## 1chlea2020003

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### Flexible Credit Line (FCL): purpose, request, and staff assessment
- FCL established on March 24, 2009; designed for crisis prevention with flexibility to draw during one- or two-year arrangements and subject to a mid-term review in two-year arrangements.
- Disbursements are not phased nor conditioned on compliance with policy targets; large upfront access with no ongoing conditions justified by very strong track records of qualifying countries.
- Authorities requested a 24-month FCL arrangement in the amount of SDR 17.443 billion (1,000 percent of quota).
- Authorities intend to treat the arrangement as precautionary and temporary and to exit the arrangement as soon as the 24-month period is completed, conditional on a reduction of risks at the time of the mid-term review.
- Staff assessment: Chile meets the qualification criteria for an arrangement under the FCL; staff supports the authorities’ request.

### Recent macroeconomic developments and policy actions (prevalent through April–May 2020)
- Economic activity:
  - Growth: 3.9 percent in 2018; 2.2 percent (yoy) in the first three quarters of 2019; 1.1 percent overall growth in 2019.
  - Contraction of 2.1 percent (yoy) in 2019Q4 due to social unrest.
  - Economic activity expanded by 1.3 percent in January 2020 and 3.3 percent in February 2020 (yoy).
  - Preliminary March economic activity: 3.1 percent decline (yoy).
- Inflation and monetary conditions:
  - Headline annual inflation: 3.4 percent in April 2020.
  - Core inflation: 2.3 percent.
  - Inflation target range: 2–4 percent; mid-point 3 percent.
  - Policy rate lowered by 125 basis points in March to 0.5 percent (BCCh’s “effective lower bound”); about 350 basis points below BCCh’s neutral nominal range (3.75 to 4.35 percent).
- Exchange rate and reserves:
  - NEER depreciated by over 7 percent in 2019Q4 relative to its average in the first three quarters of 2019, and by an additional 7 percent until end-April 2020.
  - FX reserves about US$37 billion in April 2020; just below average since 2012 (about US$ 40 billion).
- Financial sector: (reported in December 2019)
  - Capital adequacy ratio: 12.8 percent.
  - Return on equity: 11.9 percent.
  - Non-performing loan ratio: 2 percent of total loans.
- Authorities’ fiscal and social response to unrest (policy package ≈ 2.1 percent of GDP) included higher social pensions (by 50 percent), minimum guaranteed income, expanded healthcare coverage, broadened subsidies, SME finance support, higher marginal PIT bracket, and higher infrastructure spending.
- Central Bank measures included FX swaps and repo operations, suspension of issuance and buybacks of BCCh securities, expanded eligible collateral, and spot and forward FX interventions (maximum US$10 billion in each market; actual spot intervention US$ 2.55 billion; forward intervention renewing maturing contracts US$ 4.55 billion).

### Covid-19 shock, growth outlook, and labor market projections
- Revisions to growth:
  - January WEO: 2020 = 0.9 percent; 2021 = 2.7 percent.
  - Revised projections: 2020 = -4.5 percent; 2021 = 5.3 percent.
- Unemployment projection: rise to about 10 percent in 2020 (from 7.8 percent in February), then downward with recovery.
- Inflation projection: from 3.7 percent in March to 2.5 percent by end-2020.
- Staff projects a significant GDP decline in 2020Q2 due to the Covid-19 outbreak.

### External sector, ESI, and adverse scenario implications
- Current account expected to narrow considerably in 2020 due to import decline dominating export fall.
- Adverse scenario summary:
  - Exports lower by over US$11 billion.
  - Trade balance worsens by about US$5½ billion after accounting for an import decline of about US$6 billion.
  - Negative income balance narrows by about US$3 billion.
  - Overall current account balance worsens by about US$2½ billion (or about 1 percent of GDP).
- Adverse scenario (investor-perception shock) would deteriorate the financial account by about US$29 billion (about 12 percent of GDP); larger than the ~8 percent of GDP reversal in the Global Financial Crisis.
  - New inflows/outflows of portfolio and other investment worsen by about US$17 billion.
  - Net FDI worsens by US$2 billion.
  - Assumes 80 percent rollover of private external debt → additional financing gap of about US$10 billion.
- Financing gap and financing sources under adverse scenario:
  - Total financing needs: US$31.4 billion (about 13 percent of GDP) composed of a widening current account deficit of US$2.4 billion and a worsening in the financial account of US$29 billion.
  - Expected drawdowns: reserves US$5.7 billion (reserves to about 80 percent of the ARA metric); sovereign wealth fund US$1.9 billion (about 20 percent of expected fund value for end-2020).
  - Net resulting financing gap: US$23.8 billion.
- External Economic Stress Index (ESI):
  - Weights (normalized): U.S. and China growth 0.15; copper price 0.35; VXEEM 0.25; U.S. long-term yield 0.25.
  - Under adverse scenario (April 2020 WEO downside assumptions) Chile would face external stress comparable to the 2008 GFC but persistent through 2021.

