The Chilean Economy in the Context of the COVID-19 Shock
Ministerio de Hacienda
International Finance Ministry of Finance August, 2020 Ministerio de Hacienda – Gobierno de Chile
Main messages.
• After several weeks of falling new COVID-19 cases, strict social distancing measures have been gradually and partially lifted in certain areas of the country, based on progress in quantitative metrics. • Reflecting the impact of the measures taken to contain the pandemic, the Chilean economy experienced sizable sequential contractions between March and May, and an improvement at the margin in June. That being said, activity has been uneven across sectors, with output in the mining sector increasing in annual terms, and other service sectors falling sharply. • The policy response has been swift and decisive. • The Government has announced policies that mobilize up to ~USD28.3 billion in fiscal resources, providing adequate resources for the health sector, supporting households and firms, and injecting liquidity to the real economy. • After taking the policy rate to its technical minimum and actively implementing several unconventional measures to support liquidity and credit, the Central Bank of Chile continues to assess options to intensify the expansionary stance and support financial stability. • In this context, despite recent local and international developments, domestic financial conditions have remained stable, with long-term interest rates falling, corporate and bank spreads narrowing, and the local stock exchange trading sideways. In the credit space, commercial loans continue to increase, in contrast to consumer loans. • With the global economy in a deep recession, international financial conditions that have eased in recent months, and unprecedented policy support, the Chilean economy is projected to contract by 6.5% in 2020 and snapback towards 5.5% in 2021, albeit with significant uncertainty in the forecast due to the evolution of the pandemic. Pension fund withdrawal requests for ~USD14bn as of mid-August are also expected to provide transitory support to consumption in the short-term. • The recovery towards 2021 will be aided by fiscal efforts that boost public & private investment, promote job retention and creation, and continue to support SMEs. • The debt issuance plan for the current calendar year announced in April 2020 has been almost entirely completed; with financing needs and sources (assets/debt) for 2021 to be announced in the next few months.
2 COVID-19 in Chile Ministerio de Hacienda – Gobierno de Chile
The economy has been under strict containment for several months, with mobility measures suggesting the population has largely complied.
Share of Population in Quarantine Mobility Index for Chile Percent Percent, median value, for the corresponding day of the week, during the 5-week period Jan 3rd-Feb 6th.
Quarantined population, % Oxford stringency index (left axis)* Retail and recreation Transit stations Workplaces Residential 100 60 40
90 50 20 80
70 40 0 60 -20 50 30
40 -40 20 30
20 -60 10 10 -80
0 0
Jul-20 Jul-20
Apr-20 Apr-20
Jun-20 Jun-20
Mar-20 Mar-20
Feb-20
Aug-20
May-20 May-20 May-20
10-jul 17-jul 03-jul 24-jul 31-jul
05-jun 12-jun 19-jun 26-jun
03-abr 10-abr 17-abr 24-abr
07-ago 14-ago 21-ago
13-mar 20-mar 27-mar
01-may 08-may 15-may 22-may 29-may Source: Ministry of Finance, Oxford Stringency Index, * Index 0-100, where 100 is strictest. Source: Ministry of Finance based on Google’s Community Mobility Report. 4 Ministerio de Hacienda – Gobierno de Chile
New confirmed cases have been declining for several weeks.
Estimated COVID-19 Effective Reproduction Number COVID-19 Cases in Chile: New Daily Confirmed Cases March 17th – August 14th 2020. People, thousands. March 3rd – August 13th 2020.
Source: TrackingRt; https://sites.google.com/g.ucla.edu/trackingrt/home?authuser=0 Source: Ministry of Health.
5 Ministerio de Hacienda – Gobierno de Chile Step-by-Step Plan
The Government of Chile announced the Step-by-Step plan on July 20th, which provides general guidelines for the gradual lifting of sanitary measures. The plan considers 5 stages or gradual steps, ranging from Quarantine to Advanced Opening, each with specific restrictions and obligations. Movements between stages depend on epidemiological indicators, healthcare network and traceability.
STEP 1: Quarantine STEP 2: Transition STEP 3: Preparation STEP 4: Initial STEP 5: Advanced Opening Opening
Restricted mobility to Decrease the degree of Quarantine is lifted for the Activities with a lower risk of Easing of Step 4 measures. decrease propagation of the confinement. population, except for at-risk contagion are resumed, virus. groups. minimizing crowds.
3.6% 0.01% 44% of the population 20% 28% of the population 8% 0% of the of the of the of the of the population 2.0% population 2.1% population population population of the population of the population
6 Source: Ministry of Health. Recent Economic Performance Ministerio de Hacienda – Gobierno de Chile As expected, social distancing measures have triggered a major decline in Chile’s economic activity, albeit not as pronounced as in other economies.
