Chile: Selected Issues
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International Monetary Fund
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Publication Date:
05 Aug 2002
eISBN:
9781451807554
Language:
English
Keywords:
ISCR; CR; firm; bank; chapter III; incorporated company; company data; exchange rate; credit market; firm's exposure; Financial statements; Exchange rate risk; Foreign currency exposure
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This Selected Issues paper examines a number of potential factors that may have influenced the short-term behavior of the exchange rate between the Chilean peso and the U.S. dollar during the period of floating exchange rate, including the possible impact of developments in Argentina during 2001. The paper investigates whether copper prices can be successfully forecasted over medium-term horizons, emphasizing the properties of copper prices most relevant in the Chilean context, including for fiscal policymaking. The paper also provides a snapshot of the Chilean banking and corporate sectors.

Abstract

This Selected Issues paper examines a number of potential factors that may have influenced the short-term behavior of the exchange rate between the Chilean peso and the U.S. dollar during the period of floating exchange rate, including the possible impact of developments in Argentina during 2001. The paper investigates whether copper prices can be successfully forecasted over medium-term horizons, emphasizing the properties of copper prices most relevant in the Chilean context, including for fiscal policymaking. The paper also provides a snapshot of the Chilean banking and corporate sectors.

V. A Note on the Corporate Sector’s Potential Vulnerability69

A. Introduction

152. Given the role of the corporate sector as a source, as well as a transmission channel, of financial crisis in a number of countries in recent years, it is important to be aware of potential fragilities in this sector’s financial position, especially at a time of economic instability in neighboring countries and broader external volatility.

153. Given the importance of the corporate sector in the Chilean economy, it is evident that potential vulnerability in this sector would be closely associated with an economy-wide vulnerability.70 In Chile, the corporate sector (broadly defined as comprising all private sector, non-financial incorporated enterprises) is the dominant user of foreign and domestic financing: it owed more than 80 percent of the country’s external debt at the end of 2001 (itself about 60 percent of GDP), accounted for about 60 percent of total bank credit, and held about 50 percent of total foreign assets at end-2000 (mostly in foreign direct investment and trade credits). The corporate sector is linked also to other sectors of the domestic economy through production, investment, and consumption linkages. Thus, it is essential to assess its financial soundness to monitor aggregate vulnerability.

154. This notes seeks to identify potential vulnerabilities of Chile’s corporate sector to a range of shocks, including particularly financing and exchange rate shocks, by looking at the level and the time-profile of selected balance sheet and cash flow indicators that have turned out to be relatively good predictors of financial distress in other countries—see Stone (2002a and 2002b) and Mulder and Perrelli (2001).71 To place this indicator-based analysis in context, the note provides also a brief overview of the corporate sector’s structural characteristics.

155. The evidence analyzed suggests that the financial position of Chile’s corporate sector is sound overall, with no evident signs of vulnerability and limited exposure to foreign exchange risk. The time profile of some of the indicators considered suggests that this position was even stronger in the mid-late 1990s (apart from exchange rate exposure, which appears to have decreased in recent years); this is an indication that the Asian crisis first, and the less buoyant growth performance later, may have taken some toll on the corporate sector’s financial strength. The evidence suggests also that some economic sectors are potentially more vulnerable than others. These are tentative and partial conclusions in the context of a solid legal framework (including also an effective bankruptcy regime) conducive to healthy domestic financial development, and in the presence of significant foreign ownership, especially in those sectors which appear to be relatively more vulnerable.

156. The analysis is subject to a number of limitations, and thus the conclusions should not be regarded as final. The main limitation is the limited availability of data on a comparable basis across countries. The issues under considerations also are diverse and complex, and it is difficult to produce a comprehensive assessment. Therefore, additional analysis would be needed to grasp more firmly the aggregate implications of the large amount of company data currently available on Chile’s corporate sector. The existence of this information is doubtless an additional strength of the environment in which Chile’s corporate sector operates, and no doubt the company-specific information is continuously processed by market analysts, particularly with a view to judging the value of individual companies’ securities. For questions of economy-wide vulnerability, however, a more aggregated analysis is warranted. In so far as more aggregate information and analysis may help the functioning of markets, there is much scope for further work in this area.

157. The note is organized as follows: section B considers structural characteristics such as the ownership structure, legal framework, and main sources of financing; section C examines balance sheet and cash flow indicators of leverage, profitability, and liquidity; and section D explores the issue of foreign exchange risk exposure.

B. An Overview of Chile’s Corporate Sector

158. Chile’s business sector (including state-owned and financial enterprises) comprises about 500 incorporated large-size enterprises and 500,000 formal micro-, small-and medium-size enterprises (SMEs), according to data from the Superintendencia de Valores y Seguros (SVS) and the National Institute of Statistics.

159. As already mentioned, the corporate sector is here defined as comprising all private sector, non-financial incorporated enterprises, which represent the majority of the universe of 500 incorporated companies. Thus, this definition excludes SMEs and state owned enterprises, as well as private incorporated enterprises operating in the financial sector. While this is not necessarily the only possible definition, it is one that better fits Chile’s specific economic and institutional context and the purpose of the analysis.

160. In Chile, the role of state-owned enterprises is limited and well defined. The public sector controls one commercial bank (Banco del Estado) and three large nonfinancial enterprises with combined assets valued about 13 percent of GDP at end 2000 (most of which belonging to CODELCO, the national copper company); the remaining 31 largest non-financial public enterprises had combined assets valued 6 percent of GDP at end-2000. As a whole, the state-owned enterprise sector is profitable, and it is responsible for less than 10 percent of Chile’s external debt. As regards the SMEs, their financial position is not crucial from a vulnerability perspective given their relatively low level of financial integration with the rest of the economy and that they have no access to international capital markets.72

161. The distribution of Chilean firms across economic sector of operation is broadly in line with that of GDP. Firms in the corporate sectors, however, differ markedly in size, ownership, and financial structure. Hence, we now move on to describe some broad characteristics of this “population,” which are not only relevant to assess vulnerability but also support our choice to focus on a much smaller “sample” in the analysis (based on indictors) in the rest of this chapter (Sections C and D).

