(Bloomberg) -- Chilean stocks and the peso rallied the most in a decade on optimism an agreement over a new constitution will help end protests and riots that threatened to upend the country’s economy.
The benchmark stock index closed with a gain of 8.1%, while the peso added 3.3%, both posting the world’s best performances on Friday. Bond spreads narrowed and the cost to insure against default dropped.
It was the first sign of significant relief for Chilean assets after they came under pressure a month ago following the government’s move to raise subway fares. The deadly and violent upheaval that followed -- unprecedented in a country seen as an oasis of stability in the region -- sent the currency tumbling to a record low, hammered stocks and briefly cost Chile its title as Latin America’s safest borrower.
Bleary-eyed lawmakers announced an agreement over a mechanism to rewrite the constitution at about 2:30 a.m. Friday, following another day of demonstrations and arson attacks. While protesters have a long list of social-justice grievances, replacing a constitution that was penned during the dictatorship of Augusto Pinochet was a key demand.
“We don’t know if this will put an end to all the protests, but it will certainly help,” said Rodrigo Rojas, who manages $500 million at Toesca Asset Management. “The agreement improves visibility for the market versus what we had just 24 hours ago.”
Leading the Way
The protests may cost as many as 300,000 jobs, saw almost one in three supermarkets vandalized and led to 20 deaths. The police appeared to lose control of the streets at times.
The breakdown in social cohesion was a surprising turn of events for a country that, at least in financial circles, was considered the best house on a bad block, heading toward developed-nation status after years of fiscal prudence and relative stability fueled economic growth.
But the nightly images of destruction over the past month brought the IPSA stocks index down to 13 times estimated earnings, the lowest since early 2016. Inversiones La Construccion SA, with interests in pension funds and healthcare, two industries in the cross-hairs of protesters, was one of the best performers Friday, rising 26%. Builders Salfacorp SA and Besalco SA also leaped.
Swap rates in pesos plunged. By Thursday, the market had priced out almost any further monetary policy easing as the peso rout continued. In a sharp about-face today, the two-year swap fell 23 basis points, while five-year and 10-year swap rates dropped the most in at least a decade.
Of course the social turmoil in Chile didn’t happen in isolation. Populist governments have been elected in Mexico, Brazil and Argentina. Venezuela is basically a failed state. Peru’s president recently dissolved Congress after his predecessor was ousted amid corruption allegations. And in Bolivia, enraged supporters of former President Evo Morales are clashing with police as his replacement tries to establish order.
In Chile, there’s broad popular support for reform -- almost three-fourths of those surveyed late last month said protests should continue.
Under Friday’s accord, Chile will hold a referendum in April on whether to have a new constitution and which body would be in charge of drafting it. One option will be a newly elected Constituent Convention, the other a mix between the Congress and a Convention.
Key to today’s market rally is a line saying that all clauses must be approved by a two-third majority. That could potentially make it easier to avoid radical change. What has worried analysts is the potential for the economic and social model that has supported 30 years of outperformance in Chile relative to its emerging-market peers may be scrapped.
“Consensus on content will be needed,” Fernan Gonzalez, an analyst at Banchile, said in a note. “Equities should re-rate after the agreement and the sell-off,“ he said, naming Banco Santander Chile, Cencosud Shopping SA, Empresas CMPC SA, Enel Chile SA as its top picks.
Chile is well positioned to shift toward higher taxes and increased spending. After racking up huge budget surpluses during the commodities boom, the nation can afford to spend a few more points of gross domestic product on health and pensions. The government spends about 25% of GDP, compared to 38% in Brazil and Argentina.
Still, the Chile of the future will likely have a higher tax burden, higher fiscal spending and possibly more debt to satisfy protesters’ demands for bigger pensions, better health care and less economic inequality.
“This isn’t free,” said Sebastian Ide, head of trading at Banco de Chile in Santiago. “To think that asset prices will just go back to where they were is blindness. This peace will help with consumer spending, but for growth you need investment. Investment won’t come until we know where we are with the constitution and fiscal spending.”
(Updates with closing market prices.)
--With assistance from James Attwood.
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