Chile tries to stabilize local financial markets

Chile tries to stabilize local financial markets

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Chile’s Central Bank said on Wednesday that the credit line it requested from the International Monetary Fund (IMF) will reinforce the country's investment position in a "high-risk external scenario" and provide the necessary backing for policy action amid the coronavirus pandemic.

The IMF is expected to approve a two-year loan for $23.8 billion within two weeks, Central Bank Gov. Mario Marcel said in during presentation on Wednesday. The government will use the credit line, equal to 60% of Chile's international reserves, to lower financial risk, underpin financial stability, support credit flow and mitigate the contraction of economic activity, he added.

The conditions of Chile's local financial markets have deteriorated, exacerbated by institutional investors rebalancing their portfolios with more liquid assets, significantly widening spreads of corporate and local bank bonds, the Central Bank said in a financial stability report released on Wednesday.

Non-resident investors have adjusted their portfolios by decreasing their position in local sovereign bonds by 20% since December and lowering their position in local stock by 18% since February, according to the Central Bank.

Local pension funds have sold $4 billion worth of local sovereign bonds and purchased $3 billion worth of foreign assets since November 2020. More recently, they have sold $2.5 billion worth of term deposits.

"These adjustments have been influenced by massive movements of affiliates between funds, motivated in part by recommendations of non-regulated advisors, and those recommendations have increased significantly in the last months, increasing the volatility of certain markets in a way that could affect financial stability," the Central Bank said about local pension funds in the report.

The crisis this year has brought historically large downgrades private bond ratings from investment grade to high yield, the bank added. Fallen angel bonds could increase by more than $500 billion, or 15.7% of bonds rated BBB+, BBB and BBB-. This will also affect local institutional investors which hold $13.9 billion worth of bonds subject to the potential shock, the Central Bank said.

To counteract the crisis, the Central Bank said it has injected dollars into the economy and carried out foreign exchange swaps along with suspending bond sales and buying back debt. It has also relaxed rules on increasing liquidity and offered $13.7 billion in conditional credit lines for local banks.

The Finance Ministry, meanwhile, has increased capital in BancoEstado, rolled out a COVID-19 working capital credit line for companies and postponed tax payments, according to the Central Bank.

With the IMF credit line, the Central Bank plans to increase confidence and reduce financing costs. The bank also plans to broaden access to its services beyond commercial banks and some financial market infrastructures (FMIs), extending its services to non-bank financial institutions.