### Policy responses: fiscal, monetary, and financial-sector measures
- Fiscal measures:
  - Two packages up to about US$17 billion (about 7 percent of GDP) to safeguard health, protect incomes and jobs, and inject liquidity.
  - Measures: higher healthcare spending; enhanced subsidies and unemployment benefits; tax deferrals; SME liquidity via Banco del Estado; accelerated public procurement disbursements; support for vulnerable and independent workers; credit-guarantee scheme.
  - Assessment: measures adequately focused, but additional/enhanced measures might be needed if downside risks materialize.
- Monetary and financial-sector measures:
  - BCCh: policy rate reduction to 0.5 percent; offered FX swaps; funding-for-lending programs; expanded collateral framework; bank-bonds purchase program; relaxed liquidity coverage ratio; negotiating access to Foreign and International Monetary Authorities Repo Facility; BCCh may consider asset purchases under strict criteria and intends to allow peso to fluctuate freely, intervening only for exceptional volatility.
  - CMF: special treatment for provisions on deferred loans; mortgage guarantees for SME loans; adjustments to treatment of assets received as payment and margins in derivatives; one-year delay to start of Basel III implementation agenda (risk weighted assets and conservation buffer start Dec 2021; systemic charge and capital discounts Dec 2022).
  - Coordination: BCCh funding-for-lending and Ministry of Finance credit-guarantee scheme coordinated to prevent liquidity problems worsening financial sector stress.

### Fiscal stance, medium-term plans, and debt outlook
- 2020 fiscal targets/outcomes:
  - Structural deficit expected to reach 3.5 percent of GDP (slightly above revised target of 3.2 percent of GDP).
  - Headline fiscal deficit expected to increase to 8.0 percent of GDP.
  - Financing mix: debt financed ≈ 4½ percent of GDP and net asset drawdown ≈ 3½ percent of GDP.
  - Gross debt projected to about 33½ percent of GDP by end-2020.
- Tax reform (January): expected to permanently increase annual revenue by 0.8 percent of GDP by 2024.
- Medium-term commitments:
  - Authorities plan structural consolidation: lower structural deficit to 2.5 percent of GDP in 2021 and by 0.5 percent of GDP in subsequent years to reach 1 percent of GDP by 2024.
  - Staff estimate: additional measures of about ½ percent of GDP needed to stabilize debt ratio at about 42 percent of GDP by 2024.
- Policy priorities:
  - Short term: protect health, income, and jobs, especially for the most vulnerable.
  - Medium term: restore productive capacity, reduce inequality, address social issues, and ensure macroeconomic and debt stability.

### Financial sector resilience and stress-test results
- Basel III capital needs: estimated additional capital of 1.6 percent of GDP for private and public banks to meet Basel III requirements by 2024.
- BCCh stress-test (May 2020):
  - Baseline: regulatory capital decline from 12.7 percent to 10.8 percent by end-2021; no bank falls below 8 percent minimum regulatory requirement.
  - Stress scenario (assumes GDP growth path of -6.6 and about 0 percent in 2020 and 2021, respectively): regulatory capital to 9.7 percent.
- Liquidity support measures since March 2020 helped prevent cash-flow impairments turning into defaults; financial sector remains stable.

### FCL access considerations, Fund finances, and risk assessment
- Staff view: requested access of 1,000 percent of quota would provide adequate coverage against the envisaged adverse scenario and boost market confidence amid elevated uncertainty.
- Impact on Fund liquidity and commitments:
  - Forward Commitment Capacity (FCC) would decline by over 9 percent from SDR 190 billion to around SDR 173 billion on approval.
  - If fully drawn, Fund credit to Chile would represent 19.8 percent of total GRA credit outstanding as of May 15, 2020, and 16.6 percent including Chile’s purchase.
  - Fund credit to Chile would be over 104 percent of the Fund's precautionary balances as of end-FY2020.
  - With full drawdown under the adverse scenario, Chile's total external debt would rise to 93 percent of GDP at the end of the year before falling over the medium term (other figures show 92.8 percent of GDP in illustrative downside).
- Staff judgment: risks to the Fund's credit exposures are significant but manageable, citing Chile’s precautionary intent, robust institutions, sustained market access, and investment grade status.
- Safeguards: FCL safeguards procedures in progress; staff obtained BCCh audited financial statements and management letter for FY2019.

### Debt Sustainability Analysis — key baseline projections (as of May 14, 2020)
- Nominal gross public debt (percent of GDP): 2018: 14.1; 2019: 25.6; 2020: 27.9; 2021: 33.3; 2022: 36.4; 2023: 39.4; 2024: 41.0; 2025: 41.9.
- Public gross financing needs (percent of GDP): 2018: 3.0; 2019: 4.9; 2020: 4.9; 2021: 8.5; 2022: 4.8; 2023: 3.0; 2024: 3.5; 2025: 1.2.
- Real GDP growth (percent): 2018: 3.0; 2019: 3.9; 2020: 1.1; 2021: -4.5; 2022: 5.3; 2023: 3.2; 2024: 2.5; 2025: 2.5.
- Effective interest rate (percent): 2018: 6.3; 2019: 3.8; 2020: 3.7; 2021: 3.8; 2022: 2.6; 2023: 2.6; 2024: 3.0; 2025: 2.6.
- Identified debt-creating flows (percent of GDP) cumulative projection: total identified 14.5; primary deficit cumulative 14.1.
- Baseline real GDP growth path used in DSA: 2020: -4.5; 2021: 5.3; 2022: 3.2; 2023: 2.5; 2024: 2.5; 2025: 2.5.

