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Morgan Stanley on New Constitution, Maintain Short PEN/CLP

CHILE
  • Chile’s new Constitution’s drafting period is over: the draft's 499 articles have been defined, and we now move to the fine-tuning phase. A first look at this version of the document suggests that, if approved, Chile would face a higher fiscal burden and closer regulatory scrutiny on corporations, especially when it comes to the environmental front.
  • In line with their long-standing view, however, Morgan Stanley do not see signs of potentially disruptive elements to Chile's macro policy framework.The more extreme proposals have been rejected by the Plenary and the next steps of the process should not lead to major changes to the Constitution's draft.
  • Despite the current polling edge for the “Reject” option, MS continue to think that the new Constitution will end up being approved in September.
  • The exclusion of more unorthodox proposals for the business sector, economic policy, and the institutional framework that posed larger risk to investment and fiscals should be positive for most fixed income assets as the outcome should lower policy uncertainty for business leaders, promoting investment while keeping a largely orthodox fiscal framework.
  • As a result, CLP performance should continue to improve over the coming weeks, in addition to the recent hawkish adjustment to BCCh policy.
  • MS continue to recommend being short PEN/CLP (targeting 215). In summary, diverging risks regarding monetary policy, social unrest, and constitutional reform should help drive PEN/CLP lower towards their target of 215.
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