(Bloomberg) -- Chile faces its most divisive election since the return of democracy in 1990 after conservative Jose Antonio Kast and leftist Gabriel Boric made it through to next month’s presidential runoff.
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With almost 100% of ballots counted, Kast had 28% of the vote in Sunday’s first round followed by Boric with 26%, according to data from electoral body Servel. Chileans will return to the polls on Dec. 19 for the second round.
At stake is the future of Chile’s investor-friendly economic model, which has created rapid growth and perhaps the region’s strongest middle class, and yet still left millions of people behind.
Boric, a 35-year-old former student leader, wants to overhaul the system by ratcheting up levies on companies, redoing the pension system and boosting social welfare benefits. But Kast, who pledges lower corporate taxes and the preservation of pro-market rules while campaigning on a law and order, family values platform, fared better than many expected after a late surge in the polls.
What’s more, several of the nearest runner-up candidates are ideologically closer to Kast than Boric, potentially giving the 55-year-old conservative the upper hand in the scramble for endorsements.
Chile’s peso strengthened 3.6% to 799.39 in early trading, according to Datatec.
Chile, which has long been among the most prosperous and predictable democracies in Latin America, has been rocked by social and political volatility since violent street protests broke out in October 2019. The unrest led the outgoing government of President Sebastian Pinera to approve a referendum to rewrite the constitution which passed by a wide margin. The text will be drafted and put to a vote next year.
“The results make clear that the traditional parties have lost all footing in the electorate, but that the new parties are not yet able to sustain large majorities,” said Jenny Pribble, associate professor of political science at the University of Richmond. “All of this means that whoever is elected the next president of Chile will likely face challenges for governing and a very volatile political environment.”
Underscoring the uncertainty, a poll conducted before Sunday’s election and released Monday showed Kast and Boric tied at 39% in a runoff scenario.
The votes cast for those candidates in third, fourth and fifth place may hold the keys to how a runoff would play out. Franco Parisi was the surprise of the election, placing third with 12.8%, just ahead of Sebastian Sichel of the center right, while Yasna Provoste of the center left received 11.6%.
Parisi, a celebrity economist living in Alabama who hasn’t campaigned in Chile, could play the role of kingmaker, although it’s not clear how his supporters will vote in the runoff.
Turnout was below 50%, an outcome which has become more commonplace since voting was made voluntary. The 155-seat lower house was renewed along with half of the senate. The eventual allegiance of independents could sway the legislature.
In his speech, Kast called for efforts to attract supporters of Provoste, Parisi and Sichel and demonized Boric.
“We’re going to recover peace, order, progress and our freedom,” Kast said. “On Dec. 19, Chile has to choose between freedom and communism.”
Boric said he plans to debate key issues with Kast and that Chile won’t retreat in the fight against intolerance and discrimination.
“We advance toward a Chile that’s more inclusive, generous and worried about its own with no one left behind, or we continue with the logic of rejection, exclusion and privileges against which Chile rose up against,” he told supporters in Santiago.
Markets, which have been whiplashed on concerns over future economic policy and the new charter, may rally on the result, according to Klaus Kaempfe, director of portfolio solutions at Credicorp Capital in Santiago.
“Clearly this is a resurrection of the right and the results show a country that’s more balanced and from the center,” Kaempfe said in an interview. “Neither of the extremes surpassed 30%. That’s a good sign since they’ll have to moderate.”
Chileans have pulled $49 billion out of private pensions in the past two years to soften the blow of the pandemic, putting pressure on local capital markets while the peso has tumbled in 2021.
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A trained lawyer and onetime lower house lawmaker, Kast is running for the nation’s top job for the second time. He’s expressed admiration for the late dictator Augusto Pinochet and has been criticized for taking a hard line on immigration and being against same-sex marriage.
Boric became a nationally-recognized figure after helping to command protests over the cost and quality of education a decade ago. He now forms part of the Frente Amplio coalition and serves as a lower house deputy. In recent weeks he’s moderated and tried to create some distance with allies from the Communist Party.
President Pinera survived an impeachment motion last week and has seen his approval rating tumble to about 16%.
There’s plenty at stake for mining companies and their ability to supply the metals needed for the clean energy transformation.
Chile accounts for more than a quarter of the world’s mined copper and boasts the largest reserves of lithium, a key component in batteries used in electric vehicles. Copper accounted for half of Chile’s exports last year and 11% of its GDP.
While Kast wants to open up state copper behemoth Codelco to private capital as part of an investor-friendly approach, Boric plans to raise taxes and create a state lithium company.
The elections are playing out as congress debates a copper royalty bill that the industry says would imperil tens of billions of dollars in investments. At the same time an assembly of predominantly independent and left-leaning representatives are behind the drafting of the new constitution that may lead to tougher rules on water, mineral and community rights.
Whoever wins in December will face challenges in sustaining an economic rebound as inflation accelerates and the central bank raises rates. The constituent assembly can also complicate the next mandate depending on what’s written into the new charter, including the possibility of changing the role of the president. A Kast win could revive the protest movement.
“It’s very hard to say who has the upper hand because it’s difficult to know if voters who turned out for other candidates will show up in the second round,” Pribble said.
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