### Alternative and adverse scenarios (selected outcomes)
- Adverse illustrative downside shock concentrated in 2020:
  - Real GDP growth in 2020 = -8.5 percent (4 percentage points below baseline).
  - Total external debt (percent of GDP): 2019 = 65.7; 2020 = 92.8; 2021 = 81.6; 2022 = 76.0; 2023 = 70.3; 2024 = 64.3; 2025 = 61.2.
  - Public external debt (percent of GDP): 2019 = 6.1; 2020 = 21.3; 2021 = 18.3; 2022 = 18.9; 2023 = 15.7; 2024 = 11.7; 2025 = 10.1.
- Impact of full FCL drawdown under adverse scenario:
  - Total external debt ≈ 92.8 percent of GDP in 2020.
  - Public external debt ≈ 21.3 percent of GDP in 2020.
  - Fund credit would initially reach 11.4 percent of GDP and nearly 68.9 percent of Chile’s gross international reserves.
  - Debt service due on GRA credit (percent of GDP): 2020 = 0.2; 2021 = 0.3; 2022 = 0.2; 2023 = 2.2; 2024 = 3.8; 2025 = 1.7.
  - Debt service due on GRA credit (percent of Exports of Goods and Services): 2020 = 0.6; 2021 = 0.9; 2022 = 0.9; 2023 = 8.6; 2024 = 15.4; 2025 = 7.2.

### Institutional assessment, process, and policy recommendations
- Institutional strength:
  - Chile adheres to inflation targeting with a free-floating exchange rate; inflation anchored around 3 percent since 1999 (average 3.2 percent).
  - BCCh independence and policy transparency ranked high; BCCh underwent independent external evaluation.
  - Chile adhered to SDDS Plus on March 20, 2020.
  - Strong governance: Chile leads regional averages for six Worldwide Governance Indicators; regulatory quality, control of corruption, and government effectiveness rank above the 80th percentile globally.
- Policy recommendations and priorities:
  - Short term: protect health, incomes, and jobs, target support to the most vulnerable, maintain liquidity and credit support for SMEs.
  - Monetary: maintain expansionary stance, consider stronger forward guidance, asset purchase programs or secondary market purchases under strict criteria, continue allowing exchange rate to act as shock absorber while intervening for exceptional volatility.
  - Fiscal/medium term: pursue structural consolidation per authorities’ plan to reach structural deficit target of 1 percent of GDP by 2024, and consider additional measures of about ½ percent of GDP to stabilize debt at about 42 percent of GDP by 2024.
  - Institutional reforms: review tax expenditures and Pigouvian taxes (OECD/IMF TA requested); institutionalize spending review framework; consider formal escape clauses and explicit debt targets to strengthen fiscal rule framework.
- Staff recommendation: approve the FCL arrangement for Chile at access of 1,000 percent of quota given extraordinary downside risks; staff considers risks manageable with mitigating factors (precautionary intent, strong institutions, sustained market access).

*International Monetary Fund — CHILE: REQUEST FOR AN ARRANGEMENT UNDER THE FLEXIBLE CREDIT LINE (May 21, 2020); IMF staff report excerpts (Chile).*

### 17.443 billion (about US$ 23.93 billion, equivalent to 1,000 percent of quota).

### 17.443 billion (about US$ 23.93 billion, equivalent to 1,000 percent of quota).

### Flexible Credit Line (FCL): purpose and design
- The FCL was established on March 24, 2009 as part of a major reform of the Fund’s lending framework.
- Designed for crisis prevention: provides flexibility to draw on the credit line at any time during the period of the arrangement (one or two years).
- Subject to a mid-term review in two-year FCL arrangements.
- Disbursements are not phased nor conditioned on compliance with policy targets as in traditional IMF-supported programs.
- Large, upfront access with no ongoing conditions is justified by the very strong track records of countries that qualify for the FCL.

### Executive summary — context and request
- Chile’s very strong fundamentals, institutional policy frameworks, and macroeconomic track record helped absorb recent shocks, including social unrest in late 2019.
- Key policy anchors cited:
  - Structural fiscal balance rule.
  - Credible inflation-targeting framework with a free-floating exchange rate.
  - Sound financial system supported by effective regulation and supervision.
- Request: authorities are requesting a 24-month arrangement under the FCL in the amount of SDR 17.443 billion (1,000 percent of quota).
- Authorities intend to treat the arrangement as precautionary and temporary, and to exit the arrangement as soon as the 24-month period is completed, conditional on a reduction of risks at the time of the mid-term review.
- Staff assessment: Chile meets the qualification criteria for an arrangement under the FCL; staff supports the authorities’ request.

