THROUGH IN
ENHANCING RESILIENCE MACROECONOMIC ADJUSTMENT CHILE
Pablo García
Vice Governor, Central Bank of Chile
June 28th 2023
Over the three years from late 2019 to late 2022, the Chilean economy was subjected to
unprecedented macrofinancial shocks that seriously stressed markets. If left unchecked, they could
have seriously undermined sustainable growth and the wellbeing of all Chileans. External
developments, such as the pandemic and the war in Ukraine, coupled with domestic events on the
institutional front, interacted with and amplified each other. The Chilean economy slumped, then
overheated, then slowed again. Inflation spiked, reaching levels not seen in decades. Capital
markets were subjected to significant stress, indexes of institutional uncertainty and the real
exchange rate reached almost all-time highs.
The causes of these developments are multifaceted, but the consequences have been stark.
Households ́ savings rate, which typically hovered around 8% of GDP, dropped to zero during 2022.
The financing of the extraordinary boom in consumer expenditure came, in this case, through
drawdowns of pensions savings, reducing household ́s stock of financial net worth by close to 30%
of GDP. Fiscal transfers also contributed to the expansion in consumption, resulting in a fiscal deficit
of over 10% of GDP in 2021.
The external accounts reflected this massive shift in the savings/investment balance. The current
account reached a deficit close to 10% of GDP and the real exchange rate weakened to levels not
seen since the depths of the debt crisis in the 1980s. Gyrations of local and global uncertainty also
contributed, mainly from the Fed shift towards a tighter stance and local portfolio rebalancing
towards foreign exchange exposure and away from the local fixed income markets. Several
interventions by the CBC were prompted by subsequent disfunctions in the functioning of the
foreign exchange markets. The stock of international reserves was reduced, justifying the need to
bolster the buffers of external liquidity mainly though a Flexible Credit Line (FCL) with the
International Monetary Fund (IMF).
These macrofinancial developments help put into context the set of policy choices that the fiscal
and monetary authorities have implemented since 2022. The magnitude of the macroeconomic
imbalances that resulted from the interaction of the external and domestic shocks required a
forceful and multi-pronged approach, to restore macroeconomic equilibrium, reduce imbalances,
and put the economy in a solid footing for the challenges that may come ahead. The challenge that
policies faced in 2022 was to shift its stance of policy, from expansionary support during 2020 and
2021, to a contractionary stance in 2022 and 2023. On a first stage, this aimed to reduce the
magnitude of the macroeconomic imbalances, most noteworthy inflation, and in tandem excessive
consumption and a large current account deficit, to set the ground for a second stage aiming to
restore macrofinancial buffers for enhanced resilience going forward. We believe we are on track
to tackle this second stage now in Chile.
Two lessons that can be drawn from the last two decades, when the policy frameworks based on
the structural balance rule, inflation targeting, and a flexible exchange rate, are that the shocks that
can affect the Chilean economy can come fast and furious from pretty much all angles. And that for
the policy frameworks to respond appropriately, initial conditions and extant buffers matter. The
extent of policy space to react in a way to smooth the consequences of negative shocks is directly
linked to the credibility of policy, particularly the reliability of the inflation target and the
sustainability of the fiscal accounts.
Looking ahead to 2022, the stage was set to put in place a sharp shift in the policy stances from both
the fiscal and monetary sides. The CBC started hiking rates in mid 2021, foreseeing that inflation
was on the pace of increasing. This was coupled with a budget, proposed by the administration and
approved in Congress during the second half of 2021, which foresaw a large normalization in
transfers. All in all, durint 2022 and 2023 a contractionary stance in fiscal and monetary policies
have helped bring down the large macroeconomic imbalances and set the stage for rebuilding
buffers so as to face the risks that the global economy will surely have in stake going forward.
The CBC has undertaken two additional measures to bolster buffers and the resilience of the Chilean
economy to external shocks. On the one hand, we have decided to restore the external liquidity
position, both through the gradual unwinding of the local NDF position and a program of
accumulation of reserves. These do not have a foreign exchange target objective, and are consistent
with the need to hold adequate levels of international reserves in a context where the facilities with
the IMF are eminently transitory. On the other hand, the progress towards full implementation of
Basel III is well underway in Chile, aiming to both increase the quantity and the quality of the banking
system ́s capital. In this dimension, and after the favorable report from the banking supervisor, the
CBC decided to activate a CCyB charge of 0,5% of total risk weighted assets. This is not a judgement
about the overall solvency of the banking sector. Rather, given the risk assessment in global markets,
and our assessment of the local conditions of the credit market and capital position of the banking
system in Chile, our evaluation is that this would have a modest effect on credit supply. The benefits
will stem from an enhanced ability to face external financial shocks more than compensate the
modest, potential costs, in credit supply.
The international outlook for the coming years remains uncertain. The fight against inflation in
advanced economies is still unresolved. Geopolitical risks are still present. The challenges that
emerging economies face are significant. Macroeconomic authorities in countries like Chile need to
remain vigilant to the risks ahead, and be cognizant that rebuilding buffers, such as household
savings, fiscal and external sustainability, and countercyclical buffers, is important to successfully
face those risks going forward. At the CBC we are committed to this task.
