By Alexander Villegas and Fabian Cambero
SANTIAGO, March 10 (Reuters) - Elected on promises of economic growth, deregulation and public spending cuts, local markets rallied after Chile elected far-right Jose Antonio Kast as president in December, but the economic tailwinds have turned turbulent as the Iran war has sent global markets into a tailspin.
Kast, who takes power on Wednesday, is now in charge of managing the turmoil. A spokesperson for Kast's economic team said that no economic contingencies were planned at the moment, but did not provide further details of how recent developments would impact their economic agenda.
"(Kast) was elected on a promise of being an 'emergency government' that was going to fix things that mattered to Chileans quickly," said Kenneth Bunker, a political analyst and academic at University of San Sebastian, adding that one of Kast's main promises was economic growth.
"Kast's priorities will probably remain stable, but his ability to carry them out will probably be affected by the exchange rate, inflation and economic growth," Bunker said, adding that if his government can't achieve the growth it was expecting, several of its plans could be delayed.
Chile, the world's largest copper producer and second-largest lithium producer, is sensitive to fluctuations in international markets.
Copper, Chile's main export and the country's main source of revenue, climbed from less than $10,000 per ton last June to a peak of $13,618 at the end of January and every cent increase represents an additional $27 million to $35 million for the Chilean treasury, according to the outgoing government.
Before the Iran war, experts estimated Chile could receive up to $4 billion in additional revenue from the soaring prices of the red metal but the price has been volatile in recent weeks, dropping up to 8% from recent highs. As of Tuesday, the price has risen back up to $13,098.
Chile is also one of the largest oil importers in Latin America due to its lack of domestic production, increasing the impact of rising oil prices which hit nearly $120 a barrel since the start of the war.
"The Iran war has increased inflation risks considerably," Oxford Economics said in a report surveying emerging markets published on Monday.
The report added Central and Eastern Europe, Chile and India would be the hardest hit in its oil shock simulation, which showed Q2 inflation estimates rising between 0.4ppts to 1.7ppts.
"(Chile) is very sensitive to external shocks, very sensitive, whether they be geopolitical, military, or fluctuations in global markets," said Marcela Vera, an economist at the University of Santiago.
"The economy has very few financial protection barriers and it has a lot of free trade agreements, so its model is based on a primary export system."
After months of setting new highs, Chile's IPSA stock market continued to rise following the election and peaked in late January, with about a 65% surge from a year earlier.
Chile's peso, boosted by strong copper prices, had been gaining steam since July and reached its strongest point in years in early February.
But since those recent highs, the stock market has dropped over 10% and the currency has depreciated about 5% as spiking oil prices and global economic uncertainty rock the nation.
Vera noted that Chile has a fuel stabilization fund, MEPCO, that operates on three-week cycles to help smooth out price spikes.
"If the war continues for months, then we'll have a chronic effect on our economy," Vera said. "It won't just be the price of oil going up, but the cost of logistics and the price of the dollar."
A JPMorgan report released Friday said that while MEPCO dampens the impacts of spiking oil prices, it "does not eliminate pass-through effects" and raised its inflation forecast by 20 bp to 3.6% for December with "risks tilted to the upside."
(Reporting by Alexander Villegas and Fabian Cambero; Editing by Alistair Bell)
