Tricky Chilean Congress, weakening economy await Bachelet

By Alexandra Ulmer and Rosalba O'Brien SANTIAGO (Reuters) - Chile presidential favorite Michelle Bachelet is seen strolling to victory in next month's run-off vote, but she will face an uphill battle to push through an ambitious reform program and is set to inherit a weakening economy. Bachelet, Chile's first female president from 2006 to 2010, fell short of a decisive victory in Sunday's first-round election. She is expected to easily beat the governing right-wing's presidential candidate, Evelyn Matthei, in the run-off vote on December 15. Center-left Bachelet won just under 47 percent of the vote on Sunday, just under the 50 percent she needed to avoid a second round. Matthei took 25 percent, bettering many forecasts. Although Bachelet's coalition increased the number of seats it had in Congress, it failed to gain the significant majorities it needs to pass many of its planned reforms. Bachelet will now need to woo independents to block the right's veto power and hope grassroots support for her plans to reform education by increasing taxes will translate into backing in Congress. Bachelet's diverse coalition, which ranges from the Communist Party to the moderate Christian Democrats, will also need to be kept in check. And she will have to navigate all these tensions at a time when Chile's economy is cooling. The central bank has forecast growth in Chile of between 4.0 and 4.5 percent in 2013, down from 5.6 percent in 2012. The export-led economy showed a mild pickup in the third quarter but domestic demand, which has helped fuel growth in recent years, expanded a meager 1.3 percent, data showed on Monday. "With investment weakening and the current account deficit uncomfortably wide, Michelle Bachelet ... is set to inherit an economy which has become increasingly vulnerable to external shocks," said Michael Henderson, emerging markets economist at Capital Economics. "A sudden and sustained fall in the price of Chile's key export, copper, could cause the deficit to blow out, requiring a sharp reduction in domestic demand," he added. If elected, Bachelet will join a triumvirate of female South American leaders who have risen to the top of the political tree years after becoming radicalized under repressive regimes. Like Brazil's Dilma Rousseff, Bachelet will have to juggle growing discontent among the middle class with a slowing commodities-driven economy. Bachelet's policies are in line with a regional shift towards center-left governments as populist leaders, such as Argentina's Cristina Fernandez, lose ground. CONGRESS CHALLENGE Under Chile's unusual electoral system, a dictatorship-era creation which gives the second-place party a bloated presence in Congress, Bachelet's Nueva Mayoria coalition never nurtured much hopes of sweeping the legislative body. Bachelet's bloc has clinched the simple majority it needs to pass certain planned reforms, including a hike in corporate taxes, the closing of a business tax loophole and the creation of a state-run pension fund. In order to secure the four-sevenths majority required for education reform - a hot-button issue which has triggered massive student protests - Bachelet will need to butter up independents to lend their support. That will include several of the ex-leaders of those very protests, who have now entered Congress and find themselves transformed overnight from student leaders to kingmakers. And there is not much point in having tax reform without the education reform it is intended to fund, analysts say. Meanwhile, the leftish coalition is a way short of the three-fifths necessary to change the electoral system and the two-thirds needed to strike down the constitution which dates from Augusto Pinochet's military rule, both Bachelet pledges. The election outcome meant short-term sweeping changes were less likely, said Goldman Sachs analyst Tiago Severo. "The stronger performance of Bachelet vis-a-vis her allies running for Congress suggests her popularity may owe more to personal traits rather than the identification of the electorate with the coalition's main proposals, which could mitigate the bargaining power of the more extreme views within its political parties," he said. Many of the pediatrician-turned-politician's plans in her first term as president were stunted by deadlock in Congress. Experts and allies say Bachelet has since become a tougher negotiator, but she will need every ounce of political dexterity to build support for her plans. At the same time, the flow of funds from a copper-fuelled boom of recent years is slowing. Cooling investment and a mixed global picture spurred the bank to cut interest rates from 5.0 percent to 4.75 percent last month, the first time the rate had moved since January 2012. November's central bank interest rate decision is due on Tuesday and many in the market are betting on another cut. The peso rose lightly against the dollar on Monday, closing up 0.7 percent after heavy falls last week. The result of the elections was already priced in, a trader said. (Additional reporting by Froilan Romero and Anthony Esposito; Editing by Jackie Frank, Theodore d'Afflisio and Andrew Hay)