• In Chile, the constituent assembly has completed drafting a new Constitution. The process isn’t over, however, and much work (and uncertainty) remains.
  • We provide answers to key questions on the draft Constitution, the next stage of the process, and the likely outcome of the September ratification referendum below.

On Monday, May 16, the constituent assembly delivered the draft of the new Constitution, ending the constitutional debate that lasted 10 months. The work of three new commissions now begins: the Commission of Harmonization, in charge of consistency and coherence; the Commission of Transitory Norms, which will ensure a gradual implementation; and the Commission of Preamble, which communicates the intentions of the framers and the purpose of the document.

The constituent assembly will conclude its work on July 5. President Boric will then call for an exit referendum, to be held on September 4 (table 1). We have received many questions regarding the process that we summarize in the following Q&As:

1) Did the central bank’s objectives drastically change?

No, there are no changes in the objectives of the central bank (only administrative and accountability modifications).

  • The central bank’s objective continues to be ensuring the price stability and the normal functioning of internal and external payments.
  • The mandate to make decisions consistent with the general orientation of economic policy is maintained.
  • The prohibition of financing public spending is maintenance. Furthermore, the recent modifications requested by the central bank regarding the possibility of acquiring or selling public debt instruments in the secondary market, in exceptional and transitory situations, are included.
  • The number of Board members is increased from five to seven. Several studies from the IMF (including Berger et al. 20061) point out that “larger and more heterogeneous countries, countries with stronger democratic institutions, countries with floating exchange rate regimes, and independent central banks with more staff tend to have larger boards (the average board has 7–9 members)”.
  • The possibility of Congress requesting the dismissal of a Board member by a simple majority is included, which must be resolved by the Supreme Court.

2) Are the concepts of fiscal responsibility and fiscal sustainability included?

Yes. In contrast to the previous Constitution, the principle of sustainability and fiscal responsibility is explicitly included as the driver of fiscal policy.

  • The principle of sustainability and fiscal responsibility will guide the actions of the State in all its institutions and at all levels.
  • However, the president loses the exclusive initiative in terms of fiscal spending, enshrining what has been observed since the social unrest in October 2019. The Lower House could also present spending bills, although they can only be approved if the President of the Republic gives his sponsorship.

3) Would there be any significant changes to the mining industry’s regulation?

The rejection of the nationalization of mining interests has been received as good news by industrial associations. However, the draft of the new Constitution introduced some elements that, if ratified, could hinder the development of new mining projects and also establish higher levels of uncertainty. Specifically, private participation in the mining sector will be defined by a simple law, since it does not refer to concessions. In case of nationalization or expropriation, it is established that compensation will be for a “fair price”, a concept that admits interpretation. In addition, the draft ends the current notion of “water rights” and makes it non-negotiable, which could introduce rigidities for its efficient use and make it difficult to start up new projects. Regarding this point, specialists point out that despite being non-negotiable, water rights could be transferable if is determined by a future law.

4) Would the new Constitution destroy the private pension system based on pension fund administrators (AFPs)?

The new Constitution puts an end to the private capitalization system managed solely by AFPs and rules out a new solely government-managed solidarity system. Consequently, a mixed system could be implemented. However, the Constitution establishes the “public” character of the social security system, which will allow the intervention of private administrators in the management of social security. Specifically, the Constitution will allow the participation of the AFPs, among other managers. Given the recent signals from the government, and if the new Constitution is approved, we consider it likely that the government will present a pension reform that establishes a mixed system in Q3 2022.

5) Are there any changes to. the parliamentary system?

Congress will continue to be bicameral, although the current Senate will be replaced by a Chamber of the regions. The political system will be based on two asymmetric chambers, where the greatest weight will be in the Deputies (155 members), while the regional representatives will only intervene in some laws (by regional agreement).

On the other hand, the assembly retained the presidential system, in which the president of the republic will have a four-year term and may be re-elected.

6) How did the quorums change to carry out constitutional reforms?

The assembly rejected the proposal to set the necessary quorum for constitutional reforms at four sevenths. In the absence of an agreement, for this type of procedure, the normal quorum for the formation of the law would apply: either a majority of those present, or a majority of the parliamentarians in office. Consequently, autonomous institutions such as the central bank could be reformed by simple majority. In this respect, some parliamentarians are studying initiatives to give temporary stability to the new Constitution. In our view, economic or institutional reforms would be more dependent on the political cycle.