Ownership

162. Ownership in the corporate sector appears to be rather concentrated. Although about 300 different shares were listed on the Santiago Stock Exchange at end-2000 (a high number by international benchmarks), the portion of the these firms’ equity floating on the market is relatively small, suggesting that a large share of the economy’s equity is still “privately” owned.73 The economy’s equity is concentrated in about 40 economic groups or conglomerates with very diversified business interests in the economy, including in the financial sector.74

163. Foreign ownership in the corporate sector is significant, especially in the mining, electricity, and telecommunication sectors. Although it is difficult to aggregate information from company-by-company data to obtain a reliable summary indicator of such ownership, an indirect measure suggests that foreign ownership in the corporate sector might be around 30 percent: only two-thirds of the about 40 conglomerates mentioned above are classified as “national groups” in the local financial press based on company-by-company data from the SVS.75

Legal framework

164. Chile’s corporate sector enjoys a sound legal framework, judged on the basis of international standards. According to a recent worldwide comparison—see Rafael La Porta and others (1996), from which this sub-section is largely based—Chile’s legal framework provides for a relatively effective basic rule of law (in terms of well-defined property rights, enforceability of contracts, and avoidance of corruption) and very strong shareholder and creditor protection.

165. More specifically, according to this evidence, Chile’s “rule of law” score is close to the worldwide average despite the fact that its legal system, as in most of Latin America, derives from French legal tradition, which in turn scores lowest among the four systems considered (the others being Scandinavian, German, and Anglo-Saxon, in decreasing order of performance). Chile’s shareholder and creditor protection, however, is among the highest ranked in the world.76 Corporate governance was strengthened further in the context of the capital market reform in 2001.

166. The broad characteristics of the legal framework describe above are reflected also in Chile’s bankruptcy law, which guarantees strongly creditor rights while featuring some debtor protection mechanisms (Box 1). Guaranteeing creditor rights is necessary to foster financial development, while providing some debtor protection helps to minimize the economic dislocation and the social cost associated with firm failures. Other countries’ experience has shown that an effective bankruptcy regime is a key ingredient of successful strategies aimed at minimizing social and economic costs in the event of a crisis.

Chile’s Bankruptcy Law

An effective bankruptcy regime is conducive to financial development and may help minimize ! the costs of a hypothetical crisis. Chile’s bankruptcy law (last revised in 1982 following a major financial crisis and a failed experiment with a regime more favorable to debtors) provides for strong creditor protection with some safeguard mechanisms for debtors. Overall, the law has functioned well thus far, and it appears adequate also from a vulnerability standpoint. Of course, its ability to handle a large number of cases in a situation of systemic financial distress has never been tested.

Several aspects of the law assure strong creditor protection. It is easy to initiate a bankruptcy proceeding (for instance, just one overdue commercial obligation is a sufficient cause to initiate the procedure in certain cases). Once initiated, the process is predictable, and creditors have strong assurances to realize their claims. It may take time to complete, though (up to three years in extreme cases). Finally, the majority quorums necessary to impose decisions on the minority take into account the interest of both large and small creditors.

Four main safeguard mechanisms protect debtors under the existing law, albeit less strongly than creditors. Before a bankruptcy declaration, a restructuring rather than a liquidation may be agreed upon between the debtor and the creditor through extra-judicial agreements (“convenio extra-judicial”) or preventive judicial agreements (“convenio judicial preventive”). After a bankruptcy declaration, it is possible to guarantee the continuing of activity (“continuidad efectiva de giro”) and the liquidation of the firm as a on-going concern (“venta como unidad operativa”). However, all these mechanisms protect the debtor in the “private” interest of maximizing the recovery value of the creditor’s claim rather than in the “public” interest of preserving the economic value of the firm.

The existing law has served Chile’s economic system well over the past two decades by resolving predictably those cases of illiquidity and/or insolvency that arise in ordinary times. Past and recent highly publicized cases, as well as the worldwide comparison of legal frameworks mentioned in the text of this chapter, do not point to the existence of significant problems.

The existing law appears also adequate from a vulnerability perspective, as it limits the ability of a minority of creditors to veto a restructuring or a liquidation. A qualified majority of creditors can force restructuring or liquidation decisions upon the minority under the debtor protection mechanisms above (except under extra-judicial agreements, which perhaps is the reason why these agreements are rarely used in Chile). Nevertheless, the effectiveness of these mechanisms has never been “stress tested” in an actual crisis context.

Further indicating the absence of major problems with the existing bankruptcy law, a recent proposal for change (being discussed between the government and private sector entities) focuses on improving its functioning and application (to minimize the time needed to complete the process and remove the social stigma attached to it) rather than on introducing a radical overhaul of its basic principles.

Sources of financing

167. Chile’s corporate sector has made significant use of foreign capital through syndicated loans and the issuance of bonds and equities, though use of such financing remains concentrated in a relatively small number of companies—the largest and highest rated companies.77 Foreign direct investment (FDI) remains the main source of foreign capital for most firms in the corporate sector; but even the distribution of FDI is relatively skewed toward the largest companies and concentrated in a few sectors (mining, utilities, telecommunication). Therefore, domestic financial markets have an important role to play to support private investments and growth in “good times” and help smooth adjustments to internal and external shocks in “bad times”, as borne out by a large academic literature on finance and growth and finance and macroeconomic volatility—see, for instance, IDB (1996).

168. The pace of development of domestic credit and capital markets accelerated in the 1990s in Chile, assisted by continued liberalization and prudent regulation supervision, following two decades of intermittent growth. This is shown by a second recent study by Francisco Gallego and Norman Loayza (2000), from which most of the evidence quoted in this sub-section is drawn. As a result of good policies and a favorable legal environment, toward the end of the 1990s, domestic credit and capital markets had reached a development stage comparable with that of more advanced economies in terms of their size in relation to GDP. Moreover, according to this evidence, the local equity and bond markets had surpassed the credit market in terms of size at the end of the 1990s, supported by the presence of significant institutional investor base, including pension, mutual, and investment funds and life-insurance companies.78

169. In terms of liquidity and efficiency, however, domestic financial markets in Chile have not yet reached such a similar level of development and remain below world average. Furthermore, a broadly related study by Ricardo Caballero (2002) finds that only the largest companies (or those part of a conglomerate) maintained access to domestic financing during a recent “bad time”, the period 1998-2000 after the Asian, Russian, and Brazilian crisis. This latter study too, however, does not consider data for 2001, when the local corporate bond market boomed, bringing the stock of bonds outstanding to US$6 billion (about 10 percent of GDP) and the number of private sector issuers to more than 60, while the economy was coping with various external shocks. In addition, neither Caballero (2002) nor Gallego and Loayza (2000) consider recent important developments in local derivative markets: the local foreign exchange forward market, for instance, reportedly has now a daily turnover broadly comparable to the spot market, with maturities available up to three years.

