A call to strengthen the local capital market was made by the president of the Central Bank, Rosanna Costa, in her presentation of the Financial Stability Report (IEF) for the first half of the year, this in the midst of a scenario of deterioration in local financial conditions due to of the preference of national agents to invest in foreign currency, as well as the withdrawal of pension funds.
According to the IEF, as of March in 12 months there have been capital outflows totaling US$19.2 billion related to households and companies, given a greater preference of local investors for foreign assets.
Asked about it during the press conference associated with the delivery of the IEF, Rodrigo Alfaro, manager of Financial Studies of the Central Bank, pointed out that “the measurement we make of capital outflows is a flow, not a stock. What we report is an accumulated during a current year. That said, what we report is that as of March we have a total annualized outflow of capital from households and companies of US$19.2 billion. The figure for March 2021 reached US$11,000, and for March 2020, US$8 billion. A figure that can also be comparable is that in October 2019 it was US$4 billion.”
Additionally, the IEF reports that there continues to be a high activity of opening accounts in dollars, which are already located at US$12,600 million dollars by local households and companies.
According to Alfaro, “this is a phenomenon that we have reported in previous reports. Dollar accounts have increased. The figures around October 2019 were in the order of 50,000 accounts, and towards the end of 2021 it reached 100,000 accounts. At the end of February we are at 180,000 accounts. An important fact to note is that it is a number of accounts, it does not necessarily involve amounts. What we observe is that at the beginning the amounts were bigger and now they are smaller”.
Along these lines, Costa stressed that “what is behind it is a search for protection in assets that are perceived as less risky, and at this time it is taking place because investment in dollars is perceived as less risky. It is part of the phenomenon of uncertainty and risk”.
One of the themes that runs through the entire Financial Stability Report is the need to strengthen the long-term capital market and reduce uncertainty.
Along these lines, the IEF indicated that “withdrawals of pension funds have reduced the depth of the Chilean capital market, which has deteriorated medium- and long-term financing conditions, along with reducing the economy’s capacity to face external shocks. ”.
Thus, he detailed that the assets that make up the pension funds went from representing 84% of GDP in the second quarter of 2020, to 59% in 2022.
In his presentation before the Senate Finance Committee, Costa pointed out that “in this context of high local uncertainty and more recently of a strengthening of the dollar, there has been a significant additional depreciation of the peso and a rise in long-term rates. And it has happened with a volatility that exceeds that of other commodity exporters. It is worth highlighting the volatility of long-term interest rates, which usually tended to remain more isolated from external movements”.
“Therefore, the need to maintain and strengthen the long-term savings fund of the local economy stands out, which will allow the domestic capital market to be strengthened and recomposed to face a complex environment with high uncertainty, both local and external,” he says. the IEF.
And along these lines, he adds that “the loss of depth already experienced by the capital market, together with a more challenging environment, highlights the importance of having a stable long-term savings fund. A deeper financial market allows access to lower financing costs, facilitates access to long-term funds and helps cushion shocks from abroad.”
Regarding the threats to financial stability, the report noted that “increases in political-legislative uncertainty could translate into greater volatility in local markets,” and indicated that “various definitions regarding institutional functioning and financial markets are in discussion. The definition process generates uncertainty that, if it increases or remains high, could lead to increased volatility of various classes of local assets and deteriorate the conditions of access to financing.either. In fact, the empirical evidence indicates that episodes of uncertainty affect both the level and the volatility of interest rates in the local fixed income market”.
In the case of banks, one of the risk factors is that “at the local level, less depth in the capital market could increase credit restrictions. The forced liquidation of the pension funds and the threat of a repetition of these events have meant a change in the financing conditions for the banking system. In particular, greater restrictions could continue to affect the granting of housing loans, reducing the terms and availability of loans at fixed rates.
Asked specifically about the issue of the capital market by the senators present at the session of the Finance Commission, the president of the Central Bank explained that “this report underlines the importance of the capital market”, and added that “a robust market, with high local savings, it allows credit financing with less exposure to the dollar, with the consequent advantages in terms of exposure to external shocks and interest rates. It is particularly beneficial to promote the availability of stable long-term savings, because this strengthens the domestic capital market, favoring the financing of long-term credits, with a lower incidence of external financing and allows mitigating scenarios of external turbulence”.
In the midst of a scenario of greater uncertainty and weakening of the capital market, Costa warned of the higher cost for the Treasury to refinance its debt
The report recalled that the effective fiscal balance for the year 2021 stood at -8% of GDP, while the cyclically adjusted result reached -11% of GDP, with which the central government debt increased 3 percentage points, reaching to 36% of GDP at the end of last year.
“The increase in sovereign debt has occurred together with a deterioration in financial conditions, which implies a higher cost of refinancing said obligations. According to an exercise that assumes future renewals of the current stock of debt according to their maturities, and Using the current interest rate structure, it is estimated that the current cost of renewing the debt for the next ten years would be approximately US$12 billion higher than what was obtained in September 2019″, the report indicated.
“Around a quarter of this increase is the product of greater debt acquired in that period, while the rest comes from the increase in interest rates,” adds the IEF.
Before the Senate Finance Commission, the president of the Central reiterated that the strength of the market affects mortgage loans, but “it has other ramifications that also derive in households and that may be less direct: for example, the financing of public infrastructure , government financing, to give sustainability to the economy. When a country borrows more in local currency than in foreign currency, it is less exposed to vulnerability, vulnerabilities amplify business cycles and business cycles punish employment.