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JPMorgan On Presidential Runoff Results

CHILE
  • The near-term challenge: Moderate the political agenda in a credible manner so to prevent adverse financial conditions
  • Against the macro backdrop, risk scenarios associated with excess financial market volatility and protracted capital flight come to the fore. Household and firm liquidity is exceptionally elevated on pension fund withdrawals, and the policy agenda may incentivize dollarization of local currency assets (bank deposits), further weakening the exchange rate and pushing tradeable CPI higher.
  • Note that current accounts and sight deposits stand about US$29bn above pre-Covid levels and private sector dollarization and capital flight has been the rule in prior quarters. On the services side, fiscal risk and the expectation of higher taxes and labor costs may reverberate into increasing prices putting market share considerations on the back-burner. That would push the CBC to offer a higher real rate than what JPM currently envision in their base case. Policy uncertainty would affect capex, exacerbating the activity deceleration we expect ahead, which could increase risks for a suboptimal fiscal reaction in 2H22, and setting the system into a high real rate stagflation scenario.
  • To minimize the aforementioned risks, the market will need prompt signals of actual moderation. Indeed, the government elect will need not only to moderate the ambitious program, but also define priorities so as to kick off negotiations in an expedited and efficient manner.
  • A prompt clarification on key cabinet names, such as the FinMin, would help navigate the transition period until March 11 with less market volatility. The articulation with the Constitution Convention appears to be another key dimension that market is to focus upon in 1H22.
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