In focus

What is driving angst in the Andes?

When I initially put pen to paper to write a note on Chile’s upcoming constitutional convention vote, concerns over policy uncertainty appeared to be receding. Since then, a resurgence in Covid-19 infections has led to a new lockdown, delaying the vote by a month. Meanwhile congress has passed an opposition-led bill to permit individuals a third 10% public pensions withdrawal.      

And as fast as policy uncertainty has spiked higher in Chile, risks have increased across the Andean region.

In Peru, far-left candidate, Pedro Castillo, came from almost nowhere to lead in the first round presidential election. Ahead of a run-off vote in June, he continues to lead right-wing candidate Keiko Fujimori.

Over the past few weeks, political uncertainty has also escalated in Colombia. The announcement of tax reforms, needed to put public finances back on a more sustainable path, triggered demonstrations which led to the withdrawal of the bill and the resignation of the finance minister. However, anti-government protests have persisted, sadly resulting in the death of over 24 people.

What is the common thread to uncertainty?

All three of these issues are connected in the sense that a key driver is dissatisfaction about inequality. In a region which has been one of the worst hit globally by the Covid-19 pandemic, existing challenges have been brought to the fore.

To illustrate the point, a simple measure of income inequality used to compare countries is the Gini coefficient. A coefficient of zero reflects perfect equality, with maximum inequality represented by a coefficient of 1.

On this measure, Peru and Chile rank reasonably well within the Latin America region, although both Mexico, Uruguay and Argentina score better. But all three countries lag many developed market countries, as the table below shows. 


In Chile, the genesis of this uncertainty stretches back beyond a year, to October 2019 when protests against a hike in metro fares sparked a nationwide wave of civil protest against inequality. This led to a state of emergency being declared across key regions, the resignation of the entire cabinet, and a vote on a new constitution, which was overwhelmingly approved last October.

Colombia too saw protests as far back as November 2019. These led to national strikes in early 2020, which subsequently fizzled out as lockdowns were introduced in response to the pandemic. 

In Peru, political uncertainty has persisted in recent years, going back as far as the resignation of former president Pedro Pablo Kuczynski in 2018. Tensions between congress and the executive have persisted ever since. Former vice president Martin Vizcarra took the helm but was impeached  in November last year, triggering a  period which saw Peru have three different presidents in two weeks.

Why the outlook is more country specific

Although the source of popular dissatisfaction is common to all three markets, the path forward is much more specific to each country.


Chile’s economy is benefitting from the recovery in commodity prices, notably copper. And despite the renewed lockdown, its vaccination programme has been a relative success with close to 46% of the population having received at least one dose as at 11 May. While we would question the implications of the latest pensions withdrawal in the long term, the immediate impact may be positive for domestic consumption and boost the recovery. But set against all of these points is the long period of policy uncertainty.

This weekend’s vote will elect the 155 member body - the convention - which will author the new constitution. The final draft then faces a confirmatory vote by August next year. And sandwiched between the two is a presidential election in November.

With regards the convention, expectations had coalesced around recent lower house election results with 39% for right wing/centre-right parties who formed one alliance, 34.7% for the two centre-left alliances, and 16.5% for the main left-wing alliance. Given that a two-thirds majority is required to include an article in the constitution, these imply that more radical proposals from either side of the political spectrum would likely be blocked.

However, there is rising concern that the right wing/centre-right block could see its support shrink, in part linked to President Piñera’s low approval rating – now sub 10%. The president, along with a number of parties on the right, opposed the third pension withdrawal owing to concerns over potential future funding issues; pension contributions are well below the average of OECD countries. The law was backed by the left wing Frente Amplio coalition, which urged the release of pensions funds as relief in the pandemic. Of particular concern was the fact that the legislation also included a 10% withdrawal from annuities, which are technically owned by insurers and not by pensioners, breaching scheme provisions and creating legal uncertainty. Meanwhile, opposition parties have also put forward a new mining royalty bill which, if approved, would make Chile one of the heaviest taxed jurisdictions globally for mining.

Chile has long been recognised within the Latin America region as a beacon of economic and political stability. It has maintained a strong macroeconomic framework, underpinned by fiscal prudence. The public accounts have been managed with a medium-term outlook since 2001. The budget is set in relation to the forecast two year copper price, and together with the economic and social stabilisation fund, provides some insulation from the impact of foreign shocks. In short, policy prioritises saving during periods of economic strength and utilising savings when economic weakness pressures fiscal income.

That said, the message from the population has been clear in its demand for an increase in social and welfare spending in particular. In the wake of protests, President Piñera announced a new social agenda with 19 specific measures. The new constitution is expected to go further in addressing these issues, but whether more gradual change or radical change follows is still unclear.


The outlook for Peru is more binary, and hinges on the outcome of the presidential run-off on 6 June. The economy has been among the hardest hit in the region by the pandemic and less than 5% of the population have received at least one vaccine dose. Despite this, the rally in global commodity prices should still prove beneficial, but domestic uncertainty overshadows this.  

Pedro Castillo was an unknown political quantity until he took everyone by surprise by garnering the most votes in the first round of presidential elections on April 11, thanks to a late surge in support. His radical policy pledges have unsettled markets, although it is unclear what his presidency might look like in practice given the balanced makeup of congress.

Keiko Fujimori, daughter of former president Alberto Fujimori, is seen as the establishment candidate, but potentially also a polarising figure to the electorate.

Either way, congress remains fragmented and although Castillo’s Peru Libre is the largest party, it has just 37 of 130 seats. Enacting meaningful policy is likely to prove difficult, whoever emerges to lead after the run-off.


Colombia has twin fiscal and current account deficits. The impact of the pandemic has added to pressure on the fiscal accounts, which were already in need of reform. With rising public debt levels, the risk that global bond ratings agencies could downgrade the country’s debt to non-investment grade has been rising. Higher crude oil prices are beneficial for the external accounts but will need to reach higher levels to narrow the current account deficit meaningfully. 

Tax reform has been on the agenda since 2019 but was delayed following the protests. The latest proposal was surprisingly ambitious. It included a VAT rise, together with some wealth taxes, and plans to reduce the lower threshold for tax payment. This is now under review but given the strength of recent protests, which forced finance minister Alberto Carrasquilla to resign, is likely to be watered down.

While tax reform may eventually pass, it is likely to be less effective and companies could face a higher burden. Moreover, recent events illustrate the divide in congress, which is impeding the prospect of reform. Congressional elections are scheduled for March next year, with a presidential election in May 2022.

Could investment opportunities emerge from the fog of uncertainty?

If there is one thing which markets do not like, it is uncertainty, and this can produce some sizeable market movements. Add in the outlook for economic recovery across the Latin America region this year and there may be some opportunities for active managers.

In Chile, there is a risk that the nexus of already high valuations, with the market trading on a price-to-earnings (P/E) ratio of 17 times, and the looming electoral logjam could cap market performance somewhat. Commodities price strength is favourable and there are a number of well-managed companies in the market, some of which are well placed to benefit from economic recovery in other regional Latin American markets.

We’re monitoring Peru closely but the nature of the uncertainty and associated risk limits opportunities. This could change as things evolve. That said, despite recent market weakness, valuations are not particularly attractive - Peru trades on a P/E ratio of 14.5 times, roughly in line with broader emerging markets.

By contrast, Colombian equities trade on a P/E of 12.7 times, well below the average of markets in the MSCI Emerging Markets Index, of over 15. We continue to analyse opportunities but despite cheap valuations they are less exciting than elsewhere in the region in places such as Brazil.

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