Figure 1 - Household ́s Savings and Balance Sheet Structure
Household net worth by financial instrument Household gross saving
(percentage of household net worth; percentage of GDP) (percentage of GDP)
Other accounts Pension funds and insurance
Shares and other equity Loans
12 42
Household gross saving Proxy indicator (rt. axis) (*)
Securities Currency and deposits
Household net worth (rt. axis)
10
150 160
8
120
40
90
6
140
60
4
30
38
120 2
0
-30 0
-60 100
-2 36
I II III IV I II III IV I II III IV I II III IV I II III IV
I II III IV I II III IV I II III IV I II III IV I II III IV I
18 19 20 21 22
18 19 20 21 22 23
Private consumption
(*) Calculated as
1 
Nominal GDP
,
Source: Central Bank of Chile.
Figure 2 - External Accounts and Liquidity Position
Current account International reserves
(percentage of GDP) (percentage of GDP, last 12 months)
Current account: last 12 months
20
Current account: quarterly
2
18
0
-2
16
-4
-6
14
-8
-10
12
-12
-14
10
18 19 20 21 22 23
18 19 20 21 22 23
Source: Central Bank of Chile.
Figure 3 - Fiscal Balance and Debt Structure
Fiscal Balance Public Debt
(percentage of GDP) (percentage of GDP)
35 6
45
Balance (right axis)
Total debt
4,1
Revenue
Internal debt
40
4
30
External debt
Expenses
35
1,3 0,6 2
1,1
25
0,3
0,1
30
0
-0,2
20
-0,5 -0,6
25
-0,9
-2
-1,6 -1,7
-2,2
20
15
-2,7-2,8
-2,9
-4
15
-4,7
10
-6
10
5
-8
-7,3-7,7
5
0 -10 0
08 10 12 14 16 18 20 22 24 26
91 94 97 00 03 06 09 12 15 18 21 24 27
(*) The GDP used for the period 2007-2022 corresponds to the 2013 Reference Compilation. For 2021 and 2022, the
GDP from the 2018 Reference Compilation was used. Projections in grey area.
Source: Dipres.
Figure 4 - Monetary Policy and Uncertainty Indicators
MPR Corridor (*) Economic uncertainty and real exchange rate
(quarterly average, percent) (index; index aveg. 1986=100, monthly data)
Corridor Jun.23 MPR Forward 500 130
13
12
400 120
11
300 110
200 100
100 90
Economic Uncertainty
RER (right axis)
109876543210
0 80
19 20 21 22 23
21.I 22.I 23.I 24.I 25.I
21.III 22.III 23.III 24.III
(*) The corridor is built by following the methodology described in boxes V.1 of March 2020 Report and V.3 of March 2022
Report. Includes June EES, FTS pre-policy-meeting of June and the average smoothed forward curve of quarter to 13 June. This
is calculated by extracting the implicit MPR considering the forward curve on the interest rate swap curve up to 2 years,
discounting the fixed rates at every maturity at the simple accrual of the ICP. For the current quarter the surveys and the
forwards consider the average daily effective and are completed with the respective sources.
Figure 5 - Basel III and Current Capital Buffers in Banking System
Basel III Implementation Schedule (1) Capital Buffers under severe stress
Components 2023 2024 2025 2026
scenario (*)
Basel III Framework S1 S2 S1 S2 S1 S2 S1 S2
(percentage of risk-weighted assets)
Credit risk
6
Final Initial
Operational
risk
RWA Framework
Chapter
Market risk III.B.2.2
Repealing
Conservation
4
1,875% 2,5%
Buffer
AT1 1,0% 1,5%
Sistemic Banks (2) 50% 75% 100%
Deductions form
30% 65% 100%
T1 Capital 2
Pillar II 1st EESAR
Countercyclical
Capital Buffer
LCR
Liquidity NSFR 70% 80% 90% 100%
0
Regulation
1st partial 1st complete
LSAR (3) HQLA
report report
11 13 15 17 19 21 23
(1) Light green cells indicate full implementation.
(2) Percentage of the defined charge to be applied for each bank, according to systemic importance category.
(3) Additional High-Quality Liquid Assets requirement depends on the the CMF evaluation regarding the LSAR.
(*) Excess of effective equity over the regulatory minimum. The figure considers the particular limits of each bank.
As of 2021, consumption Banking Support Societies are considered.
Source: Central Bank of Chile based on information from the Financial Market Commission (CMF).
Figure 6 - Activity gap forecasts
Activity gap (1) (2)
(level, percentage points)
8
4
0
-4
-8
-12
-16
19 20 21 22 23 24 25
(1) Dotted lines show forecast from 2023Q2 to 2025Q2. (2) Forecast assumes structural paramenters updated
in December 2022 Report (trend GDP) with methodological review of potential GDP.
Figure 7 - Headline inflation forecasts
Headline inflation (*)
(annual change, percent)
14
12
10
8
6
4
2
0
19 II III IV 20 II III IV 21 II III IV 22 II III IV 23 II III IV 24 II III IV 25 II
(*) Slashed lines show forecast from 2023Q2 to 2025Q2.
Sources: Central Bank of Chile and National Statistics Institute (INE).