Chile’s Central Bank president says extent of capital outflows is comparable to 2009 financial crisis

RIO DE JANEIRO, BRAZIL – Despite the recovery of the economy in 2021, risks remain, according to the president of Chile’s Central Bank, Mario Marcel, who explained the Financial Stability Report (FSR) for the second quarter at a press conference this afternoon.

“We now have different risks, some more important than others, we have greater vulnerabilities and fewer remedies, and the core of these changes is in the capital market, contrary to what we have seen in other reports that have focused more on the banking system,” warned Marcel.

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For the Central Bank president, the main risk is the proposal to permit a fourth withdrawal of permitted funds for pandemic aid, which he reiterated in Congress.

“What worries us about a fourth withdrawal is not only a cumulative effect but also the nonlinearity of the economic response. There could come a time when expectations change significantly in their impact because of repeated withdrawals,” he said.

By this he means that the economic and market response is not necessarily the same for every withdrawal. Over time, repeated withdrawals “can trigger much more disruptive reactions,” he said.

In the literature and in the history of countries, such phenomena are usually “clearly reflected in capital outflows, there are times when they accelerate and are very difficult to stop,” he said.

CAPITAL OUTFLOWS

So far in 2021, capital outflows from households and companies abroad have amounted to US$10 billion. In 2020, the total reached US$12 billion, and in 2021 it could be even higher as the year is not yet over.

This represents a six-fold increase in capital outflows during 2018 and 2019 when they amounted to just under US$2 billion.

Also, the dollar-denominated current accounts of individuals in Chile amounted to 84,000 in July 2021, which means that the number of accounts in the U.S. currency has almost doubled since 2018 when it was 48,000. The amount accumulated in these accounts was US$10 billion in July this year, up from US$6 billion in 2018.

However, Marcel pointed out that while the amounts are significant, “the magnitude of the capital outflows is comparable to those of the 2009 financial crisis, so it is not unprecedented.”

While withdrawals from pension funds are the biggest risk, they are not the only one. “There are still risks from the external sector, heightened risk perceptions, and movements in international markets where investors are seeking refuge that are impacting emerging markets,” Marcel said.

Other risks in the local market lie in the “tightening of lending capacity due to uncertainty or deterioration of bank portfolios,” he added.

Risk and vulnerability mitigation mechanisms have been weakened as the Ministry of Finance and the Central Bank have used policy space to lead the economy out of the Covid-19 crisis.

For this reason, the Central Bank president stressed that “it is important to regain some of the room for maneuver that we lost during this period in order to be prepared for further shocks in the future because the history of financial markets is full of such shocks.”

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