Control of inflation and public spending are hampered by stagnant economic growth, the impasse of key reforms and an increasingly fragmented and discredited political system.
Chile is entering the final year of Gabriel Boric's government, far from an economic collapse, but mired in frustration. According to a recent survey by the Cadem platform, 62% of Chileans disapprove of the social-democratic leader's management, ten months before new presidential elections.
The government's inability to respond to the economic reforms' impasse in Congress and the failure of the constitutional process have dashed voters' initial hopes. And while the presidential candidates have not yet been defined, there is a clear preference for right-wing leaders.
Thus, a survey by the consulting firm Activa positions economist Evelyn Matthei (29.2%) and former deputy José Antonio Kast (11.7%) as the main favorites to be the new tenants of La Moneda.
Meanwhile, macroeconomic indicators are acceptable, albeit with significant weaknesses. For example, inflation closed last year at 4.5% year-on-year, a figure that contrasts with the high 12.8% in October 2022.
At that time, the price increase was the result of the great fiscal and monetary expansion experienced during the second government of Sebastián Piñera (2018-2022) to address the COVID-19 pandemic.
“Once the need for this demand for health and social containment decreased, there began to be surplus pesos and that generated the inflationary jump to 12%. Although later a normalization program began that reduced the fiscal deficit and raised interest rates. This generated a drop in the inflation rate and left it close to the target of the Central Bank of Chile. I believe that this trend will continue in the coming years if an austere fiscal policy is maintained,” declared Fernando Marengo , Chief Economist & Partner of BlackTORO and professor at the Catholic University of Argentina to AméricaEconomía .
In fact, the Central Bank has projected that annual inflation will fall to 3.6% by December of this year. Meanwhile, economic growth has remained stagnant for ten years. According to the World Bank, although successive governments have maintained solid macroeconomic policies, average growth of Chilean GDP has not exceeded 2% in the last decade.
This trend increases gender gaps in the labour market, limits job creation and maintains regional disparities. As an example, real GDP grew 1.9% year-on-year in the first half of 2024, driven by the mining sector.
However, informal employment rose by three percentage points in the same period, from 26.9% to 29.9%. At the same time, unemployment fell to 7.9% for men, but rose to 9.0% for women.
For Alejandro Micco , former Undersecretary of Finance in Michelle Bachelet's second government and professor at the University of Chile , a key factor in economic stagnation is the deterioration of institutions.
This is reflected in populist policies such as withdrawals from pension funds. During the Piñera administration, Congress approved on three occasions the withdrawal of 10% of funds from individual AFP accounts. And while three other attempts were rejected, a seventh withdrawal has been under discussion since last year, which could harm Chileans' pensions in the long term.
“Today, we have been discussing pension reform for more than ten years and if the parliamentary debate extends beyond January, everything will become complicated. We will begin to have more polarizing speeches and fewer opportunities for agreement, because the electoral campaign is coming,” Micco explained to AméricaEconomía .
In parallel, the last decade has seen a fragmentation of the political system. In 2015, the binomial electoral system, which favoured the existence of two political coalitions to the detriment of isolated parties and independent politicians, was abolished.
The model was replaced by a proportional system and the following year, the number of legalized political parties in Chile doubled, from 14 to 32.
By December 2024, there were 22 legally constituted organizations, four in the process of formation and three in the process. While in the Senate, there are 12 parties with representation and in the Chamber of Deputies, the number rises to 16, not counting non-affiliated congressmen.
“It is a very fragmented political system and it is therefore much more difficult to agree on medium- or long-term policies. When it comes time to debate urgent reforms such as the pension system, it is very difficult because one has to negotiate with more than 20 parties and some even have subdivisions,” Micco said.
The economist warns that the Chilean political system has become full of "SME parties" that have minimal representation in parliament and are led by a "local boss" whose interests are directed at obtaining immediate popular support.