Real GDP at a Quarterly Frequency Real GDP in the First Semester of 2020 across Select Economies Percent, year-on-year, 1986Q1:2020Q2 Percent change, year-on-year 20 0
-2 15 -1,8 -4 10 -4,6 -6 -5,9 -7,0 5 -8 -7,2 -7,1
-10 -9,1 0 -10,2 -12 -11,7 -11,4 -5 -12,4 -14 -13,1
-10 -16
-14,1 -15 -18 -17,3
-20
-20 UK
Italy
USA
Peru
Chile
Spain
China
Japan
France
Mexico
Germany
Colombia
1995 2001 2011 1987 1989 1991 1993 1997 1999 2003 2005 2007 2009 2013 2015 2017 2019 Eurozone
8 Source: Central Bank of Chile. Ministerio de Hacienda – Gobierno de Chile
The impact across sectors has been uneven.
Sectors reliant on face-to-face contact* National Monthly Activity Proxy for Mining (IMACEC Minero) Percent change, year-on-year Percent change, year-on-year
10 15
5
10 0
-5 5 -10
-15 0 -20
-25 -5
-30
-35 -10
Jul-19
Jul-19
Apr-19 Oct-19 Apr-20
Oct-19
Apr-19 Apr-20
Jan-19 Jun-19 Jan-20 Jun-20
Jan-19 Jun-19 Jan-20 Jun-20
Mar-19 Mar-20 Feb-19 Feb-20
Feb-19 Mar-19 Feb-20 Mar-20
Nov-19 Dec-19
Aug-19 Sep-19
Aug-19 Sep-19 Nov-19 Dec-19
May-19 May-20
May-19 May-20
* Corresponds to the weighted average of the annual variation between the sectors of Commerce, Restaurants and hotels, Transportation and Personal services. Weights are based on the share of each item in 2019 GDP. 9 Sources: Central Bank of Chile, National Statistics Institute. Ministerio de Hacienda – Gobierno de Chile Retail sales continue to fall, while expectations improve at the margin, still in negative territory. Retail Sales in Real Terms Expectations Percent change, year-on-year 3mma Diffusion index, 50 = neutral 60 Business Confidence (non-mining) Consumer Confidence Total No Durable Durable 5 5 55 0 0 optimistic 50 -5 -5 pessimistic
-10 -10 45
-15 -15 40 -20 -20
-25 -25 35
-30 -30 30 -35 -35
-40 -40 25
-45 -45
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 20
Jul-18 Jul-19 Jul-20
Oct-18 Apr-19 Oct-19 Apr-20
Jan-20 Jan-19
10 Sources: Central Bank of Chile, ICARE, ADIMARK.. Ministerio de Hacienda – Gobierno de Chile The decline in imports reflects domestic demand conditions, while the mining sector has supported the improvement in exports. Imports in Nominal Terms Exports in Nominal Terms Percent change, year-on-year 3mma Percent change, year-on-year 3mma
5 10 Durables Non-durables Capital goods Total Mining Manufactured Total 0
-5 5
-10 0 -15
-20 -5 -25
-30 -10 -35
-40 -15
-45
-50 -20
Jul-19 Jul-20 Jul-19 Jul-20
Oct-19 Apr-20 Oct-19 Apr-20
Jan-20 Jun-20 Jan-20 Jun-20
Mar-20 Feb-20 Feb-20 Mar-20
Dec-19 Aug-19 Sep-19 Nov-19 Aug-19 Sep-19 Nov-19 Dec-19
May-20 May-20
11 Source: Central Bank of Chile. Ministerio de Hacienda – Gobierno de Chile Inflation has fallen recently, with expectations pointing towards low prints ahead.
Inflation: Headline & Core Inflation Expectations 1-year ahead Percent change, year-on-year Percent IPC IPC SAE EconomistasEconomists OperadoresFinancial Operators financieros 6 6
5 5
4 4
3 3
2 2
1 1
Jul-19 Jul-15 Jul-16 Jul-17 Jul-18 Jul-20 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20
Oct-18 Apr-19 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-19 Apr-20 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20
Jan-19 Jan-16 Jan-17 Jan-18 Jan-20 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
12 Sources: Central Bank of Chile, National Statistics Institute. Ministerio de Hacienda – Gobierno de Chile
Fiscal policy announcements thus far imply the mobilization of ~USD28.3 billion (11.3% of GDP).
• Measures are transitory in nature, contributing to the fiscal consolidation process thereafter; • Administrative and legislative initiatives were implemented swiftly; • Several policies build on already existing institutions and mechanisms that have proved to be effective in the past, such as the state-credit guarantee mechanism (FOGAPE), and the unemployment insurance system; • Data on the implementation of these measures has been readily available on a timely basis, facilitating their evaluation and the calibration of additional measures; • Policies geared towards strengthening the credit channel in the economy have been coordinated with the Central Bank of Chile and the Financial Market Commission, thereby enhancing their impact and effectiveness.
