Michelle Bachelet (pictured) is well on her way to returning to the Chilean presidency after winning 46.7 per cent of the votes in the first round of the country’s presidential elections on Sunday.

But while the 62-year old former pediatrician is expected to win the second round run-off on December 15 by a comfortable margin, she is also set to inherit an economy that is much less robust than the one she presided over during with her previous stint in 2006-2010.

The challenges before her was underscored by the swathe of third-quarter economic data released on Monday.

First the GDP data:

On the face of it, Chile’s economy, which grew at 4.7 per cent during the third quarter compared to a year earlier and ahead of market expectations of 4.4 per cent, suggests that things are ticking up again.

But as analysts at Capital Economics noted, this was largely driven by a rebound in mining exports, which is unlikely to be sustained given that growth in China – while on the mend – is unlikely to return to the blistering pace seen over the past decade.

Domestic demand, which has helped fuel the economy in recent years, cooled to a 1.3 percent expansion from the prior year. That compares to growth of 4.1 percent in the second quarter of 2013 and an expansion of 8.3 percent in the third quarter 2012.

Compounding the problem is weakening business sentiment, fuelled by concerns that some of Bachelet’s proposals – including amendments to foreign investor protection rights and a “tax and spend” strategy of higher corporate taxes to fight worsening income equality and fund much needed educational reforms – could threaten the market-friendly model on which Chile’s economic success has been built.

Monday’s data showed that fixed capital formation grew just 3.2 per cent in the third quarter on a year-on year basis, compared to the 8.6 per cent increase seen in the second quarter.

And then, there is the balance of payment issue. Data on Monday showed that Chile’s current account deficit remained uncomfortably large at 3.5 per cent of GDP last quarter.

As Capital Economics sees it:

All of this leaves the economy looking vulnerable to a negative external shock. A sudden and sustained fall in the price of Chile’s key export, copper, could cause the deficit to blow out…

The view was echoed by analysts at Nomura, who argued:

In summary, Ms. Bachelet will be facing much less favorable conditions at both home and abroad, compared with her previous stint (2006-10).

Back then, China was growing at double digits, commodity prices were surging, copper was in short supply globally, economic growth was fast in Chile and unemployment was falling. In the next four years, China will likely grow around 7%, commodity prices will probably be on the decline, the copper investment cycle is maturing and global supply is expected to exceed demand by 2015.

We are already witnessing slower growth, lower interest rates and a weaker currency in Chile, and we expect the adjustment to continue. Whether Ms. Bachelet will be able to manage the high expectations of voters, improve access to education and help better prepare Chile for a “post-copper” era, without overburdening an economy that is set to undergo a period of adjustment, will become the biggest challenge for her second term as President.

Related reading:
Bachelet set to reclaim power in Chile, FT
Restless Chile awaits returning Bachelet, FT
Chile swings left, Lex
Chile file, beyondbrics

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