After a storm comes a calm in Chile

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Two weeks ago, in an unprecedented decision, Chilean President Michelle Bachelet asked all her ministers to resign so that she could form a new and more trustworthy cabinet that would help her to promote the reforms that Chile needs to reignite economic growth.

While some analysts may argue that this action, coupled with a series of corruption scandals, present one of the worst political crisis Chile has seen since the 1973 overthrow of President Allende, FSG believes that such sentiment is overblown and that Chile’s political stability and multinationals’ interests under President Bachelet are not at risk.

However, in order to understand this conclusion it is important to first analyze the three main events that triggered Chile’s current political turmoil:

  • Chile’s political crisis began in October 2014, when Chile’s judicial agency charged with investigating and prosecuting crimes involving public officials accused the main opposition party, the right-wing Independent Democratic Union, of accepting illegal funds from Penta, an investment bank and holding company, owned by former supporters of the Chilean military regime under Augusto Pinochet. As a result of this accusations, four Penta executives were eventually convicted of dodging tax payments on their political contributions, and they are now in jail as they await their appeal. Bachelet’s party officials’ political euphoria over the Penta scandal was short-lived though.
  • In early February, Qué Pasa, a respected national weekly, published a scathing account of how Bachelet’s son, Sebastian Davalos, illegally leveraged his political influence to secure a US$ 1.5 million loan from the owner of the Bank of Chile, Andronico Luksic. The loan went to a group called Caval, whose owners include Bachelet’s son and daughter-in-law, and was used to finance the purchase of 100 acres of rural real estate that was expected to triple in value if it obtained urban zoning.
  • Most recently in late February, corruption scandals escalated when it was revealed that Soquimich, an important multinational chemical company, had been financing dozens of political candidates since 2010. Although Bachelet has not been involved in these acts of corruption, congressional candidates from Bachelet’s party were identified as recipients of the illegal funds.

The disclosure of these events have badly damaged Bachelet’s image as an honest leader and concerned benefactor of the poor, leading Bachelet’s popularity and acceptance rates to fall to the lowest levels since she became president.

However, after a period of partisan mudslinging, many of Chile’s political leaders have begun to recognize that the general public has grown extremely disenchanted with them and the political system as a whole. As a remedy, leaders of the official party began conversations for a “great accord” aimed at reducing corruption. Measures include: 

  • Reform of campaign finance regulations. Moving forward, the provision of financial resources for political campaigns will be completely managed and regulated by the government. Additionally, companies will be prohibited from making financial contributions to politicians, and anonymous donations to political campaigns will be eliminated.
  • The drafting of a more inclusive Constitution. In September this year, President Bachelet will start this process by opening up dialogue on the constitutional process to citizens, aiming to completely overhaul a constitution that “is not applicable to Chile’s current reality” since it was created during Augusto Pinochet’s 1973-1990 dictatorship.
  • Dismissal of all members of president Bachelet’s cabinet. President Bachelet took a radical measure to recover credibility among Chileans. Under recent rumors of corruption and political pressures that involved some of her Ministers, on May 6th President Bachelet requested the resignation of all the 23 members of her cabinet. While this seemed to be a destabilizing measure for Chile’s political apparatus, President Bachelet ended up accepting the resignation of 5 of her 23 ministers, confirming 14 in their previous positions and relocating 4 in other ministries.

Early indications show that these anti-corruption initiatives, coupled with the cabinet reshuffling, have been effective in restoring popular support for the government, with recent polls already showing a healthy improvement of 5 points in President Bachelet’s popularity. As President Bachelet said: “after a storm comes a calm”. The question now becomes whether Chile can leverage its newfound calm to double down on growth-boosting policy reforms, which is what the country ultimately needs to keep attracting investment and create jobs for its people.

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