13 Ministerio de Hacienda – Gobierno de Chile The Ministry of Finance’s swift policy response was designed to be large, timely, transitory, and targeted. Announcement of Economic Measures in Select Economies
Above the Line Fiscal Policy Measures in Select Economies Days between first Percent of GDP Country First case First announcement case and first announcement 25 Chile Mar. 3, 2020 Mar. 19, 2020 16 Korea Jan. 20, 2020 Feb. 5, 2020 16 Brazil Feb. 26, 2020 Mar. 16, 2020 19 Colombia Mar. 6, 2020 Mar. 27, 2020 21 Peru Mar. 6, 2020 Mar. 30, 2020 24 20 Japan Jan. 16, 2020 Feb. 28, 2020 43 Germany Jan. 28, 2020 Mar. 13, 2020 45 France Jan. 24, 2020 Mar. 12, 2020 48 Philippines Jan. 30, 2020 Mar. 19, 2020 49 USA Jan. 21, 2020 Mar. 13, 2020 52 Canada Jan. 26, 2020 Mar. 20, 2020 54 15 Italy Jan. 31, 2020 Mar. 25, 2020 54 Singapore Jan. 23, 2020 Mar. 20, 2020 57 Thailand Jan. 13, 2020 Mar. 24, 2020 71 China Dec. 8, 2019 Mar. 5, 2020 88 Source: Central Bank of Chile. 10
7,7 Elements of Fiscal Packages in Select Economies Advanced Economies Emerging Market Economies Chile US JP DE FR IT ES GB BR CN ID IN KR MX RU ZA Supporting the health sector ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ 5 Simple Sample Average: 4.2% Supporting households Transfers (1) ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Other labor income (2) ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Wage subsidies ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Tax cuts ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ 0 Tax deferral ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
Supporting Firms
UK
Italy
USA
Peru India
Chile Tax deferral ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
Brazil
Spain Egypt
China
Korea
Japan
Kenya
Ghana
Russia Turkey
France Poland
Mexico Nigeria
Tunisia
Finland
Albania
Canada
Georgia
Belgium Ethiopia Vietnam
Bulgaria Liquidity support (3) ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
Senegal
Pakistan
Australia
Sweden
Rumania
Denmark Mauritius
Germany
Colombia
Argentina
Indonesia Honduras Singapore
Philippines Tax cuts ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
Switzerland
CzechRep.
Bangladesh
Netherlands
SouthAfrica SaudiArabia
New New Zealand Transfers ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Guinea-Bissau Source: Ministry of Finance based on BIS data. (1) includes cash and in-kind transfers to affected households. (2) extended unemployment Source: Ministry of Finance, based on IMF data as of July 3rd, 2020. and sick leave benefits (3) non-budgetary measures such as equity injections, asset purchases, loans and debt assumptions or government guarantees and contingent liabilities. 14 Ministerio de Hacienda – Gobierno de Chile
Policy measures have reached households and Progress can be monitored at: reporte.hacienda.cl firms.
• Tax-related measures totalling USD3.3 billion during April- June have supported households and firms by postponing and/or suspending tax payments;
• 1.5 million households received a total of USD166 million in cash transfers in April;
• Since mid-June, ~6.5 million people have received a total of ~USD 1.4 billion in emergency household incomes;
• Since late June, over 270,000 requests totalling USD 84 million have been paid out to independent workers;
• Since August 1st, over 1 million cash transfers for the middle class totalling ~USD470 million have been paid out; separately over half a million requests for loans directly from the Treasury.
15 Ministerio de Hacienda – Gobierno de Chile Policy measures such as commercial loans with state guarantees support continue to support the flow of credit in the economy. FOGAPE: Cumulative Placements through August 14th Commercial & Consumer Loans during Recessions in Chile USD Billions Cumulative annual percent change with respect to month 0 10
Consumer 9 6,0
8 4,5 3,0 7 1,5
6 0,0
-1,5 5 -3,0
4 -4,5
-6,0 3 0 1 2 3
2
1
0 8 14 18 20 25 27 29 2 4 8 11 15 17 19 23 25 30 2 6 8 10 14 17 21 23 27 29 31 4 6 11 13 May June July August
Small Medium Large Very Large
Source: Central Bank of Chile based on data from the Financial Market Commission*. Small (0-25,000UF), Medium (25,000-100,000UF), Large (100,000-600,000UF), Very Large (600,000- * Month 0 is the first month with negative IMACEC interanual print. 1,000,000UF) 16 Source: Ministry of Finance based on data from the Financial Market Commission. Ministerio de Hacienda – Gobierno de Chile Recent labor market reforms have mitigated an even sharper deterioration of the labor market, incomes, and the real economy. Employment Protection Law
• Allows for the transitory suspension of the worker-employer relationship of up to 6 months, with the employer paying health and pension contributions. Workers maintain the contractual relationship, all rights, and receive monthly payouts from the unemployment insurance (UI) system according to current withdrawal rules. • Reduced work schedule (up to 50% reduction) allows for a smoother adjustment in the labor market and should facilitate the recovery. Employers pay for the hours worked, and the UI system supplements this labor income by up to 25% of the wage. • These programs are funded from the UI funds and do not have an impact on the fiscal balance. As of August 19th, personal UI accounts amounted to ~USD 7.9 billion, and the Solidarity Fund had ~USD3.9 billion.
