Part of the recent relative stability relies on specific programs to support the financial system and in monetary policy conditions that have allowed access to liquidity at a very low cost. This has allowed generating profits that strengthened the banks’ balance sheets. However, credit risk in certain assets, such as the commercial mortgage portfolio of US and European banks is still high. The recent default in Dubai is one example of such risk being materialized, considering that Eurozone banks with systemic importance in the area show a high degree of exposure to this type of operations. Another risk comes from challenges posed to macroeconomic management by portfolio rebalancing or external savings being redirected to emerging economies which could cause significant increases in capital flows. Like its emerging peers, Chile has been at the receiving side of important portfolio investment flows. The difference is that outflows from institutional investors have been particularly high, more than offsetting the inflows (figure 16). Another BIS Review 9/2010  5  risk, as has been said repeatedly, relates with uncertainty surrounding the persistent global imbalances. Domestically, it is possible that in the short run economic activity picks up faster than expected because of faster inventory replenishment. Also noteworthy is the risk associated to the trends of the different exchange rates and their effects on the RER. The RER has appreciated since September, with direct consequences on projected inflation. The Board reiterates that it closely monitors the implications of the RER level on inflation and compliance with its monetary policy objective.

In Chile, domestic demand continues to reflect substantial inventory depletion and, to a lesser extent, a drop in gross fixed capital formation, particularly the machinery & equipment component (figure 7). Inventory depletion has exceeded September projections and those of other economies, shaving-off four percentage points of domestic demand in the last year. More recently, some indicators suggest that the inventory cycle is entering a new phase, where part of the depletion could respond to sales increasing faster than production (figure 8). The end of the drop in inventories has a positive effect on GDP by itself, but the size and timing of its contribution to growth is still uncertain. This will depend on the level that firms consider adequate to face a cyclical recovery. It is very likely that such level will be smaller than it was before the global crisis. The adjustment of gross fixed capital formation has been similar to that of Asian economies, with quarterly drops of around 10% between end-of 2008 and beginning-of 2009 (figure 9). Weak investment is reflected in sluggish imports of capital goods, which are yet to show a rebound. Investments in engineering and construction works have improved. Although a fall is expected for this year, information from the Capital Goods Survey shows a new increase in investment projects in the period 2009–2012, with some of them being pushed off from this year to the next one or two. Gross fixed capital formation will drop more than 15% annually in 2009, which will presumably revert in part during 2010.