Entries for 'Chile'

Exchange rate flexibility has eased the adjustment to COVID-19 in most large countries. However, “fear of floating” is still high across Central America and the Caribbean. While local market financing is increasing, countries have largely had to borrow in hard currency to help withstand the shock.

COVID-19 has widened fiscal deficits and spurred needs for additional funding. As a result, QE-type measures have gained impetus amid disinflationary pressure. While countries with sounder institutions can take more aggressive steps, we expect QE to remain modest barring a resurgence of instability. 

COVID-19 has increased external funding challenges despite moderate borrowing needs. Notwithstanding oil price relief, collapsing remittances and tourism will weigh on current account receipts. While some countries have tapped global debt markets, uncertainty over financing sources remains. 

COVID-19 has affected Latin America through multiple channels. Pre-existing challenges and increased exposure put the region in a difficult position. We project a deep recession this year amid a sudden stop in capital flows and limited policy space. 

We are expanding our capital flows data to include derivatives, starting with an analysis of non-resident currency forwards in Chile. On aggregate, non-residents are usually short CLP via forwards. The correlation between forwards and capital flows isn’t very strong. Recent drops in carry did not result in a shorter forward position.

Growth underperformance has amplified social demands for change. While protests will weigh on growth, as in other EMs facing social turmoil, several mitigating factors exist. Bolstering a more inclusive agenda is a tall order, and the risk of erosion of macro fundamentals and institutions is high. 

Current account deficits in Frontier LatAm are wide by EM standards, largely due to energy trade imbalances, but lower oil prices since 2014 have helped ease financing gaps. Despite global headwinds and regional tensions, we project CA deficits to stay contained in 2019-20, broadly financed by FDI. 

We analyze external adjustment in Colombia, Peru, and Chile, commodity exporters with sound macro policy frameworks, in the aftermath of the decline in commodity prices. Despite real depreciation, exports have improved only modestly, with most of the adjustment due to significant import compression. 

Growth has rebounded, driven by higher copper prices and robust investment. Ongoing reforms will help reduce the fiscal deficit and stabilize public debt. High external corporate debt poses challenges, but several factors mitigate risks.