Workers with Approved Requests Workers by Sector Firms by Number of Employees Thousands of workers. Data through 8/16/20 Thousands of workers. Data through 8/16/20 Total number of firms through 8/16/20 Total Weekly Change Others (15 No Large Medium 800 70 sectors); information; (>200); (50 to 199); 134 677 1.400 700 60 3.781 600 50 Retail; 167 Small (10 500 to 49); 40 Transportation 20.591 400 & Storage; 38 30 300 Total: Total: 117 20 Administrative 722 200 Services; 45 100 10 Constructio Micro (1 to n; 152 9); 90.640 0 0 Accommod Manufacturing; ation &
68 Food
jul.05 jul.12 jul.19 jul.26
jul.12 jul.05 jul.19 jul.26
jun.28 jun.07 jun.14 jun.21
jun.14 jun.21 jun.28
jun.07 Services;
apr.30
aug.02 aug.09 aug.16
aug.02 aug.09 aug.16
may.08 may.15 may.22 may.31
may.08 may.22 may.31 may.15 119
17 Source: Ministry of Finance based on data from Superintendence of Pensions. Ministerio de Hacienda – Gobierno de Chile
The Central Bank of Chile has actively implemented extraordinary measures.
Real Monetary Policy Rate * • Policy rate cut to 0.5% (technical minimum); Percent
• New Conditional Financing Facility (FCIC): banks have access to 4- 2 year loans at the policy rate (0.5%), with loan size increasing as a function of additional credit to more stressed segments; 1
• Bank bonds purchase program (USD8 billion) 0 • Special assets purchase program (USD8 billion) -1 • Term deposit purchase program (USD8 billion) -2
• Repo on instruments issued by banks (USD10 billion)
Peru
Chile
Brazil
Mexico Norway
• Liquidity Credit Line also made available; corporate bonds allowed as Canada Australia
eligible collateral in peso liquidity facilities; Colombia New Zealanad New • Adjustments to the peso and USD REPO & FX swap arrangements; * Real monetary policy rate equivalent to the nominal monetary policy rate deflated with inflation expectations for 2020Q4. Source: Bloomberg • USD sales program extended until 9/1/21; • Transitory adjustments to reserve requirements, flexibilization of liquidity requirements for banks.
More information on the rationale to implement these measures is available at the following link, with additional information on the status of implementation in the following link. Source: Central Bank of Chile. 18 Ministerio de Hacienda – Gobierno de Chile
While it has also further expanded its toolkit to manage financial shocks.
Precautionary tools bolster the Bank’s ability to weather shocks New ability to purchase Treasury Bonds in the Secondary Market
• 2-year IMF Flexible Credit Line for USD23.9 billion, reflects Chile’s • Recent legislative adjustments have provided the Central Bank the very strong fundamentals, institutional policy frameworks, track record ability to purchase Treasury bonds in the secondary market, under of economic performance and policy implementation and commitment exceptional and transitory circumstances, in order to facilitate the to maintain such policies in the future; Bank’s fulfillment of normal functioning of internal and external • Access to NY FED FIMA Repo facility; payments. • Increase in bilateral swap line with the PBoC, now equivalent to • This adjustment occurs in the context of low outstanding amounts of RMB 50.000 million (USD7.1 billion). Central Bank debt available in the secondary market available to act to stabilize financial markets. Reserves + Sovereign Wealth Funds for Select Economies Percent of ARA Metric 400 Central Bank of Chile’s Outstanding Bonds & Notes Reserves SWF FCL Percent of GDP 300 35 200 30 25 Intervention to sterilize FCIC’s 100 20 monetary effect 15 0
10
Peru
India
Chile Brazil
Egypt 5
China
Russia Turkey
Poland
Mexico
Croatia
Bulgary
Ukraine
Panama Ecuador
Uruguay Hungary
Thailand
Malaysia Romania
Colombia 0
Paraguay Argentina
Indonesia
Dom. Rep. Dom. Philippines
South Africa South 1995 2000 2005 2010 2015 2020 * ARA: Assessment of Reserve Adequacy Metric: Fixed (Float) Exchange Rate = 10(5)% x Exports + 10(5)% x Broad Money + 30% x ST Debt + 20(15)% x Other Liabilities. ST External debt on a remaining maturity basis. BonosBonds PagarésNotes Corto Plazo 19 Source: Central Bank of Chile based on IMF and Sovereign Wealth Fund Institute data. Ministerio de Hacienda – Gobierno de Chile
The Financial Market Commission has also implemented several measures to ensure the proper flow of credit.