170. As a result of these new developments, retained earnings, which had traditionally been the most important source of domestic financing along side bank credit becamealessimportant source of investment financing in the 1990s. Nonetheless, the econometric evidence reported by Gallego and Loayza (2000) shows that only the largest firms (or those part of conglomerates) ceased to face a binding financing constraint in the 1990s; other companies continued to be sensitive to “cash-flow” variables, thus suggesting they continue to be financially-constrained.

171. In summary, by reviewing the sources of financing available to the corporate sectors, albeit briefly and in broad terms, we saw that only a limited number of companies—the largest and highest-rated—might in principle have been able to load their balance sheets with debt financing in such a way to become vulnerable to shocks. On those grounds, but also because of the difficulties of conducting a balance sheet and cash flow indicator analysis with a larger sample, in the next section we shall focus only on companies listed on the stock exchange and included in the IPSA index—the index comprising the 40 most actively traded stocks on the Santiago Exchange.

C. Balance Sheet and Cash Flow Indicators

172. Research on the role of the corporate sector as a potential source as well as transmission channel of financial crises points to the importance of specific balance sheet and cash flow information—most notably on interest cover, leverage, liquidity, profitability, and foreign exchange exposure.79 According to this research, corporate sector-driven crises have tended to unfold in two stages. The first stage was a long build up of balance sheet fragilities rooted in poor governance, excessive credit expansion, accelerated capital inflows, and, in many cases, overheating of the economy. In the second stage, a shock, often external, triggered a sudden crisis, with the severity of the crisis directly associated with the degree of leverage, previous availability of financing, and weakness in corporate governance and in the general legal environment.

173. Interest cover (the ratio of earnings to interest expenses) is a cash flow indicator that measures the risk that a firm may not be able to service its debt on time, potentially signaling proximity to a situation of distress. Leverage indicators measure a firm’s indebtedness relative to its assets or net worth and quantify a firm’s exposure to the risk that shocks to profitability may impair its repayment capacity pushing it into insolvency. Corporate liquidity indicators determine a company’s ability to carry out its operations without endangering credit quality and thus the risk of facing a refinancing shock. Such liquidity indicators include (i) the “current ratio”—current assets (cash and accounts receivables) to current liabilities (debt and other liabilities coming due within a year)—(ii) the “quick or acid ratio”—current assets minus inventories to current liabilities—and (iii) the ratio of short term liabilities to total liabilities.

174. Profitability is naturally a crucial determinant of corporate strength, affecting capital growth, attraction of new equity, operating capacity, ability to withstand adverse shocks, and, ultimately, repayment capacity and survival. A sharp decline in corporate sector profitability (for instance, as a result of economic slowdown) may serve as leading indicator of financial system distress. However, care should be taken to distinguish between normal cyclical fluctuations in profitability from other more persistent tendencies. The most common indicators of profitability are (i) the return on equity (earnings to average equity), (ii) the return on assets (earnings to average assets) and (iii) or the operating margin (earnings to sales) that measures income in relation to costs, and reveals a firm’s strength in maintaining a healthy margin and capital growth.

175. This literature emphasizes the difficulties in formulating vulnerability assessments based on these indicators including because of limitations on data availability, lack of uniform accounting practices across countries, and absence of established benchmarks against which to assess the indicators in individual cases, among other reasons. Despite these difficulties, this section attempts to assess the soundness of the Chile’s core corporate sector against the yardstick of a small subset of standard balance sheet and cash flow indicators, chosen among those discussed above based mainly on data availability. To put indicators for Chile’s corporate sector in some perspective, these are compared to those of about 600 companies drawn from eight other emerging markets and three industrial countries for which data comparable (at least in principle) are available through end-2000 (Table 1-5).80

Table 1

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) To Interest Expense On Debt 1/

(Indicator of general financial soundness)

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Sources: Worldscope database; and IMF staff calculations.

Number of times.

Table 2

Total Debt to Common Equity 1/

(Indicator of leverage)

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Sources: Worldscope database; and IMF staff calculations.

In percent

Table 3

Short-Term Debt to Total Debt 1/

(Indicator of vulnerability to temporary cut-of from financing-in combination with leverage)

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Sources: World database; and IMF staff calculations.

In percent

Table 4

Current Assets To Current Liabilities

(Current Ratio) 1/

(Indicator of liquidity)

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Sources: Worldscope database; and IMF staff calculations.

Number of times.

Table 5

Earnings Before Interest and Taxes (EBIT) minus Income Taxes and Other Taxes To sales 1/

(Indicator of Profitability)

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Sources: World database; and IMF staff calculations.

Number of times.

176. The information presented in Table 1- 5 suggests that Chile’s largest companies have tended to be financially sound, when compared to companies in comparator countries. Moreover, there was no evident sign of vulnerability in the levels of the indicators considered at end-2000. Nonetheless, the overall picture at end 2000 was not as strong as it had been in the mid-1990s.81

177. More specifically, the international comparison between Chile and other emerging and industrial countries during 1991-2000 shows:

178. Although a consistent set of data for 2001 is not yet available from the same source, the 2001 results reported by the Chilean financial press based on SVS data—which should be the primary source for WORLDSCOPE—indicate that the recent tendency of increasing leverage and decreasing profitability (netting out proceeds from the sale of assets) might have continued in 2001. However, these reports suggest also that the most leveraged sectors—telecommunications, commerce, and electricity—are also the most profitable ones. More specifically, the commerce and forestry sectors led the profitability rankings, while the food and beverage and the electric sectors came in third and fourth respectively.