7) Is there any impact of the restitution of lands considered ancestral?

The new Constitution does not indicate what the land restitution process will be. This is an identity norm that was certainly influenced by the situation of violence in the South of Chile. In a joint reading with the consecration of the property right (Art. 20), it would imply an important fiscal burden assuming that the interpretation of “fair price” corresponds to the advance payment of the market value of the lands that are registered as ancestral indigenous property. All in all, we see negative effects on the forestry industry that, although it could receive market compensation, would likely see an impact on its production levels given the uncertainty regarding the consideration of ancestral land that will be mandated if the new Constitution is approved. On the other hand, the provision could be transformed into an opportunity to pacify the South of Chile in cases where land demands are indeed the problem. There is disagreement on this point.

8) How to interpret two justice systems, one for indigenous people and the other for the rest of the population?

One of the questions that has arisen is how the courts of the indigenous people should be established so that they function effectively and in coordination with the National Justice System. The constituent assembly has explained that the details will remain in the law and not in the Constitution. Some members have pointed out that the Constitution establishes the need for coordination with the justice system with common crimes excluded. Other experts contend that such issues will be part of the implementation process of the new Constitution. There is a minor risk of generating opportunities for arbitrage between the indigenous justice system and the system for the rest of Chileans, which would accentuate the problems of animosity towards indigenous minorities.

9) What is the likely outcome of the referendum on new Constitution?

Currently, the polls show more people in favour of rejecting the new Constitution (46% according to the Cadem poll). However, we expect a tight result in the exit referendum on September 4.

10) How would markets react to the new Constitution? Have they priced in the related impact?

The last two weeks before the end of the plenary voting for the drafting of the new Constitution, members of the assembly from the socialist party began to vote against extreme proposals (nationalization of mining sector, a pay-as-you-go pension system, among others), all of them originated from minority groups. In this context, the expected scenarios for asset prices have eliminated the probability of a new Constitution with dramatic changes. Thus, it is reasonable to expect a decrease in the risk premia on Chilean asset prices. In any case, a high degree of uncertainty persists with respect to the work of the harmonization commission, which will merge articles and could even lead to new votes on the plenary. The fact that the polls are pointing to rejection will probably lead the socialists to maintain a conservative position, but there is no guarantee of that.

11) Are material changes likely to come from the commission of transitory norms or harmonization?

The harmonization process will conclude its work on June 13 (table 1 again). Although the regulation allows the presentation of rejected norms in the transitory norms commission, particularly those that were not reviewed in a second proposal after their rejection, we assign a low probability of approval.

Berger, Nitsch and Lybeck (2006). “Central Bank Boards Around the World: Why Does Membership Size Differ?”. IMF Working Papers.

DISCLAIMER

This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.

These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall this report be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The information contained in this report is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a swap or trading strategy involving a swap or any other transaction. Scotiabank may engage in transactions in a manner inconsistent with the views discussed this report and may have positions, or be in the process of acquiring or disposing of positions, referred to in this report.

Scotiabank, its affiliates and any of their respective officers, directors and employees may from time to time take positions in currencies, act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to securities or related derivatives. As a result of these actions, Scotiabank may receive remuneration. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. Officers, directors and employees of Scotiabank and its affiliates may serve as directors of corporations.

Any securities discussed in this report may not be suitable for all investors. Scotiabank recommends that investors independently evaluate any issuer and security discussed in this report, and consult with any advisors they deem necessary prior to making any investment.

This report and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced without the prior express written consent of Scotiabank.

™ Trademark of The Bank of Nova Scotia. Used under license, where applicable.

Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including; Scotiabank Europe plc; Scotiabank (Ireland) Designated Activity Company; Scotiabank Inverlat S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Casa de Bolsa, S.A. de C.V., Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Derivados S.A. de C.V. – all members of the Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia is authorized by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available from us on request. Scotiabank Europe plc is authorized by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority.

Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V, Grupo Financiero Scotiabank Inverlat, and Scotia Inverlat Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.

Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law.