• Enhanced monitoring and supervisory activities, both individually and in coordination with the Financial Stability Council, with particular emphasis on credit risk; • Issued and/or modified rules that provide greater flexibility to financial entities to support credit • Greater flexibility certain regulatory liquidity requirements and allowed for greater supervisory discretion on the Liquidity Coverage Ratio; • Updated provision requirements to banks and other credit providers (including insurance companies) • Issued regulation so that Banks may use state guarantees to mitigate credit risk consistent with Basel III capital standards; • Facilitate voluntary renegotation of loan payments, including the possibility of including grace periods of up to 6 months in comercial and housing loans, by not requiring additional provisions for banks, credit cooperatives and insurance companies; • Delayed the timetable of transition towards Basel III standards on capital requirements (Pillar 1) so as to reduce the pro-cyclical effects of additional capital requirements, while maintaining the timetable for supervisory tools contemplated in Pillar 2. • Issued regulation to expedite issuance of debt (bonds and comercial paper) in local Markets; • Greater engagement with other local and foreign financial market oversight bodies; • Strengthened proactive role as a public institution on financial market services.
Source: Financial Market Commission; More information available at the following link. 20 Short-term Outlook Ministerio de Hacienda – Gobierno de Chile The main source of uncertainty is the evolution of the pandemic, including risks of second waves after gradual reopenings.
New Confirmed Cases (per million) 15 day average China Europa Oceanía África Asia sin China EEUU (eje der.) América del Sur (eje der.) 50 250
45
40 200
35
30 150
25
20 100
15
10 50
5
0 0
01-jul 08-jul 15-jul 22-jul 29-jul
17-jun 03-jun 10-jun 24-jun
12-feb 05-feb 19-feb 26-feb
01-abr 15-abr 08-abr 22-abr 29-abr
29-ene 22-ene 05-ago
04-mar 11-mar 18-mar 25-mar
06-may 13-may 20-may 27-may
Fuente: CSSE at Johns Hopkins University. 22 Ministerio de Hacienda – Gobierno de Chile The global economy is expected to contract sharply in 2020 and snapback in 2021, while global financial conditions have eased and Chile’s ToT improved.
Real GDP Growth Forecasts by Region Equity Indices Year to date change in Future Prices Percent year-on-year Jan.15=100, through August 17th, 2020. Jan-20 = 100, through August 18th, 2020.
MSCI Emerging MSCI Advanced 110 110 2020 2021 S&P500 IPSA Copper Brent 8,2 110 8 100 100 6,0 5,4 4,5 100 3,6 90 90 4 2,4 1,0 90 80 80 0 70 70 80 -4 60 60 –4,9 70 –5,8 -8 50 50 –8,0 –9,1 60 –10,2 40 40 -12 World USA Euro Area Japan China Brazil 50 30 30
Jan Feb Mar Apr May Jun Jul Aug
Jul
Apr
Jan Jun
Mar Feb
Aug May
Source: IMF, June-2020 WEO data. Source: Bloomberg. Source: Bloomberg.
23 Ministerio de Hacienda – Gobierno de Chile
Chile’s economy is projected to contract sharply in 2020 and snapback in 2021.
Chile’s Real GDP: Actual & Forecast Percent year-on-year
10
8 7.4 7.2 6.8 6.3 6.1 5.7 5.8 6 5.3 5.3 5.5 4.9 4.3 4.1 4.0 3.9 4 3.5 3.3 3.1 2.3 1.8 2 1.7 1.2 1.1
0 -0.4 -2 -1.6
-4
-6 -6.5 -8 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Source: Ministry of Finance. Public Finance Report 2020 Q2. 24 Ministerio de Hacienda – Gobierno de Chile
Fiscal support remains through 2021.
Real Primary Expenditures 2019=100
Source: Proposal prepared by counsel of 16 economists. 25 Ministerio de Hacienda – Gobierno de Chile
Revenues and expenditures reflect COVID-19’s impact and policy response.