### Risks and rationale for the FCL
- Principal external risks related to the Covid-19 outbreak:
  - Significant deterioration in global demand for Chilean exports.
  - Sharp decline or reversal of capital inflows toward emerging markets.
  - Abrupt tightening of global financial conditions.
- Effects of a prolonged Covid-19 outbreak would limit exports and foreign direct investment.
- Persistently high global risk aversion and tight global financing conditions could curtail or reverse capital inflows.
- Large stock of domestic securities held by non-residents: a prolonged flight to safety could lead to large pressures on the balance of payments.
- The FCL arrangement is intended to boost market confidence amid elevated uncertainty and volatility in global financial markets by enhancing Chile’s external buffers and providing insurance against tail risks.

### Recent developments and policy actions
- Economic activity:
  - Growth: 3.9 percent in 2018; 2.2 percent (yoy) in the first three quarters of 2019; 1.1 percent overall growth in 2019.
  - Contraction of 2.1 percent (yoy) in 2019Q4 due to social unrest.
  - Economic activity expanded by 1.3 percent in January 2020 and 3.3 percent in February 2020 (yoy).
- Authorities’ fiscal and social response to unrest:
  - Policy package of about 2.1 percent of GDP announced in December 2019, including:
    - Higher social pensions (by 50 percent).
    - Introduction of a minimum guaranteed income.
    - Expanded healthcare coverage.
    - Broadened subsidies for the most vulnerable.
    - Support for SME financing via increased capital of the state-owned bank and the development agency.
    - Higher top bracket for marginal personal income tax.
    - Higher infrastructure spending.
- Central Bank of Chile (BCCh) measures:
  - Increased liquidity through FX swaps and repo operations, suspended issuance and initiated buyback of BCCh securities, expanded eligible collateral.
  - Spot and forward FX interventions at end-November (maximum amount of US$10 billion in each market); actual spot intervention amounted to US$ 2.55 billion in total; forward intervention through non-deliverable forwards was limited to renewing maturing contracts in the total amount of US$ 4.55 billion.
  - First FX intervention involving FX sales since 2002.
- Exchange rate:
  - NEER depreciated by over 7 percent in 2019Q4 relative to its average in the first three quarters of 2019, and by an additional 7 percent until end-April 2020.
  - Central Bank let the exchange rate adjust without intervention in 2020 to play its role as shock absorber.
- Inflation and monetary conditions:
  - Headline annual inflation was 3.4 percent in April 2020.
  - Core inflation remained stable at 2.3 percent.
  - Inflation target range: 2–4 percent; mid-point 3 percent.
- Financial sector soundness (as reported in December 2019):
  - Capital adequacy ratio: 12.8 percent.
  - Return on equity: 11.9 percent.
  - Non-performing loan ratio: 2 percent of total loans.
  - Liquidity monitored via the standard Basel liquidity coverage ratio.
- Reserves and flows:
  - FX reserves were about US$37 billion in April 2020; just below their average since 2012 (about US$ 40 billion).
  - FDI-inflows reached a historical high in January-February 2020.
  - Non-residents’ portfolio outflows exceeded those in past episodes but have started to stabilize.

### Institutional assessment, process, and Fund finances
- Staff conducted a virtual fact-finding staff visit in April 2020 to assess FCL qualification.
- The last Article IV consultation concluded on November 7, 2018; the 2019 consultation was not completed due to changing conditions.
- Fund liquidity: the proposed commitment of SDR 17.443 billion would have a significant but manageable impact on the Fund’s liquidity position.
- Process note: an informal meeting to consult with the Executive Board on a possible FCL arrangement for Chile was held on May 12, 2020.

### Staff appraisal excerpt (Managing Director’s statement)
- Chile’s very strong fundamentals, institutional policy frameworks, and track record have been instrumental in absorbing recent shocks.
- Authorities continue to show strong commitment to maintaining very strong policies and institutional policy frameworks going forward.
- Notwithstanding strong fundamentals, Chile’s open economy is exposed to substantial external risks from the Covid-19 outbreak.
- The FCL arrangement will help boost market confidence amid elevated uncertainty and volatility in global financial markets.
- Authorities intend the FCL to be precautionary and temporary, and to exit as soon as the 24-month period is completed, conditional on a reduction of risks at the time of the mid-term review.

*International Monetary Fund — CHILE: REQUEST FOR AN ARRANGEMENT UNDER THE FLEXIBLE CREDIT LINE (May 21, 2020).*

### 12.      Staff projects a significant GDP decline in 2020Q2 due to the Covid-19 outbreak,

### 12. Staff projects a significant GDP decline in 2020Q2 due to the Covid-19 outbreak

### Growth outlook and labor market
- Growth revisions:
  - January WEO projections: 2020 = 0.9 percent; 2021 = 2.7 percent.
  - Revised projections: 2020 = -4.5 percent; 2021 = 5.3 percent.
- Preliminary March economic activity: 3.1 percent decline (yoy).
- Inflation projection: from 3.7 percent in March to 2.5 percent by end-2020.
- Unemployment projection: rise to about 10 percent in 2020 (from 7.8 percent in February), then downward with recovery.
- Note: A growth acceleration in 2021 was already in pre-Covid-19 staff projections and is compounded by recovery from the pandemic.

