Policy Responses to COVID-19 in Emerging Market Economies: an Open Market Operations Perspective

The X Open Market Operations (Digital) Meeting

CEMLA and Banco de México Beltrán de Ramón A. Director Financial Markets of

September 3rd, 2020 • One of the CB’s objectives is to ensure the proper Recent functioning of the financial system’s chain of payments. In addition, it has the function of seeking financial stability developments and making market dynamics work. • For these reasons, from October 2019 the CB has developed measures that seek to manage the impact of both internal and external shocks that have challenged the economy. • The measures include tools which provide liquidity in pesos and in US$, and which also maintain financial stability • During March’s MPM, the Board decided to keep the MPR at 0.5% (Effective Lower Bound) and communicate that it will consider options to boost the monetary impulse by increasing the use of unconventional tools, if needed BANCO CENTRAL DE CHILE In line with the ELB, the money market has traded under the MPR, very close to the permanent deposit facility (PDF)

Monetary Policy Rate Deposit and swap rates Monetary market and bill rates (percentage) (porcentaje) (percentage) 3,0 3,5 Últ. 0,8 sem.

3,0 2,5 0,7

0,6 2,5 2,0 0,5

2,0 1,5 0,4 0,3 1,5 1,0 0,2

1,0 0,1 0,5 ELB 0 0,5 Apr 1 Apr 26 May 21 Jun 15 Jul 10 Aug 4 0,0 Mar 2 Mar 30 Apr 28 May 28 Jun 25 Jul 27 Aug 24 0,0 Swap 30d Swap 90d Swap 180d 7d Bill 14d Bill Dep 30d Jan-19Apr-19 Jul-19 Oct-19 Jan-20Apr-20 Jul-20 Swap 360d Dep 30d Dep 90d Dep 90d PDF Dep 180d Dep 360d MPR 3 Source: Central Bank of Chile, Bloomberg. BANCO CENTRAL DE CHILE In order to strengthen the international liquidity position, the CB has adopted international financing lines in the case of severe shocks to handle a potentially massive capital outflow.

1. FCL: precautionary financing line for US$ InternationalReservas Internacionales Reserves and y SovereignFondos SoberanosWealth Funds 23.9 billion, for 2 years. The balance sheet is expanded in the case of activation. 25,0% 2. PBoC Swap Line: Swap line where CB seeks to increase the amount and functions. The 20,0% balance sheet is expanded in the case of 15,0% activation. 3. FIMA: FED repo program. This mechanism 10,0%

doesn’t expand the balance sheet, because 5,0% the cash is collateralized with instruments. 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

ReservasRIN (% (% GDP) PIB) ReservasRIN + SWF+ FFSS (%(% PIB)GDP)

Source: Central Bank of Chile. 4 BANCO CENTRAL DE CHILE The national and international environment has challenged us to take quick and effective actions to mitigate the impacts on local market

The CB has carried out all the necessary operations to provide liquidity in local and foreign currency.

• It has broadened the accepted collateral for the funding operations to include corporate bonds.

• It has implemented the Bank bond purchase program to mitigate disruptions in fixed income markets.

• It has established the Conditional Funding Facility, FCIC1 and FCIC2, to encourage credit to the most vulnerable sectors.

The description of the measures, their objectives, and their impact on the CB’s balance sheet will be detailed in the following slides.

5 BANCO CENTRAL DE CHILE 1. Mitigate the volatility of the CLP in order to allow adequate price formation.

• On November 28th, 2019, the CB announced an Spot Dollar exchange rate intervention program which lasted (US$millions) until May 2020. 3.000 240

2.500 200 • The program considered amounts up to i) US$10 2.000 160 billion in spot sales, and up to ii) US$10 billion in stock of currency hedging instruments. 1.500 120

1.000 80 • On January 3rd, 2020, temporary spot sales were suspended, totaling US$2,550 million and 500 40 US$4,500 million in forwards, which will be 0 - renewed as they expire. 2-Dec-19 10-Dec-19 18-Dec-19 30-Dec-19

Cumulative USD Sold daily USD Sold (rhs)

6 BANCO CENTRAL DE CHILE 1. Mitigate the volatility of the CLP in order to allow adequate price formation

• On March 16th, the Board extended the • If the differential between the forward’s trading exchange intervention program to January price and the observed exchange rate is positive, the banks pay the CB, implying less liquidity without 9th, 2021, as a result of impacts of COVID- affecting the balance sheet 19. • On June 3rd, the CB announced that it will

let the stock of US$ forwards expire at a Non-Deliverable Forward (NDF) rate of US$250 million per week, due to 6.000 (US$ millions) 5.000 decreased volatility of the exchange 4.000 market. However, it conditions the behavior 3.000 2.000 of volatility in this market and reiterates 1.000 that the exchange intervention program 0 will continue until January 2021.