Central Government’s Revenue (1991-2020F) Central Government’s Expenditures (1991-2020F) Percent change in real terms Percent change in real terms
30 28,2 18 16,5 23,1 16 20 14
10 12 11.4 Jan-20 forecast 10 1,2 Jan-20 0 forecast: 8.5% 8 6,6 -10 6
-16,1 4 -20 -20,4 2
-30 0
2007 1991 1993 1995 1997 1999 2001 2003 2005 2009 2011 2013 2015 2017 2019
1995 2003 2012 2020 1991 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2004 2005 2006 2007 2008 2009 2010 2011 2013 2014 2015 2016 2017 2018 2019 • Revenues are expected to fall by 16.1% in real terms with respect to 2019, down • Real expenditures in 2020 are projected to rise by 11.4%, up from the 10.4% from the -11.8% estimated in April. The revision is explained by lower growth (- forecasted in April, driven by fiscal measures implemented to support the economy in 3.8%) and tax and administrative measures (-0.5%). the context of the COVID-19 shock. • Revenue as a share of GDP is projected to reach 19.1% by end-2020. • As a result, expenditures as a share of GDP are expected to rise to 28.7% by end- Source: Ministry of Finance based on the Public Finance Report 2020 Q2. 2020. 26 Ministerio de Hacienda – Gobierno de Chile
Chile’s fiscal deficit is expected to widen this year, in line with broad fiscal support across the globe.
Projected Headline Fiscal Balances in 2020 Across Select Economies Percent of GDP
Source: IMF for all economies except for Chile. Chile’s January and April data is from the February and June Informe de Finanzas Públicas report 27 Ministerio de Hacienda – Gobierno de Chile
Gross public debt is projected to rise until 2024, mainly due to transitory and exceptional fiscal support for the economy.
Central Government Debt Growth Stabilization Forecast Percent year-on-year
Source: Ministry of Finance. Public Finance Report 2020 Q2. 28 Ministerio de Hacienda – Gobierno de Chile
Debt has risen, but remains low relative to peers.
Central Government’s Gross Debt Gross Public Debt Forecast for Selected Economies Percent of GDP Percent of GDP, 2021
In March 2020, gross debt reached 29.5%
58.5%, S&P A+ Simple Average*
* Includes Chile, China, and Slovak Republic Source: All forecasts are from the IMF’s Fiscal Monitor April 2020, except from Chile which Source: Ministry of Finance. was taken from IFP 2Q, 2020; Dipres. 29 Ministerio de Hacienda – Gobierno de Chile
Chile has the fiscal space to support the economy.
Central Government’s Net Debt Public Treasury Assets(*) Percent of GDP Total Assets as a Percent of GDP, as of March-20.
24.2% of GDP (USD 57.4 bn.)
(*) FEES: Economic and Social Stabilization Fund; FRP: Pension Reserve Fund; OATP: Other Financial Assets of Public Treasury; FPE: Education Fund; Permanent Financial Investments: Include historical capital transfers to State Owned Enterprises, student loans, participation in private utilities enterprises, among others. e: estimated Source: Ministry of Finance. 30 Ministerio de Hacienda – Gobierno de Chile An increasing and diversified investment pipeline should also support growth.
Private Investment Pipeline per Year Private Investment Pipeline over a 4-year horizon USD billion USD billion 14 jun-19 jun-20 40 38 12 36 36 36 10 35 32 8 30
6 26 25 4
2 20
0 dic-19
jun-19 jun-20
mar-20 mar-19
sept-19
2020 2021 2022 2023 Private Investment Pipeline over a 5-year horizon Private Investment Pipeline per Year by Sector USD billion USD billion 60 2020 2021 2022 2023 2024 Total 55 Mining 2,890 4,903 4,131 2,099 1,156 15,181 50 Housing 2,008 2,275 1,693 1,013 577 7,566 Energy 4,082 1,974 437 339 165 6,998 45 Public Works 797 1,244 1,452 2,181 2,764 8,438 40 Others 566 338 235 185 158 1,482 35 Industrial 561 605 318 86 50 1,619 30 Forestry 717 597 0 0 0 1,314 25 Ports 6 25 44 37 3 116
TOTAL 11,628 11,961 8,311 5,939 4,873 42,713
mar-19 mar-15 mar-16 mar-17 mar-18 mar-20
sept-18 sept-16 sept-17 sept-19 sept-15 31 Source: Ministry of Finance based on information from the Corporación de Bienes de Capital. Ministerio de Hacienda – Gobierno de Chile Efforts are now focused on strengthening the economic recovery. Boosting Investment
Public Investment push Facilitating private investment projects • 2,544 public investment projects totaling ~USD 34 billion in 2020-2022, of which USD 4.5 billion were recently added. • 138 private projects totaling USD 24.5 billion over Public Investment Pipeline per Year by Ministry* 2020-2022 have been identified and will be USD billion streamlined;
Ministry 2020 2021 2022 2020-2022 Public Works 2,862 4,239 3,861 10,962 Housing 2,512 3,274 2,969 8,755 • Bidding and construction of 31 public works projects Transport & Telecommunications 140 128 181 449 under concessions for ~USD 8.6 billion, including Interior 1,882 2,101 1,783 5,766 Sports 40 84 136 260 hospitals, airports, highways, among others; Agriculture 112 187 154 453 Other Ministries 2,502 2,273 2,341 7,116 TOTAL 10,050 12,286 11,425 33,761 Source: Ministry of Finance. * Preliminary pipeline subject to review. • Tendering of 114 fiscal properties.
