Pablo García Silva: Enhancing resilience through macroeconomic adjustment in Chile

Speech by Mr Pablo García Silva, Deputy Governor of the Central Bank of Chile, at meetings and round tables with analysts and investors in the context of Chile Day, New York and Toronto, 28 June 2023.

The views expressed in this speech are those of the speaker and not the view of the BIS.

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).