D. Foreign Exchange Exposure

179. Exposure to foreign exchange risk in a country’s corporate sector can be a significant source of financial distress or can result in a more costly adjustment process to external shocks. Several recent crises, including the Asian crisis, have been triggered or deepened by the balance sheet impact of sharp exchange rate depreciations; Chile’ own response to contagion from the Asian and Russian crisis in 1997-1998, which included a sharp increase in interest rates, seems to have been in part motivated by the presence of foreign exchange exposure in the corporate sector.

180. Following that experience, a number of policy measures have been taken in Chile to improve the ability of the economy in general, and the corporate sector in particular, to absorb shocks through exchange rate adjustment. Chief among these was the adoption of a fully flexible exchange rate regime, which removed any perceived exchange rate “insurance” provided by a less flexible arrangement such as the former exchange rate band system. Important regulatory changes were also implemented: banks must take into account the foreign exchange exposure of their clients in risk classification, while non-financial incorporated companies must disclose their net open position and explicitly state their foreign exchange risk management policy.82 Moreover, the recently implemented capital market reform package introduced normative changes to support further development of local capital markets, including particularly the derivative and bond markets, which helped companies reduce foreign exchange exposure significantly in 2001, both by substituting domestic-currency for foreign-currency denominated financing and by direct financial hedging.83

181. Today, the corporate sector’s exposure to foreign exchange risk seems to be limited in Chile as evidenced by the relatively small aggregate balance sheet impact resulted from the large depreciation of the peso in 2001. Over the first three quarters of 2001, the accounting exchange rate depreciated by about 20 percent against the US dollar, the currency in which most foreign liabilities are denominated. Over the same period, the balance sheet loss as measured by the aggregate “diferencia de cambio” of all incorporated companies reporting to the SVS (including companies operating in the financial sector), was only US$1.3 billion (roughly 2 percent of GDP or only about 2 percent of the aggregate net worth of these companies).

182. In principle, of course, such aggregate information could hide important micro imbalances. Even within the non-financial corporate sector, individual companies or economic sectors could be much more heavily exposed than the average for the market and, if the aggregate exposure were concentrated in a few companies with systemic importance, there could still be significant spillover risks through intra-firm linkages. In addition, within the aggregate figure just mentioned, the exposure of non-financial firms as a group would not be detected if it were being offset in part by the position of financial institutions that are long in dollars.84

183. An analysis of the available data, however, indicates that even though a few companies (operating mostly in the non-tradable sector) have significant foreign exchange exposure, the aggregate is not strongly skewed toward the non-financial corporate sector. In aggregate, the “diferencia de cambio” of the 33 non financial firms in the IPSA stock market index was only US$670 million in January-September 2001, or 2.9 percent of their aggregate net-worth and 1 percent of total assets; figures broadly comparable to that for the universe of reporting firms discussed above. These losses were concentrated in seven companies, operating in the energy, retail, and construction sectors. Even these seven firms, however, were not affected severely: in all seven cases the loss was between 1 and 4 percent of total assets; only three companies had a loss larger than 6 percent of their own net worth, and no company had a loss larger than 10 percent of its net worth. It is also worth noting that companies in the electricity sector have an especially large share of foreign ownership, mitigating the direct effects of such losses on Chile national income and wealth.

184. These results may be seen as a sort of “real-life” stress test of the system, given the sharp deterioration of Chile’s external environment in 2001, and they compare favorably with the results of standard (forward-looking) stress test exercises for other (investment grade) emerging market countries.85 These findings are important because they suggest that Chile’s flexible exchange rate regime may work without excessive “fear of floating”. Nonetheless, it would be prudent to continue monitoring this specific source of potential vulnerability.

ANNEX I

Summary of Tax System as of May 2002

(All amounts in Chilean pesos)

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Sources: Ministry of finance, Dirección de Presupuestos, Cálculo de Ingresos Generates de la Nación Correspandiente al AfiO 2002, Santiago: November 2001 and information provided by the Chilean authorities.

UTA stands for Unidad Tributar la Anual (annual tax unit), and corresponds to 12 times the value of a December’s UTM (Unidad Tributaria Mensual) or monthly tax unit. The UTM is adjusted each month according to the change in average price level in the second-past month. In December 2001 one UTM was worth Ch$28, G24 and reflected changes in the price level as per December 31, 2001.

The monthly withheld tax on labor income is computed using the same progressive schedule, but using UTM instead of UTA. Beginning with the 2003 tax year, these rates will be effectively lowered, as the brackets will refer to income in excess of the 13.5 UTM exemption, and the marginal rates for the top 3 brackets will be lowered by 1, 2, and 3 percentage points, respectively.

UF stands for Unidad de Fomento, a price reference unit widely used in financial contracts which is adjusted daily. A schedule from the 10th of each month to the 9th of the subsequent month reflects changes in the price level in the previous month. On December 31, 2001, one UF was worth Ch$16,262.66 and reflected changes in the price level as per December 31, 2001.

ANNEX II

CHILE: MAIN MONETARY AND BANKING MEASURES IN 2001

January
18

At its monthly monetary policy meeting, the Board of the central bank decided to reduce the policy interest rate by 25 basis points from UF+5.0 percent to UF+4.75 percent. The liquidity credit line rates were also adjusted by 25 basis points, to UF+4.75 percent, UF+6.75 percent and UF+8.75 percent. Similarly, the liquidity deposit rate was lowered to UF+3.75 percent.

18

Law No. 19,705 (law on take over bids) included amendments to Decree Law No. 3,500 on Pension Funds, which made it necessary to coordinate the central bank’s regulations in this area with the legislation. The main amendments were: to authorize pension fund administrators (AFPs) to invest up to 5 percent of a Type 1 fund in mutual fund shares; to eliminate the distinctions between different types of investment fund shares, authorizing AFPs to invest up to 25 percent of a Type 1 fund in investment fund shares and mutual fund shares; and to increase the limit on investment of Type 1 funds in shares of open corporations from 37 percent to 40 percent, and the limit on investment of Type 1 funds in shares of open real estate corporations from 10 percent to 40 percent.