7 BANCO CENTRAL DE CHILE 2. Facilitate the management of liquidity in US$ in order to mitigate eventual tensions in the financial markets

• FX swaps have been implemented since FX Swap (US$ millions) November 2019. 1.500

• These are temporary operations of term loans 1.200 in US$ at a LIBOR + 200 bp, and are guaranteed with liquidity in pesos. 900

600 • Maturities were extended in March 2020: 30, 300 90 and 180 days, all at a LIBOR + 200 bp

0 Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- 19 19 20 20 20 20 20 20 8 BANCO CENTRAL DE CHILE 3. Facilitate the management of liquidity in CLP

• REPOs have been implemented since REPO November 2019. (US$ millions) 3.000

• These are temporary operations of term loans 2.500 in pesos at a MPR, which are guaranteed with 2.000

financial instruments 1.500

1.000 • Maturities were extended in March 2020: 7, 30, 90 and 180 days, as were the universe of 500 collaterals: instruments issued by CB, 0 Government, banks and corporate entities.

9 BANCO CENTRAL DE CHILE 3. Facilitate the management of liquidity in CLP

• The CB has been buying back its instruments at Cumulative Buyback by Instrument Type market prices since November 2019. The total (US$ millions) buyback amount has reached US$3,300 million. 7.000 6.000

5.000

• The program was modified in March, to buying 4.000

back all instruments with maturities below 3 3.000 years at MPR of 0.5%. The goal was improve 2.000 the transmission of . 1.000

0

Inflation Linked Bond Nominal Bond Bill 10 BANCO CENTRAL DE CHILE 4. Contain volatility in the fixed income market

• Bank Bonds Purchase (BBP): this program was Bank Bonds Purchase (US$ millions) announced in the MPM of March 16th, to 1.600 6.000 1.400 purchase a total of US$4,000 million. 5.000 1.200 4.000 • Purchases were made at swap promedio 1.000 800 3.000 camara (SPC) premium rates, differentiated by 600 2.000 the issuer´s risk rating: 400 1.000 AAA = SPC+250 bp 200

AA = SPC+260 bp 0 0

A = SPC+280 bp

1-Jul 6-Jul 9-Jul

2-Apr 6-Apr 8-Apr

13-Jul 20-Jul 27-Jul

5-Aug

25-Jun

20-Mar 23-Mar 24-Mar

13-Aug 20-Aug • Last March, the total amount of the purchases Inflation Linked Bonds Nominal Bonds was increased to US$8,000 million. Cumulative purchases (rhs)

11 BANCO CENTRAL DE CHILE In fact, BBP program had an intended crowding-in effect on corporate bonds (which are not permitted for CB purchases). We also saw some additional contraction in most spreads for both markets since our last call Corporate (banking only) inflation-linked bonds swap Corporate inflation-linked bonds swap spreads 2 to 600 spreads 2 to 5 years 600 5 years (basis points) (basis points) 400 400 AA A AAA AA 200 200

0 0 Jan.19 Apr.19 Jul.19 Oct.19 Jan.20 Apr.20 Jul.20 Jan.19 Apr.19 Jul.19 Oct.19 Jan.20 Apr.20 Jul.20 Note: 5-day moving average yield Banking bonds (linked inflation) holdings per agent Corporate bonds (linked inflation) holding per agent (var. since march in US$ millions) (var. since march in US$ millions) Banks Banks Others Others

Mutual Funds Mutual Funds

Pension Funds Pension Funds

-8.000 -6.000 -4.000 -2.000 0 -1.500 -1.000 -500 0 500 1.000 1.500 12 Source: Central Bank of Chile. BANCO CENTRAL DE CHILE 5. Provide liquidity, support the flow of credit and the transmission of monetary policy

• The Condition Funding Facility (FCIC) is a special In June an FCIC2 was approved, for up to an additional US$16,000 million. financial line used to promote the financing and refinancing of loans for households and small and FCIC 1/LCL, Additional Credit Line (US$ millions) medium size companies. 25.000 • This measure has a limit of 15% of the total bank´s 20.000 portfolio, equivalent to US$24,000 million. The maturity is 4 years, at minimum MPR. The 15.000 instruments for the guarantees include instruments 10.000 issued by CB, the Government, banks, corporates and banks’ credit portfolio. 5.000 • A 2 year Credit Liquidity Line (LCL) was also offered 0

at a minimum MPR, backed by the constitution of

2-Jul 9-Jul

4-Jun

16-Jul 23-Jul 30-Jul 6-Aug

reserve requirements in pesos. 7-May

11-Jun 18-Jun 25-Jun

16-Apr 23-Apr 30-Apr

20-Aug 13-Aug

21-May 28-May LCL Usage14-May FCIC 1 Usage 13 LCL Limit Additional Line Limit BANCO CENTRAL DE CHILE 6. Mitigate volatility resulting from the change in the Pension Fund portfolio