Source: https://www.gob.cl/chileserecupera/inversion/ 32 Ministerio de Hacienda – Gobierno de Chile
Promoting Jobs Support for SMEs
• Special financing instruments and subsidies; Wage subsidy schemes in the order of • Technical Assistance; USD 2 billion: • Promotion of National Tourism; • On the job retention front, firms that have experienced a decline in their • Roundtables with relevant parties. sales and have temporariliy suspended workers, shall receive a fixed sum per worker during the recovery phase; • To promote job creation: partly Facilitating & Simplifying Permits subsidized wages on new hires paid to employers for up to 6 months;
• In addition, when the hiring subsidy • Agenda that includes 28 measures to expires, a hiring tax credit shall be reduce red-tape in the preparation implemented, equivalent to 23% of the processes of private investment wage. projects, following the recommendations of the National Productivity Comission.
Job Training & Reconversion programs • Special focus on reducing bureaucracy for SMEs.
Source: https://www.gob.cl/chileserecupera/incentivos/ 33 Ministerio de Hacienda – Gobierno de Chile In the context of several elections ahead, confidence in institutions has increased and violence has declined. Approval of Institutions1 and Industries2 Recent Adjustments to the Political Calendar CADEM surveys, August 17th and August 10th Dec-19 Aug-20 Dec-19 Aug-20 2020 2021 Investigative Police (PDI) 57 72 Supermarkets 47 68 Municipalities 66 Metro 53 63 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May 2020 2021 Civil Registry 62 National Health Insurance System 37 57 26 25 Air Force 50 60 National Plebiscite on Constitution Mining Companies 37 55 Navy 51 60 Primaries for Mayors & Regional 7 29 Pharmacies 21 55 Army 43 57 Governors Banks 34 49 Police 35 52 Elections for Municipalities, Regional 7 4 or 11 Telecom Companies 44 48 Central Bank 42 52 Governors, and Members of the Retail 29 40 Constitutional Convention.* Attorney General's Office 25 29 Transantiago 15 34 22 2 or 9 Business Associations 26 29 Runoff for Regional Governors AFPs 9 23 Catholic Church 19 27 Private Health Insurance Comp. 10 22 Source: Ministry of Finance. * Members of the Constitutional Convention will be selected in this election if the “Approve” option Congress 11 25 th obtains a simple majority in the National Plebiscite of October 25 , 2020. Justice Tribunals 18 19
th 1 2 Source: CADEM, August 17 2020. Percent of Approval. Share of answers between 5-7, where 1 is “nada de confianza” and 7 is “mucha confianza.” On the Constitutional Reform Process … Number of Severe Events in Chile* Reported between October 19th 2019 – August 17th 2020 o The process to reform the constitution was decided within the current constitutional 2019 2020 framework; 350 o The design was supported by close to all the political and social forces across the political spectrum, hence it is not an imposition from a minority; 300 o New constitutional norms require a high quorum of 2/3; 250 o The constitution must respect all existing international treaties currently in place; 200 o The body eventually elected will be solely responsible for drafting the new Constitution, and will not have any right over other bodies, powers of the State, nor have the ability to alter 150 voting quorums; 100 o The constitutional convention will not interfere with the legislative work of Congress, or affect the electoral political cycle currently in place; 50 o If the “approval” vote reaches majority, the process is likely to stretch for two-years. 0 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Source: Ministry of the Interior. * Defined as looting, arson, and/or destruction of property. 34 Financing Ministerio de Hacienda – Gobierno de Chile
Debt Management Strategy Debt Issuance Plan for 2020
Strategy Total bond issuances for USD12.7 billion in 2020 (USD8.7 billion plus • Domestic: to develop and lengthen yield curves (nominal and real), USD4 billion for the COVID-19 plan) while deepening liquidity by fostering greater participation of non- residents • In January 2020, Chile issued the equivalent of USD 3.3 billion in USD & EUR • Issuances have strengthened benchmarks and have created denominated green bonds. In May 2020, Chile issued additional USD 2.0 billion longer tenors, extending the debt maturity profile in line with in USD & EUR denominated bond. international standards • Local currency issuances for ~USD6.6 billion in Q2 and Q3 2020, have been scheduled through the local auction system: • External: to establish benchmarks for Chilean companies in international capital markets • In order to further improve the liquidity and depth of the domestic fixed-income market in the short end of the curves, Chile issued new T-bills maturing in 6 to • In addition: to promote the growth of a green asset class 12 months. (social/green bonds) that attracts foreign investment in support of the • New benchmarks maturing in 2025 was issued, but no longer bonds in local country’s sustainable infrastructure and development needs, while currency are planned for 2020. diversifying the investor base • Furthermore, the Ministry of Finance will continue implementing liability management (LM) operations of local currency bonds throughout 2020. • Remaining issuances for USD 0.8 billion will be announced in the months to come.