### Current account and external sector
- Current account: expected to narrow considerably in 2020.
- Trade balance drivers:
  - Improvement driven by decline in imports due to significant peso depreciation and impaired domestic demand.
  - Decline of exports driven by fall in trading partners’ external demand is projected to be dominated by import decline.
- Net income balance: expected to improve with projected decline in corporate profitability.
- Adverse scenario (summary figures):
  - Exports lower by over US$11 billion.
  - Trade balance worsens by about US$5½ billion after accounting for an import decline of about US$6 billion.
  - Negative income balance narrows by about US$3 billion.
  - Overall current account balance worsens by about US$2½ billion (or about 1 percent of GDP).

### Key risks
- Main risk: prolonged Covid-19 outbreak leading to extended mitigation measures, high uncertainties, negative effects on activity and confidence, impaired productive capacity, and strain on corporate balance sheets.
- External risks: lower growth in China and the U.S., and a further slump in copper prices — would reduce export growth and may deter FDI.
- Financial risks: Covid-19-related lower risk appetite could lead to significantly and persistently tighter financial conditions and capital outflows.
- Domestic risks: reemergence of social protests and uncertainties from the New Constitution process (expected finalized by June 2022) have subsided.
- Corporate leverage: non-financial corporate debt remains high, but leverage is largely related to obligations to parent companies or hedged against foreign exchange risk.
- External Stress Index (ESI): Covid-19 pushed Chile’s ESI to its worst level since the mid-1990s; prolonged pandemic could keep stress comparable to 2008 GFC levels with much longer persistence.

### Policy response: fiscal measures
- Fiscal packages: two packages up to about US$17 billion (or about 7 percent of GDP) to safeguard health, protect incomes and jobs, and inject liquidity.
- Measures include:
  - Higher healthcare spending.
  - Enhanced subsidies and unemployment benefits.
  - A set of tax deferrals.
  - Liquidity provision to SMEs, including through Banco del Estado.
  - Accelerated disbursements for public procurement contracts.
  - Support for the most vulnerable and independent workers.
  - A credit-guarantee scheme to support borrowers.
- Assessment: measures are adequately focused on containing human and economic impact, but additional or enhanced measures might be needed if downside risks materialize.

### Policy response: monetary and financial-sector measures
- Monetary policy:
  - Policy rate lowered by 125 basis points in March to 0.5 percent (considered by the BCCh as the “effective lower bound”).
  - Policy rate is about 350 basis points below BCCh’s estimates of the neutral nominal interest rate range (3.75 to 4.35 percent).
  - BCCh kept the policy rate unchanged in its May monetary policy meeting and signaled maintaining an expansionary monetary stance over a longer period.
  - Potential additional easing tools: stronger forward guidance, asset purchase programs, loans via extended collateral framework; BCCh may consider purchases of government securities in secondary market under strict criteria.
  - BCCh intends to continue allowing the peso to fluctuate freely, intervening only to address exceptional volatility; BCCh is considering revisiting desired level of reserves and does not envisage CFMs.
- BCCh liquidity and market support measures:
  - Offered FX swaps.
  - Introduced funding-for-lending programs.
  - Expanded collateral framework (including corporate bonds and the credit guarantee scheme).
  - Introduced a bank-bonds purchase program.
  - Relaxed liquidity coverage ratio (temporary deviations tolerated case-by-case).
  - Negotiating access to the Foreign and International Monetary Authorities Repo Facility.
- Financial Market Commission (CMF) measures:
  - Special treatment in establishment of provisions for deferred loans (while monitoring credit quality).
  - Use of mortgage guarantees to safeguard loans for SMEs.
  - Adjustments in treatment of assets received as payment and margins in derivative transactions.
  - Delay by one year of start of implementation agenda for Basel III standards (implementation of regulation related to risk weighted assets and conservation buffer now start in Dec 2021; systemic charge and capital discounts in Dec 2022).
- Coordination: strong coordination between BCCh funding-for-lending program and Ministry of Finance credit-guarantee scheme to prevent liquidity problems from worsening financial sector stress.

### Fiscal stance, medium-term plans, and debt outlook
- 2020 fiscal targets and outcomes:
  - Structural deficit expected to reach 3.5 percent of GDP (slightly above revised target of 3.2 percent of GDP).
  - Headline fiscal deficit expected to increase to 8.0 percent of GDP owing to policy responses and cyclical revenue adjustments.
  - Financing mix: financed by debt for about 4½ percent of GDP and by net asset drawdown of about 3½ percent of GDP.
  - Gross debt projected to about 33½ percent of GDP by end-2020.
- Tax reform (January): approved, expected to permanently increase annual revenue by 0.8 percent of GDP by 2024 (largest gains from electronic invoicing, reduction of tax benefits for financial system and corporates, and a higher PIT bracket).
- Medium-term commitments:
  - Authorities plan structural consolidation: lower structural deficit to 2.5 percent of GDP in 2021 and by 0.5 percent of GDP in subsequent years to reach 1 percent of GDP by 2024.
  - Staff estimate for debt stabilization: additional measures of about ½ percent of GDP are needed to stabilize debt ratio at about 42 percent of GDP by 2024 (authorities’ committed spending is about ½ percent of GDP higher than level consistent with 2024 target).
- Policy priorities:
  - Short term: protect health, income, and jobs, especially for the most vulnerable.
  - Medium term: restore productive capacity, reduce inequality, address social issues, ensure macroeconomic and debt stability.
- Institutional reforms:
  - Authorities asked independent advisory committee to propose tax structure improvements to increase revenue while enhancing productivity and incentivizing investments.
  - Joint TA from OECD and IMF requested to review tax expenditures and Pigouvian taxes.
  - Ongoing efforts to institutionalize a spending review framework with IMF Fiscal Affairs Department TA.
  - Consideration of formal escape clauses and explicit debt targets to strengthen fiscal rule framework.