February
20

Institutions with a deficit on their current account for purposes of No. 8 of Title II of Chapter III.H.2 of the Compendium of Financial Regulations that have been so informed by the central bank by 5:10 p.m. of the day in question are permitted to seek interbank loans and funds from the Monetary Operations Department between 4:50 p.m. and 5:10 p.m. for the sole purpose of covering said deficit. The special financing facilities will be charged against the liquidity credit line and will bear a rate equivalent to the rate on the third tranche. Alternatively, such institutions may approach the Monetary Operations Department during the same time frame to enter into a repo through the central bank’s promissory note window, the rate on said operation being the rate on the second tranche of the liquidity credit line. These measures form part of a gradual move toward the establishment of a Real-Time Gross Settlement System (RTGS).

At its monthly monetary policy meeting, the Board of the central bank decided to reduce the policy interest rate by 25 basis points from UF+4.75 percent to UF+4.50 percent. The liquidity credit line rates were also adjusted by 25 basis points, to UF+ 4.50 percent, UF+6.50 percent and UF+8.50 percent. Similarly, the liquidity deposit rate was lowered to UF+3.50 percent

March
02

In a special session, the Board of the central bank decided to reduce the policy interest rate by 50 basis points from UF+4.50 percent to UF+4.00 percent. The liquidity credit line rates were also adjusted by 50 basis points, to UF+4.00 percent, UF+6.00 percent and UF+8.00 percent. Similarly, the liquidity deposit rate was lowered to UF+3.00 percent.

20

Savings and loan cooperatives supervised by the Superintendency of Banks and Financial Institutions were authorized to open and maintain housing savings accounts as long as they met the following requirements: risk-based capital ratio of at least 10 percent and basic capital ratio of at least 5 percent; legal reserves exceeding the equivalent of UF 400,000; compliance with the mismatch limits (normas de calce); and authorization of the Superintendency of Banks and Financial Institutions.

April
10

At its monthly monetary policy meeting, the Board of the central bank decided to reduce the policy interest rate by 25 basis points from UF+4.00 percent to UF+3.75 percent. The liquidity credit line rates were also adjusted by 25 basis points, to UF+3.75 percent, UF+5.75 percent and UF+7.75 percent. Similarly, the liquidity deposit rate was lowered to UF+2.75 percent.

June
12

At its monthly monetary policy meeting, the Board of the central bank decided to reduce the policy interest rate by 25 basis points from UF+3.75 percent to UF+3.50 percent. The liquidity credit line rates were also adjusted by 25 basis points, to UF+3.50 percent, UF+5.50 percent and UF+7.50 percent. Similarly, the liquidity deposit rate was lowered to UF+2.50 percent.

13

The requirement that loans originating in repo operations between banking institutions established in Chile and involving instruments denominated, indexed or payable in foreign currencies must be denominated in the same currency as the original loan, was eliminated. The purpose of this measure is to broaden this type of operations without increasing the risk involved, which remains covered by the mismatch limits.

July
06

Owing to the additional auction of US$1 billion in PRDs (dollar-indexed promissory notes), the Board of the central bank decided that, in the case of long-term instruments (PRCs—indexed promissory notes payable in coupons), auctions for terms of 10, 12, and 14 years would be suspended and only auctions for terms of 8 and 20 years would be maintained.

26

The Board of the central bank decided that as of the reserve requirement period beginning August 9, 2001, the monetary policy interest rate would be defined in nominal terms, that is, as a percentage of a value in pesos rather than in UFs. The same would apply to rates for liquidity lines of credit and deposits. The annual nominal interest rate corresponding to the annual monetary policy rate of UF+3.5 percent was set at 6.5 percent. This takes into consideration a real interest rate target of 3.5 percent and a projected inflation target of 3 percent, equal to the center of the target range for inflation.

August
13

With a view to facilitating the financial system’s transition to the new nominalized monetary policy rate, the Board of the central bank decided to raise the maturity mismatch threshold for asset and liability operations in domestic currency temporarily, i.e., for 270 days.

25

The frequency of adjustment of the annual interest rate payable on the indexed principal of Term Savings Accounts and Term Savings Accounts with Deferred Withdrawal was increased from once per quarter to monthly, and the prior notice for rate changes was reduced from ten to five days. The aim in making this regulation more flexible was to adjust these savings products to the new monetary policy implemented by the central bank, thus allowing financial institutions to better deal with the increased volatility of rates on deposit instruments denominated in UF, owing to the need to coordinate them with nominal deposit rates, which fluctuate in line with the changes in the policy rate.

September
01

The Central Bank of Chile was integrated into Chile’s Formal Secondary Market for transactions in pension fund securities when it offered to purchase securities through a system in which bidders participated simultaneously in determining the prices of the securities they were trading, as long as these operations were regulated by general regulations and there was timely reporting of the date of purchase of the securities and the volume and price of the transactions (open market operations).

07

The interest rate on deposits of banks and finance companies in the Technical Reserve Deposit Account was adjusted, and it was specified that the rate would be equivalent to the interest rate on the first tranche of the liquidity credit line less 200 basis points.

10

The regulation governing indexation payments on Term Savings Accounts and Term Savings Accounts with Deferred Withdrawal was tightened, establishing that such deposits had to be held for a minimum of 90 days to be eligible for indexing and, regarding the calculation and payment of indexation amounts, that withdrawals had to be charged to the deposit(s) in reverse chronological order. It was decided that this restriction would apply only to those deposits made as of the date of publication of this measure, and financial institutions were granted the option of continuing to apply the regulation in force prior to that date during the twelve months following that date. The aim of this measure was to adjust these savings products to the new monetary policy implemented by the central bank by restricting the use of these accounts for hedging purposes.

Similarly, the time frame allowed financial institutions to change the interest rate payable on the balances maintained in said savings accounts in order to adjust it to the change in the CPI in the previous month was increased from one to ten days.

October
13

It was decided to conduct foreign currency swaps with banks and finance companies. This provided a new monetary regulation instrument that enabled the bank to conduct forex buying or selling operations on the spot market while simultaneously executing reverse operations on the forward market, thus injecting or withdrawing domestic currency resources for the duration of the operation.