• On July 8th, the withdrawal of 10% of the CC-VP (US$ millions)

pension funds was approved, which would 4.500

cause a liquidation of asset by PF. Two 4.000

additional measures were implemented: 3.500

3.000 • CC-VP: cash purchase of bank bonds with joint 2.500 and simultaneous sale in terms of 1 or 3 2.000 months, for up to US$10,000 million. 1.500 1.000 • Until now, the total amount reached is 500 - US$3,837 million. 3-Aug 10-Aug 24-Aug 25-Aug

Inflation Linked Bank Bond Cumulative

14 BANCO CENTRAL DE CHILE 6. Mitigate volatility resulting from the change in the Pension Fund portfolio

• Bank Deposit Purchase: direct purchase over Bank Deposit Purchase of bank deposits, for a total (US$ millions) amount of US$8,000 million. 80 70

60

50

40

30

20

10

0 7-Aug 14-Aug 21-Aug Inflation Linked Nominal

15 BANCO CENTRAL DE CHILE So far the FCIC has been the most effective tool to provide liquidity. The purchase of bank bonds and the CB´s debt buy-back program have also played an important role. Special programs liquidity injection account for around 20% of GDP.

Central Bank of Chile Special Operations Impact on CB's Balance Sheet Total amount Amount of the Current since Assets Liabilities Balance Sheet program amount announcement FX Spot 10,000 2,550 ↓ RIN ↓Liquidity, Bill ↓ NDF 10,000 1,650 35,540   

FX Swap 4,000 2,422 ↓ RIN ↑ US$ credit Unchanged Unchanged REPO 621 6,214 ↑ REPO ↑ Liquidity, Bill ↑ ↑ Purchase of bank bonds 16,000 5,385 ↑ BB ↑ Liquidity, Bill

CC VP Program 10,000 3,837 ↑ BB pledge ↑ Liquidity, Bill ↑ Deposite Program 8,000 167 ↑BD ↑ Liquidity, Bill ↑ ↓ BCP, BCU ↑ Bond buyback of CBC 8,514* 6,190 Unchanged Unchanged Liquidity, Bill Facility of Conditional Financing to the Increase of Placements fo Banking Companies (FCFI) and Liquidity Line of Credit (LLC) Use FCFI 1 + Use FCFI (FCFI1 + Use of LLC Use FCFI 1 + LLC ↑LCL, REPO pledge ↑ LLC (%) FCFI2) ↑ Liquidity, Bill (FCIC) 7,077 22,978 95 19,889 16 Source: CBC | Outstanding amount of instrument of CBC at the start of the program BANCO CENTRAL DE CHILE On August 6, a law was approved that allows the CB to buy Goverment Bonds. So far this measure hasn’t been used, however it allows the CB to have another mechanism for providing liquidity if neccesary.

Stock of US$ 64,244 millions Stock of US$ 1,708 millions Central Bank Debt Stock (BCP-BCU) (US$ millions) 10.000

9.000

8.000

7.000

6.000

5.000

4.000

3.000

2.000

1.000

0

BCP (Nominal Bond) BCU (Inflation Linked Bond) Source: Central Bank of Chile. 17 BANCO CENTRAL DE CHILE All these operations have implied an increase in local assets on the Balance sheet, which now represent 17% of GDP, as compared to the RIN which are equivalent to 15% of GDP.

Central Bank Balance Sheet International Reserves (mill. US$) (US$ millions)

60.000 45.000

40.000 40.000

35.000 20.000

30.000 0 25.000 -20.000 20.000

-40.000 15.000

-60.000 10.000 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 5.000 USD Sell Circ/CtaCTe/RT BCCh Debt 0 FLI/FPL/DL/FPD Others Buyback BCCh Bonds

REPO/FCIC/LCL Bank Bonds FX Swap

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 18 Source: Central Bank of Chile. Policy Responses to COVID-19 in Emerging Market Economies: an Open Market Operations Perspective

The X Open Market Operations (Digital) Meeting

CEMLA and Banco de México Beltrán de Ramón A. Director Financial Markets Central Bank of Chile

September 3rd, 2020