Chile’s new constitution

The "yes" option for a new constitution won the 25 October referendum with 78.28% of the vote, versus 21.72% for the option "no". The constituent body chosen to draft the new document will be a Constituent Convention (a 155-member body elected by popular vote), which obtained 79.99% of the vote, ahead of a Mixed Convention (172 members, half elected and half parliamentarians chosen by Congress), with 21.01%. Elections for the Constituent Convention are scheduled for April 2021.

A new constitution is likely to increase the role of the state in the economy, particularly in the provision of basic services. Launching a process to draft a new constitution was a key promise by President Sebastián Piñera following the violent unrest that started in October 2019 over social grievances. The existing constitution, established in 1980, is considered illegitimate by large sections of the population and politicians because it was drafted under the dictatorship of Augusto Pinochet. The new constitution is likely to increase the role of the state in the economy, transitioning from a "subsidiary state" - which provides services where the private sector cannot - to a "welfare state", which guarantees access to quality basic services to all the population.

Property rights and the ownership of natural resources are likely to be reviewed. Property rights are enshrined in the 1980 constitution, with high compensation required for expropriated property. A redrafted constitution is likely to strengthen the role of the state to limit property rights that affect basic services and are of public use, such as public healthcare, national security, and the environment. This is primarily likely to affect water rights, which in Chile are private and permanent and would go alongside proposed changes to the water code and a glacier protection law, both bills currently in Congress. Lithium is classed as a "strategic mineral" and does not allow concessions. Therefore, only the state, state-owned companies, or private companies operating under partnerships with the Chilean Production Development Corporation (CORFO) can develop the mineral. The constitutional process is likely to open a debate on whether to fully nationalise the sector or allow complete private involvement via concessions, but maintaining its special status is the most likely scenario. For copper, Chile's main export, a new constitution is likely to protect the national status of state-owned company Codelco, while continuing to allow private investment.

Presidential powers likely to be reduced. The Chilean president has strong prerogatives, such as veto and decree powers, and exclusive competence to present legislation on certain issues, such as taxes and administration of the budget. Some of these powers are likely to be reduced to balance the powers with the legislature. The role of the Constitutional Court (Tribunal Constitucional: TC) is also likely to be reviewed, as it has the power to repeal legislation approved by Congress. For example, in 2016, it ruled unconstitutional the provision of a labour reform by former president Michelle Bachelet that would have substantially increased the power of unions. There are also proposals to install a semi-presidential system.

The constitutional redraft will significantly raise investor uncertainty, but the composition of the Constituent Convention will help prevent significant regulatory changes. The constitutional process threatens to change the regulatory framework that has characterised Chile's business-friendly environment. However, the election of the members of the Constituent Convention will be done by districts, which suggests that the body will have a similar composition as Congress, with an overall similar representation of the main political forces in Congress. Representatives from the ruling centre-right coalition Chile Vamos (Chile Let's Go) and moderate elements of the centre-left, such as the Christian Democrats (Democracia Cristiana: DC) and Convergencia Progresista, will water down any significant changes on a new constitution or any attempts to diminish respect for institutions, the rule of law or international treaties. In addition, the two-thirds majority that the constituent body will be required to approve each article of the new constitution means that the basic concept of private property is likely to be preserved. In addition, the numerous bilateral investment treaties signed by Chile over the last 30 years offer additional protection for foreign investors that did not exist when the existing constitution was drafted.

Indicators of changing risk environment

Increasing risk

• The left-wing opposition Broad Front (Frente Amplio: FA) gets significant representation in the Constituent Convention, likely pushing for more radical changes, such as the nationalisation of development of natural resources.
• Widespread anti-government protests re-emerge at a similar strength as in October 2019, indicating that the set-up of a Constituent Convention failed to quell unrest.
• The FA or the Communist Party (Partido Comunista: PC) win the presidential election in November 2021, likely steering the constitution into one that significantly increases the role of the state in the economy.

Decreasing risk

• The business sector gets significant representation in the Constituent Convention, increasing the likelihood of it blocking policy that would undermine the business environment.
• The ruling coalition Chile Vamos has a strong showing in the legislative elections in November 2021 indicating that a state-interventionist agenda is likely to be diluted, as the Constitution needs to be approved by Congress.
• Chile Vamos wins the presidential election in November 2021, steering the constitution into one that continues to protect property rights and the involvement of the private sector in almost all sectors of the economy.

Posted 29 October 2020 by Carla Selman, Senior Research Analyst, Country Risk, IHS Markit