A prolonged global economic slowdown and tight international credit conditions remain the biggest threats to Chilean financial stability, Chile’s central bank said Wednesday in its half-year Financial Stability Report.
As the Chilean economy is very dependent on exports, the expected contraction in the global economy due to the international financial crisis will have a strong impact on the local economy, the bank said.
However, as credit conditions abroad have become more restrictive, Chilean companies increasingly have turned to the local market to meet their financing needs, the report noted.
According to the central bank, from January through April, Chilean companies issued $1.51 billion in bonds on the local market, versus $1.72 billion in all of 2008. In January-April 2008, only $346 million had been issued on the local bond market.
The country’s institutional investors, namely private pension funds, or AFPs by the local acronym, have been the biggest investors in these bond issues, the central bank said.
Despite the weak external conditions the local banking system is facing due to the effects the global crisis, the system has safeguards in place that will help it weather the financial storm, the central bank said.
“This report’s analysis is that the Chilean financial system is prepared to face an adverse external scenario without [the system] turning into an additional source of risk or volatility,” the bank said in the report. Bank President Jose De Gregorio presented the report to the Senate Finance Committee on Wednesday.
The strength of the local banking system has been reflected in the share prices of local banks and in their credit ratings, the monetary authority said.
“Local banks’ stock prices show a very different behavior than the U.S. banking sector stock indexes,” according to the central bank.
Some of the country’s biggest banks, in terms of lending, are publicly traded, including Banco Santander Chile (SAN) and Banco de Chile (BCH).
On the heels of Moody’s upgrade of Chile’s foreign currency rating to A1, from A2, in March, the ratings agency upgraded the leading banks’ foreign currency deposit rating to a similar A1 rating.
While the central bank’s analysis shows local banks have reduced their profits due to increased provisioning, the “system as a whole shows reasonable levels of capitalization, with a strong basic capital foundation,” the report said.
The monetary authority, under the current international financial outlook, will continue with its active policies of supporting local banks’ liquidity in local and foreign currency so these can continue to develop their part in providing credit to homes and companies, the report said.
Since the onset of the global crisis, the central bank, among other liquidity boosting measures, has offered local banks $500 million in dollar swaps in a weekly auction. The monetary authority has said it will maintain its dollar-swap-auction program through the end of the year to help maintain local market liquidity.
Speaking to reporters after presenting the report to Congress, De Gregorio said that, from a regulatory standpoint, Chilean banks have a solid financial position.
If the bank hadn’t made the decisions it did, such as cutting the benchmark rate an unprecedented 700 basis points and offering banks access to liquidity boosting measures, the local financial system “would have seen tighter conditions,” he added.
“The bank’s policy has been to provide every liquidity instrument that is available,” the central banker said.
As to the government’s decisions to increase fiscal spending, sell dollars on the local market, and issue bonds locally, De Gregorio said these have an effect on local instruments but no effect whatsoever on financial stability.
While banks’ provisioning has increased, Chilean households have shown a very cautious approach to incurring new debt.
“The risk of households defaulting is limited as these have reduced their spending, which has reduced their exposure to risk,” he sa
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