### Financial sector resilience and stress-test results
- Basel III implementation: authorities committed to strengthening regulatory and supervisory framework; Basel III requirements will require larger capital buffers.
- Liquidity support measures since March 2020 helped prevent cash-flow impairments turning into defaults; financial sector remains stable.
- BCCh stress-test (May 2020) results:
  - Baseline scenario (BCCh): regulatory capital decline from 12.7 percent to 10.8 percent by end-2021; no bank falls below 8 percent minimum regulatory requirement.
  - Stress scenario (assumes GDP growth path of -6.6 and about 0 percent in 2020 and 2021, respectively): regulatory capital to 9.7 percent.

### Flexible Credit Line (FCL) access considerations
- Rationale: authorities requested an arrangement under the FCL given high external uncertainty and elevated ESI.
- Staff assessment: requested access of 1,000 percent of quota would provide adequate coverage against envisaged adverse scenario (which envisions persistent negative pandemic effects rather than speedy recovery in 2020Q3, with dramatic implications for investor confidence and capital flows).
- Adverse scenario implications summarized under external sector section above.

*International Monetary Fund staff report excerpt (Chile).*

### 26.      More importantly, the external shock envisaged in the adverse scenario would change

### 1chlea2020003 - 26.      More importantly, the external shock envisaged in the adverse scenario would change

### Adverse scenario: investor perceptions and capital-flow reversal
- The adverse scenario would change investors’ perceptions towards emerging markets, including Chile, and result in sharp declines or reversals of capital flows.
- The financial account balance would deteriorate by about US$29 billion (about 12 percent of GDP) under the adverse scenario.
- This deterioration is larger than the reversal in the financial account of about 8 percent of GDP that Chile experienced during the Global Financial Crisis.
- Breakdown:
  - New inflows and outflows of portfolio and other investment flows worsen by about US$17 billion.
  - Net FDI worsens by an additional US$2 billion.
- Further tightening of global financial conditions would likely put strain on external debt servicing.
- Adverse scenario assumption: 80 percent rollover of private external debt, resulting in an additional financing gap of about US$10 billion (Box 3).
- Public sector external debt: staff assume full rollover of public sector external debt and no threats to public debt sustainability, given limited public external short-term financing needs and large public liquid assets.

### Financing gap, reserve and sovereign wealth fund use
- The adverse scenario results in a financing gap of US$23.8 billion.
- Total financing needs sum to US$31.4 billion (about 13 percent of GDP), composed of:
  - Widening current account deficit of US$2.4 billion.
  - Worsening in the financial account balance of US$29 billion.
- Expected sources and drawdowns:
  - Drawdown of reserves of US$5.7 billion (would bring reserves to about 80 percent of the ARA metric).
  - Drawdown of the sovereign wealth fund (economic and social stabilization fund) of US$1.9 billion (about 20 percent of the expected fund value for end-2020).
  - Most other liquid Treasury assets after expected net asset financing to the 2020 deficit of about 3½ percent of GDP relate to the pension fund, which is not meant for economic stabilization.
- Net resulting financing gap: US$23.8 billion, mainly driven by movements in the financial account.

### External Economic Stress Index (ESI) — key points
- The ESI is a weighted sum of standardized deviations of proxies from their means; constructed by: (i) identify key external risks; (ii) choose proxies; (iii) weigh them.
- Main external risks for Chile: low growth in trading partners, low copper prices, tight financing conditions.
- Proxies used:
  - Risks to exports: output growth in the U.S. and China.
  - Risks to copper industry and inward FDI: international copper prices.
  - Financial conditions: emerging markets volatility index (VXEEM) and the yield on ten-year U.S. Treasuries (detrended).
- Weights (normalized, based on balance of payments and IIP shares of GDP):
  - Growth in the U.S. and China: 0.15.
  - Price of copper: 0.35.
  - VXEEM: 0.25.
  - U.S. long-term yield: 0.25.
- Chile faces its highest level of external stress since the mid-1990s; an adverse scenario with prolonged global Covid-19 effects would keep external stress high through most of 2021.
- Adverse scenario assumptions (from April 2020 WEO downside):
  - U.S. growth lower by 1.9 and 4.9 percentage points in 2020 and 2021, respectively, relative to the baseline.
  - China growth lower by 2.2 and 2.9 percentage points in 2020 and 2021, respectively.
  - Copper prices assumed to fall towards about $3,200 per ton (about 160 cents per pound).
  - VXEEM assumed to remain at current levels (more than two standard deviations above average).
- Under this scenario, Chile would face external stress comparable to the 2008 GFC but persistent through 2021.