November
06

With the start-up of the open market operations system, via electronic mail, the regulations governing window sales and auctions of all promissory notes issued by the central bank for monetary regulation purposes were amended to adjust them to this new method of executing transactions, ending with the receipt of bids on special forms designed for that purpose.

ANNEX III

CHILE: Main Exchange and Foreign Trade Measures in 2001

April
19

During the 1990s, the Central Bank of Chile began a process of gradual exchange liberalization that culminated on April 19 with the elimination of the remaining exchange restrictions and entry into force of a new Compendium of International Exchange Regulations. The new regulations eliminated foreign exchange restrictions that had hitherto affected investment and financing decisions, giving full application to the principle of exchange rate liberalization set out in the Organic Constitutional Law of the Central Bank of Chile (LOC) for international exchange transactions. The most important of these include:

1. The prior authorization requirement for external loans obtained directly or through the issuance of bonds placed abroad, as well as for deposits from abroad, and the obligation to surrender foreign exchange received from abroad and brought into the country for purposes of investment or capital contributions.

2. The system of accreditation and control on the right of access to the Formal Exchange Market granted by the Central Bank, in compliance with the afore-mentioned requirements for prior authorization or surrender (as appropriate), for the payment or transfer abroad of the foreign exchange corresponding to capital, interest, indexation adjustments or profits obtained on credit operations, deposits, capital contributions or investments from abroad.

3. The requirements to be met before residents could make foreign currency remittances for the purpose of foreign investment, capital contributions, loans or deposits, further amending the regulations applicable to the return of foreign exchange associated with such operations, for purpose of capital, interest, indexation adjustments or profits received.

4. The requirements to be met for the recording and authorization of special clauses in foreign loan contracts containing foreign payment or remittance obligations different from those contemplated in the pertinent regulations, which, upon approval, would generate the corresponding right to access the Formal Exchange Market in the event the recorded conditions materialized, making it possible to fulfill the respective payment or remittance obligation.

5. The minimum weighted risk classification and maturity restrictions for the issuance of bonds.

6. The limitations on the currency in which external debt may be issued or contracted.

7. The regulations applicable to the agreements referred to in Article 47 of the LOC on the entry of foreign exchange into the country, with a view to establishing the exchange regime applicable to the purchase of shares in open corporations or shares in investment funds governed by Law 18,815 through the issuance of securities representing said shares for trading on official exchanges abroad or other trading. Henceforth, the operations described are considered investments from abroad and are governed by the regular provisions applicable to said investments.

8. The reserve requirement on foreign capital (previously set at zero).

Despite the elimination of the exchange restrictions, for information purposes, the central bank has maintained the requirement that certain transactions be made through the Formal Exchange Market. The exception to this is payments related to foreign trade, for which all transactions may be made through the Informal Exchange Market, in which case the information should be reported directly to the central bank. The reporting requirements are set out in the Manual of Reporting Procedures and Forms which should be used in conjunction with the new Compendium of International Exchange Regulations.

July
06

In light of the growing instability of the international financial markets, which has led to greater volatility in the value of the Chilean peso and other currencies in the region, resulting in greater demand for exchange risk hedging instruments, the Central Bank of Chile considered it useful to increase the issuance of PRDs during the second half of the year with a view to satisfying said demand. It, therefore, announced the auction of an additional approximate US$1 billion. Similarly, during the second half of the year, the central bank decided to offer an early swap option for paper that was near maturity.

August
16

To enhance the stability of the country’s financial markets, in light of persistent negative external conditions, the Board of the central bank adopted the following measures:

1. Increase the supply of PRDs during the rest of the year for a total of up to US$2 billion over and above the amounts previously announced.

2. Target up to US$2 billion in international reserves to finance foreign exchange sale operations, which could be carried out on the exchange market.

Table 1.

Chile: Aggregate Demand and Supply

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Sources: Central Bank of Chile; and Fund staff estimates.

Due to a change in the base year for national accounts data, rates of growth are unavailable for 1996.

General government.

Weighted by the contribution to domestic expenditure in the previous year.

Goods and nonfactor services.

Table 2.

Chile: Savings Investment

(As percent of nominal GDP)

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Source: Central Bank of Chile; and Fund staff estimate

Includes changes in stocks.

Includes central bank losses.

Table 3.

Chile: Sectoral Origin of GDP

(At constant 1996 market prices)

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Sources: Central Bank of Chile: and Fund staff estimates.

Due to a change in the base year for national accounts data, rates of growth are unavailable for 1996.

Includes imputed banking charges, import duties, and value-added tax on imports.

Table 4.

Chile: National Accounts at Current Prices

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Sources: Central Bank of Chile; and Fund staff estimates.

Goods and nonfactor services.

Table 5.

Chile: National Accounts at Constant (1996) Prices

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Sources: Cental Bank of Chile; and Fund staff estimates.

Goods and nonfactor services.

Table 6.

Indicators of Mining Output

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Source: National Bureau of Statistics, as reported in the Monthly Bulletin of the central Bank of chile

Includes iodine and nitrate

Table 7.

Chile: Indicators of the Manufacturing Sector

(Annual percentage changes)

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Source: Chilean Association of Manufacturers (SOFOFA).
Table 8.

Chile: Population, Labor Force, and Employment

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Source: National Bureau of statistics (INE); and Fund staff estimates.

Estimated level on June 30 of each year.

Annual averages.

Table 9.

Chile: Index of Nominal Wages

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Source: National Bureau of Statistics (INE).
Table 10.

Chile: Consumer Price Index

(Base; December 1998=100)

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Source: National Bureau of statistics (INE).

Excludes fuel and fresh fruits and vegetable

Table 11.

Chile: Social Indicators

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Source: Ministry of Cooperation and planning (MIDEPLAN).

Percent of population.

Distribution of national income by quintiles of households.

Percent of population over 15 years of age.

Percent of the age group enrolled.

Years

Estimate for 1995-2000

Per 1,000 live births.

Table 12.

Chile: summary Operations of the Central Government

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Sources: Ministry of Finance; and Fund staff estimates.
Table 13.