“All the finance ministers were against policies such as the withdrawal of pension funds, but when you have a divided system it is very difficult to stop it. Because it is very easy for someone to divert attention and convince the citizens that it is okay to promote a reform that allows them to obtain the equivalent of two or three months of salary,” Micco added.
On the other hand, fragmentation has favoured the growth of radical left and right forces. Their growing success in recent electoral processes generates uncertainty among national and foreign investors, which ends up affecting Chile's economic growth.
“The private sector is seeking refuge outside the country, a trend that began with the social unrest in 2019 and has continued over time. We are talking about a business sector that historically invested its financial savings in the Chilean economy and, since the outbreak, diversified its portfolio outside the country. Disappointment with the government and failed attempts to change the Constitution also increased the perception of risk,” adds Fernando Marengo.
As an example, in May 2021, the three left-wing coalitions participating in the first election of constituents together accounted for 48% of the vote. Credit default swaps (CDS) then rose by 33% to 72 points.
Although it remained the lowest index in the region, this phenomenon showed investors' fear of a Constitutional Convention favorable to higher public spending and debt. When in September 2022, 62% of the electorate rejected the draft Constitution, the CDS began to gradually decline.
Similarly, when the next constitutional process was dominated by the Republican Party, a far-right organization, the country risk averaged 150 points during the weeks leading up to the approval referendum in November 2023.
The following month, once the Constitution was rejected, the country risk fell by 1.5% after four consecutive months of increases.
The volatility in voter preferences and the rise of “SME parties” led a group of senators belonging to historic left- and right-wing parties to present a bill to reform the political system in November 2024.
If this initiative promoted by the Socialist Party (PS), the Party for Democracy (PPD), the Independent Democratic Union (UDI), the National Renewal Party (RN) and Evópoli is approved, a threshold of 4% of the votes cast will be imposed for a party to have representation in the 2025 elections. It should be noted that this threshold will be raised to 5% in future elections.
“There is another measure in the reform that is by far the most important: if a congressman is elected by a political party and then withdraws from the organization, he automatically loses his seat. This adds weight to affiliation with a political party and discourages representatives from pursuing personal agendas,” explains Micco, who believes that this reform should only be the first step in a more ambitious one.
GLOBAL CONTEXT AND GOVERNMENT BALANCE SHEET
Leaving aside internal disputes, the international context will also play an important role in the Chilean economy in the short term.
“The economies of China and the European Union are slowing down with inflation rates relatively under control, especially in China. In addition, you have a US economy that is still growing above potential, but whose activity is slowing down and inflation is still above the Federal Reserve's (Fed) target range,” says Fernando Marengo.
In this context, the Argentine economist points out that as the US fiscal deficit reaches 7% of GDP, inflation will fall at a slower pace than in the rest of the world. As a result, capital will invest in dollars, this currency will gain value and the rest of the currencies will depreciate.
Marengo cites as a recent example the depreciation of the exchange rate in September last year following the Fed's first interest rate cut in four years.
Likewise, a possible increase in tariffs by the United States during the future administration of Donald Trump would harm Chile due to the fall in international prices of raw materials and, therefore, a lower volume in global trade. The other immediate consequence would be the worsening of the trade war between China and the United States.
All of this will be addressed to a greater extent by the government that takes over in March 2026, leaving some questions about Boric's legacy. Both Marengo and Micco agree that the government's record is mediocre, due to its inability to reverse economic stagnation and confront social problems such as the outbreak of organized crime.
In fact, in August 2024, a survey by the National Institute of Statistics revealed that 87% of Chileans perceived that crime had increased in the previous 12 months. So marked is the concern about citizen insecurity that, according to LatAm Pulse, 15.3% of Chileans would vote for the Christian Socialist Carolina Tohá, Minister of the Interior and Public Security, in the presidential elections in November.
But it remains to be seen whether the Chilean electorate will follow the traditional “law of the pendulum” and vote for the traditional right in the November elections. As the volatility of the last electoral processes shows, the cards are on the table and it is still too early to make predictions.