### Box 3 — Description of the Adverse Scenario: assumptions and magnitudes
- Justification: Access of US$23.8 billion (about 1,000 percent of quota) can be justified under this adverse scenario.
- Key comparative note: Assumptions comparable to recent FCL arrangements (2018 Colombia, 2019 Mexico) for commodity prices, exports, imports, FDI, and rollover; portfolio and other flows assumed more conservatively.
- Current account shocks and offsets:
  - Value of mining exports (USD) assumed to drop by 27 percent (one-standard deviation copper price shock), bringing copper price to a similar level as during the GFC.
  - Global demand for non-mining exports assumed to drop by 10 percent (about one standard deviation).
  - Countervailing factors:
    - Oil imports assumed to decline by 27 percent.
    - Non-oil imports assumed to decline by 10 percent due to exchange rate depreciation and weaker domestic demand.
    - Net income balance improves following a 27-percent drop in FDI-related income outflows, which dominates a 10-percent drop in FDI-related income inflows.
  - Overall effect: current account deficit widens.
- Foreign Direct Investment:
  - FDI inflows decline by 27 percent relative to baseline, but remain above the average of the previous three years.
  - Outward FDI by Chilean residents assumed to decline by 10 percent.
- Portfolio flows and other investments:
  - Net inflows by non-residents and residents worsen by about 1.03 standard deviation (corresponding to a 15 percent probability of a one-sided event).
  - These shocks are smaller than the Mexico 2019 FCL arrangement (1.6 standard deviations) but lead to large financing gaps given flow sizes for Chile.
- External debt rollover:
  - Rollover rates of 80 percent assumed for amortization of private sector external debt (short-term at original maturity and medium- and long-term debt coming due).
  - Full rollover of public sector external debt assumed.
- Use of reserves and sovereign wealth fund:
  - Drawdown of FX reserves of US$5.7 billion assumed (maximum drawdown to keep reserves above 80 percent of the ARA metric).
  - Drawdown of US$1.9 billion from the sovereign wealth fund (about 20 percent of expected end-2020 fund value).
  - Expected net asset financing to the deficit of about 3½ percent of GDP in 2020 noted; most other liquid Treasury assets relate to the pension fund (not for stabilization).

### Review of qualification: external position, capital account, reserves, and public finances
- Sustainable external position:
  - 2018 Article IV assessment: external position broadly consistent with fundamentals and desirable policies.
  - Staff assessment unchanged for 2019: average current account gap based on EBA models for 2019 was about -0.6 percent of GDP.
  - Real effective exchange rate gap (REER-index EBA) indicates absence of misalignment.
  - Current account deficit widened to 3.9 percent of GDP in 2019; higher than EBA current account and ES norms of about 1 percent of GDP, largely due to:
    - Strong investment in mining (one-off contributions of 1½ and ¼ percent of GDP, totaling about 1.7 percent of GDP).
    - Effect of policy gaps was less than ¼ percent of GDP in 2019.
  - Preliminary 2020 assessment: somewhat stronger external position but still in line with fundamentals.
  - Exchange rate depreciation: about 13 percent (real effective terms) until end-March 2020 compared to 2019 average.
  - 2020 current account deficit expected to narrow substantially to less than 1 percent of GDP due to depreciation and weaker domestic demand.
  - External DSA points to sustainable external debt even under adverse scenarios; net IIP narrowed to -15 percent of GDP at end-2019.
- Capital account position:
  - Private flows dominated capital account:
    - Private flows accounted for 81.7 percent of total asset flows and 72 percent of total liability flows over the past three years.
    - Private sector on average accounted for about 83 percent of total assets and about 94 percent of total IIP liabilities over the same horizon.
    - FDI and portfolio inflows averaged 59 percent of total inflows; private sector holdings accounted for about 95 percent of Chile’s external debt; public sector institutions held about 5 percent.
- Track record of sovereign access:
  - Uninterrupted access to international capital markets at favorable terms for several decades.
  - Investment grade status with three major rating agencies.
  - Sovereign bond spreads (as of May 14, 2020): EMBIG 271 bps, five-year CDS 114 bps.
  - Median over past five years: EMBIG 190 bps, five-year CDS 90 bps.
  - Central government issued external debt in each of the past five years (latest bonds: January 2020 for US$3.3 billion and May 2020 for US$2 billion).
  - Cumulative amount over that period equivalent to 515 percent of Chile’s quota at the Fund.
- International reserves and liquid assets:
  - Reserves-to-ARA ratio: 88 percent at end-2019, 90 percent on average over last three years.
  - Reserves have remained above the 80 percent threshold in any year.
  - Adding buffer for copper price volatility gives reserves-to-commodity-augmented ARA of 74 percent.
  - More than half of non-FDI short-term external debt are banks’ debts (US$22 billion), more than half covered by liquid foreign exchange assets.
  - Reserves at end-2019 are more than three times estimated potential net FX liquidity needs of banks.
  - Central government holds approximately US$25 billion in usable liquid external assets, including US$12 billion in the sovereign wealth fund for economic stabilization at end-2019; counting these as reserves would raise reserves to 111 percent of ARA.
  - Reserve coverage of prospective imports: 7 months.
  - Reserve coverage of broad money: 20 percent.
  - Reserve coverage of short-term external debt: 92 percent.
  - Authorities committed to free-floating exchange rate regime; authorities plan to revisit reserve accumulation policy and continue exploring other sources of precautionary financing (BCCh discussing enhancing bilateral RMB/CLP currency swap agreement).
- Sustainable public debt and fiscal policy:
  - Fiscal policy guided by fiscal rule and structural deficit targets.
  - Authorities committed to debt stability, including additional revenue and expenditure measures if necessary to reach structural deficit target of 1 percent of GDP by 2024.
  - Staff calculation: medium-term fiscal consolidation lowering structural deficit to 0.5 percent of GDP by 2025 would stabilize debt ratio at about 42 percent of GDP.
  - Debt sustainability analysis shows robust debt trajectory to standard shocks (growth, exchange rate, interest rates).
  - Chile’s debt sustainable with high probability due to low debt levels, adequate reserves, significant buffers, sound macro-fundamentals and strong policy track record.
  - Liquidity risks mitigated by large domestic banking sector and sizable assets; fiscal buffers (sovereign wealth fund and other assets) enable countercyclical policies.

