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Barclays: Boric To Face Clash Between Demands For Reform And Pragmatism

CHILE
  • To a large extent, Barclays think Boric’s need for moderation will be dictated by markets’ reaction. Along these lines, he pledged during his campaign and his winning victory speech that the country would maintain fiscal prudence. However, there are elements that will, in their view, also temper his moderation: the extent of his win in the second round, the fact that the Communist Party is a meaningful portion of his coalition (in fact, it has more seats than Boric’s own party in the Lower House), and the fact that the Constitutional Assembly is further left leaning than Congress.
  • In the short term, on the economic front, Barclays expect Boric to try to limit the market impact of the election result with a moderate choice for Minister of Finance and market-friendly comments regarding the importance of central bank independence, which he has publicly recognized before. However, we expect the fiscal deficit to be larger than the budget currently proposes (which is 5pps of GDP fiscal consolidation).
  • On the monetary policy front, they think the BCCh will be forced to hike well above its current forecast of the neutral rate (3.25-3.75%): Barclays forecast the terminal rate to be 5.75%, but see upside risks to this call if the CLP weakens significantly and the fiscal stimulus remains wide next year.
  • Given attractive entry levels and valuation, they recommend going long 3m USDCLP 1x1.5 put spreads (strikes: 850, 830, expiry: 18 March 2022, cost: 24bp, breakeven around 791). In the medium term, they remain bearish Chilean assets.
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