Chile: Central Government Revenue

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Sources: Ministry of Finance; and Fund staff estimates.

Net of rebates.

Including deposits by CODELCO for military purchases under Law 13,196.

Table 14.

Chile: Central Government Expenditure

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Sources: Ministry of Finance; and Fund staff estimates.

Includes employer contributions to the social security system.

Assumes that funds transferred under Law 13,196 by CODELCO to an account for military purchases are spent in the same year.

Includes “recogrition bonds”, cash transfers of accumulated contributions of currently retired persons who in the past had moved to a private system.

Table 15.

Chile: Operations of the Public Enterprises

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Source: Ministry of Finance
Table 16.

Chile: Summary Operations of CODELCO

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Sources: Ministry of Finance; and Fund staff estimate

Includes employer contributions to the social system.

U.S. cents per pound.

In percent of GDP.

Table 17.

Chile: Real Interest Rates on Central Bank Notes and Operations of the Financial System

(In percent per annum)

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Sources: Central Bank of Chile; and Fund staff estimates.

Since May 29, 1995 the interest rate on overnight operations between the central bank and commercial banks has been the main operating target of monetary policy. The values reported here are the equivalent real rate in annual terms. The central bank targets this rate.

Since August 2001 the monetary policy rate is quoted in nominal terms.

Table 18.

Chile: Private Sector Holdings of Financial Assets

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Sources: Central Bank of Chile; and Fund staff estimates.

Includes liabilities of pension funds to the private sector, but excludes intrafinancial flows as well as central bank notes and treasury notes in hands of the private sector.

Foreign deposits are valued at end-of-period exchange rates.

Nominal changes deflated by changes in the consumer price index.

Excludes central bank promissory notes.

Table 19.

Chile: Operation of the Financial System 1/

(Percentage change with respect to liabilities to the private sector at the beginning of the period)

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Sources: Central Bank of Chile; Superintendency of Penison Fund Administration; and Fund staff estimates.

Flows measured at constant end-of-period exchange rates.

Includes dollar deposits, mortagage bonds, and deposits with pension funds.

Annual percentage change, Excludes pension funds.

Broad money includes narrow money (MIA) plus savings and time deposits.

Table 20.

Chile: Operations of the Central Bank

(Percentage change with respect to liabilities to the private sector at the beginning of the period) 1/

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Sources: Central Bank of Chile; and Fund staff estimates.

Flows measured at constant end-of-period exchange rates.

Excludes holdings of treasury notes on account of the 1983-86 capitalization of the central bank, which are included in other net domestic assets.

Table 21.

Chile: Operations of Banks, Nonbanks, and Pension Funds 1/

(Percentage change with respect to liabilities to the private sector at the beginning of the period)

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Sources: Central Bank of Chile; Superintendency of Penison Adiministration; and Fund staff estimates.

Flows measured at constant end-of-period exchange rates.

Excludes deposits of pension funds.

Since June 2000, figures include the Pension Fund Type 2 which had 65 affiliates at end-December 2000.

Consists mostly of holdings of central bank promissory notes, commercial bank letters of credit, and time and savings depostis.

Table 22.

Chile: Summary Accounts of the Financial System

(End-of-period stocks; in billions of Chilean pesos)

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Sources: Central Bank of Chile; Superintendency of Penison Adiministration; and Fund staff estimates.

Consists of commercial banks, including the Banco del Estado, insurance companies, and the pension funds.

Excludes holdings of treasury notes on account of the 1983-85 capitalization of the central bank. These notes are included in other assets.

Includes mortgage boods, U.S. dollar deposits, and deposits with pension funds.

Table 23.

Chile: Summary Account of the central Bank

(End-of-period stocks; in billions of Chilean pesos)

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Source: Central Bank of Chile; and fund staff estimates.

Excludes holdings of treasury notes on account of the 1983-86 capitalization of the central bank, which are included in other net domestic assets.

Table 24.

Summary Accounts of Banks and Nonbank Financial Intermediaries 1/

(End-of-period stocks; in billions of Chilean pesos)

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Sources: Central Bank of Chile; and Fund staff estimates.

Excludes the pension funds.

Table 25.

Chile: Summary Accounts of Penison Funds 1/

(End-of-period stocks; in billions of Chilean pesos)

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Sources: Central Bank of Chile; Superintendency of Penison Funds Administrator; and Fund staff estimates.

Since June 2000, figures include the peasion Fund Type 2 which had 65 affilites at end-December 2000.

Table 26.

chile: Pension Funds—Selected Indicators 1/

(End-of-period values; unless otherwise indicated)

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Sources: Central Bank of Chile; Superintendency of the AFPs; Fund staff estimate

Since June 2000, figures include the pension fund Type 2 which had 65 affiliates at end-December 2000.

Includes all workers affiliated to an AFP that during the specified month pay, or declare and do not pay, the contributions to the pension fund.

Until May 1993 pension funds were not allowed to invest in foreign assets Currently, they can invest up to 16 percent of the value of the fund.

Table 27.

Chile: Export and Import Values, Volumes and Prices

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Source: Central Bank of Chile
Table 28.

Chile: Exports (f.o.b.) by Main Categories

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Source: Central Bank of Chile.
Table 29.

Chile: Imports (c.i.f.) by Type of Goods

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Source: Central Bank of Chile.

Includes free zone imports and goods aquired in foreign ports by shipping companies (e.g., fuel, food supplies).

Table 30.

Chile: Direction of Trade

(In percent)

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Source: Central Bank of Chile.

Austtria, Demark, Finland, Greece, Iralan and portugal as of 1995.

Bolivia, colombis Ecuador, peru, and Venezuels.

Excludes imports through Free Trade zones.

Table 31.

Chile: Net International Reserves of the Financial System

(In millions of U.S. dollars)

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Sources: Central Bank of Chile; and fund staff estimates.

Valued at end-of-period market price

SDRs are valued at end-od-period rates with respect to the U.S.dollar.

Includes Banco del Estado.

  • Budenevich C. and J. C. Quiroz (2001), “Un analisis de la Evolution Reciente de la Fragilidad Financiera del Sector Corporativo en Chile: Aspectos Estructurales y Coyuntorales”, draft, Universidad Finis Terrae.

