the final weeks of the campaign, Kast hinted that he could govern by decree. His advisors also highlighted that existing laws, if fully implemented, would help make his security and economic growth agenda viable.
His proposal to reduce corporate taxes is one that could face impasse in the Senate. Kast promised to reduce corporate tax from 27% to 23% for medium and large companies, with an additional 3% reduction for those that hire less qualified workers, at risk of migrating to the informal market.
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“Getting this approved is more complex and will require an eventual Kast government to form a legislative majority,” LarrainVial analysts wrote in a note on Monday. “Advancement in spending cuts would help reduce chronic fiscal deficits, if revenue remains stable.”
Kast beat other right-wing candidates to secure a spot in the second round, and received support from center-right rival Evelyn Matthei and libertarian Johannes Kaiser on Sunday night. Still, it received less than a quarter of the votes, which will require negotiation to maintain that support. PDG candidate Franco Parisi did not declare support after winning a fifth of the votes.
“In 2021, Parisi came in third place and ended up supporting Kast, but the second round results showed that more voters chose Gabriel Boric. This time, Parisi may make it difficult, trying to capitalize on his surprisingly strong support,” BBVA strategists including Alejandro Cuadrado wrote in a note to clients on Monday.
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Reducing bureaucracy in environmental licensing, another point on Kast’s agenda, should be easier to approve in Congress. During the campaign, almost all candidates expressed support for simplifying the process, seen as a way to stimulate investments.
The flexibility of licensing would benefit the mining sector, key to the Chilean economy, according to BTG. “These advances are likely to create a favorable investment environment and generate positive market response.”
Citi, however, adopted a cautious tone after the right failed to win clear majorities. The result reduces “expectations of progress in structural reforms” essential for economic growth, bank analysts, including Paloma Echeverria Paul, wrote in a note on Monday.
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