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Chile’s new president faces most pressing threat from China

Michelle Bachelet, the popular former president of Chile, is back in power after winning Sunday's runoff election in a landslide over her centre-right rival and onetime childhood playmate, Evelyn Matthei, by a wide margin.

It was a rare case where two women faced off for the top political job in a major Latin American country. But there is no question about which candidate made business people and investors more nervous. That would be the social democrat Ms. Bachelet.

Armed with her overwhelming victory – albeit after a relatively low voter turnout – and a majority for her centre-left coalition in both houses of congress, Ms. Bachelet quickly affirmed that she will pursue her promised reformist agenda when she takes office in March. Her main target is the yawning gap between the country's elite haves and everyone else. And she intends to reform the tax code and raise corporate taxes to help narrow it.

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The highlights of her costly package include more than $15-billion (U.S.) in increased social spending, an overhaul of deteriorating public health, free university education and a state pension scheme. This all comes at a time when Chile's economy is slowing as global demand for its key copper exports softens. Yet she still vows to eliminate the country's modest deficit by 2018.

Another goal, spelled out in her platform, is constitutional change that recognizes "full, absolute, exclusive, unalienable and unlimited public control over water (and) mining."

This has prompted some of her more outspoken critics to raise the spectre of this bastion of political and economic stability becoming another Argentina or Venezuela, frightening off capital with punitive taxes and the threats of nationalizing foreign interests and imposing tougher restrictions in the crucial resources sector.

But the fact is that fears of a dramatic shift in Chile to the radical left seem unfounded, not least because Ms. Bachelet, who was a relative moderate in her previous term, doesn't have so sweeping a mandate. Chileans remain a fairly conservative lot who have enjoyed the benefits of stable growth and steadily increasing foreign investment. Unemployment slid this year to 6.2 per cent, an 18-year low, average inflation is a moderate 3 per cent and domestic consumption has been on the rise.

This is the opportune time to widen access to higher education, improve the quality of state health care and implement some other reforms to strengthen the social safety net. But anything more radical is likely to be a non-starter.

"Like all politicians … Bachelet made all sorts of promises. Nevertheless, her ability to deliver will be extremely limited," says Latin American specialist Walter Molano, a managing partner at BCP Securities in Greenwich, Conn.

Mr. Molano notes that her coalition won 55 per cent of the Senate vote and 57 per cent of the lower house, which falls below the super majority needed to push through constitutional changes.

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"That is not to say that Bachelet cannot call for a national referendum to rewrite the constitution, but it is unlikely she will get the support to make such changes," he said in a note. "As the dust settles, very little will change in Chile."

But the country does face a potential economic crisis that could well derail Ms. Bachelet's more ambitious plans. It would be triggered by an eventual currency devaluation by China, which accounts for more than 24 per cent of Chile's exports and fully 7.5 per cent of its GDP.

"Such an event will be a devastating blow," Mr. Molano writes. "Faced with such a scenario, President Bachelet will have to put her social agenda on the back burner and attend to more pressing needs. Some Chileans may be fretting about the country's move to the left, but the real red menace lies on the other side of the ocean."

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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