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  • Caballero R. (2002), “Coping with Chile’s External Vulnerability: A Financial Problem”, by Ricardo Caballero, Economia Chilena, Vol. 5, No. 1.

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  • Gallego F. and N. Loayza (2000), “Financial Structure in Chile: Macroeconomic developments and Microeconomic Effects”, by Francisco Gallego and Norman Loayza, Economia Chilena, Vol. 3, No. 2.

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  • Inter-American Development Bank (1996), “Overcoming Volatility”, Annual Report of Economic and Social Progress in Latin America, Washington, D.C.

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  • La Porta R. others and (1996), “Law and Finance”, NBER Working paper No. 5661, reproduced and discussed by David Bein and Charles Calomiris in “Emerging Markets Financial Markets”, McGraw-Hill Irvin, 2001.

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  • Mulder C. and R. Perrelli (2001), “The Role of Corporate, legal, and Macroeconomic Balance Sheet Indicators in Crisis Detection and Prevention” Foreign IMF WP/02/59.

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  • Phillips, Steven (2000), “Assessing External Vulnerability: The Case of Chile”, Chapter IV in Chile: Selected Issues, IMF Staff Country Report No. 00/104.

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  • Sundararajan V. others and (2002), “Financial Soundness Indicators: Analytical Aspects and Country Practice” IMF Occasional Paper No. 212, pages 24–28.

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  • Stone M. (2002a), “Large-Scale Post-Crisis Corporate Sector Restructuring”, IMF WP/forthcoming.

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69

Prepared by Alessandro Rebucci (PDR) and Andrew Swiston (WHD). The authors would like to thank Marco Espinosa, Ketil Hviding, Saul Lizondo, Laura Papi, and Mauricio Villafuerte, and the discussants (Sergio Lehmann and Alejandro Jara) and the participants at a seminar at the Banco Central de Chile for numerous and useful comments and discussions. They are particularly grateful to Steven Phillips for steering much of their work on these issues, and to Eduardo Ochoa at the Superintendencia de Valores y Seguros for kindly providing some of the data used. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or IMF policy. Remaining errors are ours.

70

In this note, “vulnerability” is broadly defined as the risk that the financial position of an “entity” (the whole economy, a bank, a firm, a sector, etc.) becomes unsustainable, possibly leading to an external or internal financial crisis, whereas an entity’s position is considered sustainable if it is both solvent and liquid.

71

A more traditional vulnerability assessment for the economy as a whole based on indicators of reserve adequacy, competitiveness, etc. is provided by Phillips (2000). An update of some those indicators is reported in the accompanying staff report for this Article IV consultation.

72

SMEs reportedly employ a significant share of the labor force, and their aggregate performance may have an impact on the economy as whole—and thus also on the corporate sector—at least through the domestic demand channel.

73

About 80 percent of equity trading is conducted on the Santiago Stock Exchange, while the remaining 20 percent is conducted on the Chilean Electronic Exchange, and the Valparaiso Stock Exchange.

74

Note that directed lending is tightly regulated under the general banking law.

75

Interestingly, the central bank estimates that less than half—indeed, only 43 percent—of the stock of medium and long-term external debt owed by the private sector is owed by companies controlled by Chilean residents.

76

For instance, Chile is one of only 10 countries worldwide among the about 50 considered by Rafael La Porta and others (1996) requiring that ordinary shares carry one vote per share and scores very high on a combined index of “anti-director rights”; further, with only a few other countries worldwide, it scores the maximum in terms of creditor protection.

77

About 15 companies had either ADRs or internationally placed bonds outstanding, as of end-2001. More companies, however, have access to international syndicated lending. This suggests that the size of a company is probably an important factor in gaining access to international bond and equity markets by assuring sufficient liquidity in secondary markets.

78

The study by Gallego and Loayza (2000) includes tradable security issued by the public sector when measuring the size of the domestic bond market, but does not take into account the very large increase in the stock of corporate bond issued after 1997, when the sample period analyzed ends.

79

See, for instance, Sundararajan and others (2002), which summarizes both the academic literature and the empirical work done at the IMF in this area in recent years. The first part of this section draws mainly on this reference.

80

This part of the analysis is based on the WORLDSCOPE database. For Chile, this includes about 30 companies, the majority of which are in the IPSA stock market index of the country’s 40 most traded stocks. A complete set of data for end-2001 from this source is not yet available.

81

Interestingly, similar conclusions are reached by Budenvich and Quiroz (2001), who look at indicators ofinterest cover, leverage, liquidity and profitability in a broader sample, based on SVS data for 150 Chilean firms from March 1995 to June 2001, excluding the largest and highest-rated companies operating in the telecommunication and electric sectors.

82

Disclosure requirements and practices for non-financial incorporated companies are still being fine tuned. At the moment, the net impact of foreign exchange fluctuations in the value of net financial assets is supposed to be reported in the income statement item “Diferencia de cambio” (“Nota 30”), while the position in derivative instruments (if any) and the firm’s foreign exchange risk management policy are reported in separate supplementary notes (“Nota 34” and the “Analisis razondo”). Some companies, however, have reported the “diferencia de cambio” gross of the effect financial hedging. For those companies, therefore, the reported “diferencia de cambio” could overstate the actual extent of their exposure.

83

For instance, prepayments of foreign bonds are reported at USS 1,7 billion in 2001. At the same time, Chilean companies have issued bonds in domestic currency for the equivalent of about USS 3 billion in 2001.

84

Note that Chile’s public sector has a long net open position in foreign currency, and hence is not exposed to a depreciation of the Chilean peso.

85

Unfortunately, the international comparison discussed in section C, which could provide a better benchmark, does not cover the foreign exchange exposure because of lack of comparable data.

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Cover IMF Staff Country Reports
Chile: Selected Issues
Author:
International Monetary Fund
Volume/Issue:
Volume 2002: Issue 163
Publisher:
International Monetary Fund
ISBN:
9781451807554
ISSN:
1934-7685
Pages:
140
DOI:
https://doi.org/10.5089/9781451807554.002