Swiss Bank Julius Baer: “Regardless of the presidential result, Chile’s fiscal position will continue to deteriorate”

RIO DE JANEIRO, BRAZIL – A report by Swiss investment bank Julius Baer on the impact of the presidential elections on the Chilean market provides a less than encouraging view.

One of its main conclusions is that “Chile’s fiscal position will continue to deteriorate, as increased social spending is at the top of all candidates’ agendas”.

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In addition, the report notes that “the new Constitution, together with a fragmented Congress, will be the main problems that the new President will have to face”.

The bank expects that “markets will slowly focus on Chile’s fiscal deterioration and downgrade risk for Chilean fixed income. Credit default swaps and implied bond ratings have already priced in the risk of a five- and three-tranche downgrade, respectively, but we expect volatility to continue after the elections, as the new President will seek to materialize his electoral agenda. Therefore, the current environment does not seem sufficiently attractive to us.”

Regarding Chilean equities, Julius Baer says that “there has been a significant price correction since early September, along with other asset classes. They have been losing value significantly in recent weeks (e.g., the MSCI Chile index is down 4% in the last month in US$ terms).”

Despite the discount in equities, they do not see a buying opportunity in domestic equities. “We prefer to stay on the sidelines with respect to the political landscape, considering how polarized the political race is,” the report states.

BORIC AND THE RISK OF HIGHER SPENDING

Julius Baer mentions that the candidate most likely to win is the left-wing representative, Gabriel Boric.

The document highlights Boric’s proposal to increase the tax burden by 8% of GDP to finance higher spending on education, pensions, health and other social rights.

Regarding the program of the Apruebo Dignidad candidate, it indicates that “the plan seems very ambitious, especially the tax reforms, and there is a risk that the new higher spending will be implemented before the new tax money arrives to finance it, thus damaging the country’s fiscal position”.

KAST: “LESS PASSIONATE ABOUT SOCIAL SPENDING”

On the Social Christian Front candidate, José Antonio Kast, the Swiss bank, describes him as “conservative” and says that he has seen an upturn in popularity in recent weeks, implying Boric’s primary opponent.

Regarding his program, the bank states that “the economic policy plan presented differs significantly from Boric’s, with more emphasis on cutting taxes for companies and reducing the size of government”.

In this line, he affirms that “by promoting an open economy, Kast is less passionate about social spending compared to the policies of the other candidates”.

Even so, he details that his ideas include measures such as a negative income tax of 17% for people earning above the minimum wage, but below the tax exemption limit.

SICHEL AND PROVOSTE

“Sebastián Sichel and Yasna Provoste, candidates for the center-right and center-left parties, respectively, appear to be lagging in the political race,” warns Julius Baer.

The report describes Provoste as “more inclined towards Boric” and summarizes her proposals as seeking the “establishment of a broader welfare state in which the state would increase its transfers and guarantee basic services, such as water, health and education”.

On Sichel’s side, the Swiss bank highlights that he would “increase public revenues in a more progressive tax system (higher wealth and property taxes and a lower income tax threshold), as well as tax products and activities that harm the environment”.