Amount Operation (USD billion) (*) Bonds in FX issued in January & May 2020 5.3 Local currency issuances thus far 6.6 Remaining issuances for 4Q 0.8 Total 2020 Issuances 12.7 (*) The exchange rate used to express local currency bonds in USD corresponds to that of the date of Supreme Decree Nr. 507 (April 3, 2020)) 36 Ministerio de Hacienda – Gobierno de Chile Debt is mostly denominated in local currency, and held by important local institutional investors, while green bonds provide access to new investors.
Debt Composition by Currency Holdings of Local Currency Treasury Bonds by Type of Institution Percent of total Percent of Total, as of July 3, 2020 100% 7% 15% 6% 4% 80% 38%
60%
68% Source: Central Bank of Chile
83% 42% 40% Total Assets Managed by Institutional Investors Percent of GDP 122% of GDP 140% (USD 326 bn.) 120% 20% 22% 100% 9% 16% 20% 80% 9% 18% 17% 18% 11% 60% 80% 0% 40% 53% 62% 2002 2010 2019 20% USD Euros UF Pesos Other 2002 2010 2019
Pension Funds Insurance Companies Mutual Funds Source: Ministry of Finance Source: Financial Market Commission 37 Ministerio de Hacienda – Gobierno de Chile
Chile’s debt stands out among its peers by a high average maturity and well distributed maturities.
Maturity Profile As of July 31, 2020; USD billion
15 Debt in Pesos Debt in UF Debt in USD Debt in €
10
5
0 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050
Source: Ministry of Finance Average term-to-maturity of Outstanding Marketable Debt in selected OECD countries Calculated on December 31, 2007 and 2019; years 20 18 2007 2019 16 14 12 10 8 6 4 2 0
Source: OECD Sovereign Borrowing Outlook, February 2020. 30 Ministerio de Hacienda – Gobierno de Chile
The Ministry of Finance has made significant progress towards improving liquidity in the local fixed income market in recent years.
• Concentration of trading in key benchmarks, achieved by liability management Maturity Profile: Nominal Curve operations in local currency bonds As of August 21, 2020; USD billion 8 • Aimed at creating strong references both in inflation-linked and nominal curves Bills New Debt Issued to Repurchase in 2020 Repurchased Bonds in 2020 7 • Implemented by exchanging illiquid & low outstanding bonds (“non-benchmark bonds”), 6 with liquid “benchmark bonds” that have larger outstanding amounts 5 • Legislative adjustments that facilitated Euroclearability 4 • Greater weight in international fixed-income indices 3 • Four local Euroclearable primary bond issuances since 2017 have allowed for a 2 broader inclusion of Chilean bonds in the GBI Emerging Market Bond Index 1 -
• Chile’s share in this index increased from 0.10% in 2016 to 2.8% by July, 2020 and
2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2021 2022 2023 2024 2025 2050 non-resident holdings share reached 15.4% by June, 2020 2020 Source: Ministry of Finance
Non-resident Holdings of LC Debt & GBI-EM Share Maturity Profile: Inflation-linked Curve (UF) Percent of total As of August 21, 2020; USD billion Holdings of local debt by non-residents (left axis) 25% 4% 8 Chile's share in GBI-EM Index (right axis) Bills New Debt Issued to Repurchase in 2020 Repurchased Bonds in 2020 3.2% 19.9% 7 20% 2.8%* 3% 6 2.5% 14.2% 15.4% 5 15% 2.8% 12.2% 4 2% 3 10% 6.9% 2 5.2% 1% 5% 3.5% 3.4% 1 - 0.1%
0% 0%
2025 2031 2037 2043 2049 2020 2021 2022 2023 2024 2026 2027 2028 2029 2030 2032 2033 2034 2035 2036 2038 2039 2040 2041 2042 2044 2045 2046 2047 2048 2050 2013 2014 2015 2016 2017 2018 2019 jun-20 Source: Central Bank of Chile and JP Morgan Source: Ministry of Finance 39 *Estimated for July 2020. The Chilean Economy in the Context of the COVID-19 Shock
Ministerio de Hacienda
International Finance Ministry of Finance August, 2020