*Source: CHILE — INTERNATIONAL MONETARY FUND*

### 33.      Low and stable inflation in the context of a sound monetary and exchange rate policy

### 33.      Low and stable inflation in the context of a sound monetary and exchange rate policy framework

### Monetary policy, inflation, and exchange rate framework
- Chile maintains a free-floating exchange rate system and an inflation-targeting regime introduced in 1999.
- Inflation has been maintained around 3 percent (the mid-point of the target range) since 1999, with an average of 3.2 percent.
- Inflation expectations at the 12-month horizon have been firmly anchored to the target over the past 10 years.
- Due to high credibility of monetary policy, exchange rate pass-through to domestic prices is among the lowest in the region.
- The BCCh has had a small and negative equity for a long time, which has not compromised policy solvency and does not require immediate recapitalization.
- The BCCh’s independence is well-established; it has voluntarily undergone an independent external evaluation of the conduct of its monetary and financial policy, with the expert panel highlighting high standards of policy analysis, conduct, and independence.
- The BCCh monetary policy transparency has been ranked high among inflation-targeting regimes.

### Financial system soundness and buffers
- The financial sector appears to be sound overall; capital buffers will be reinforced starting in 2021.
- At end-2019, estimated capital needs to meet the Basel III regulatory requirements by 2024 (including capital conservation buffer and capital discounts) are estimated at 1.6 percent of GDP for both private and public banks.
- Banco del Estado received 0.2 percent of GDP in capital under the stimulus plan to support lending to SMEs.
- Large banks are currently sound but should be closely monitored due to systemic nature and potential resolution challenges in a downside scenario.
- Systemic risk from non-financial sector external debt is low—about half is FDI-related and the rest is generally hedged against exchange rate risk—but should continue to be monitored, together with SME portfolio health.
- Pension funds are well-supervised and soundly managed.

### Financial supervision, regulatory alignment, and AML/CFT
- The 2011 FSAP concluded Chile’s financial regulatory and supervisory system is robust; the 2018 Article IV staff report and recent staff visits did not find substantial concerns.
- An update of the FSAP was underway but was delayed to November 2020 due to the Covid-19 pandemic.
- Supervisory authorities are committed to align the regulatory framework with Basel III, with a one-year postponement of the start of the implementation process justified by the circumstances surrounding the Covid-19 crisis; banks are expected to catch up in 2021 and 2022 on Basel III capital and liquidity requirements.
- Restructuring the supervisory framework is expected to reduce opportunities for regulatory arbitrage from the prevailing conglomerate structure.
- Progress remains to be made in terms of early intervention and bank resolution regime.
- Chile is undergoing an assessment against the FATF AML/CFT standard by GAFILAT (FATF Latin America regional body), currently delayed due to Covid-19; the assessment will include recommendations to further strengthen the AML/CFT framework.

### Data, track record, and institutional strength
- On March 20, 2020, Chile adhered to the Fund’s Special Data Dissemination Standard (SDDS) Plus.
- Chile has a sustained track record of implementing very strong policies, meeting all relevant core indicators in each of the five most recent years (staff assessment).
- Very strong fiscal and monetary institutional frameworks and high policy credibility allowed effective adjustment to shocks, including during the Global Financial Crisis.
- Fiscal and monetary policies show very strong countercyclical responses, and the country relies on the shock absorbing power of the free-floating exchange rate and on open capital accounts.
- Chile leads the regional average for all six indicators in the 2018 Worldwide Governance Indicators report; regulatory quality, control of corruption, and government effectiveness rank above the 80th percentile among all countries.

### FCL arrangement: design, impact on Fund finances, and risks
- Authorities intend to exit the FCL arrangement at the end of the 24-month period, conditional on a reduction of the risks considered at the time of the mid-term review.
- The proposed arrangement under the FCL is SDR 17.443 billion, or 1,000 percent of quota.
- Impact on Fund liquidity and commitments:
  - The Fund’s Forward Commitment Capacity (FCC) would decline by over 9 percent from its current level of SDR 190 billion to around SDR 173 billion.
  - If Chile were to draw under the FCL arrangement it would be automatically excluded from the Financial Transaction Plan (FTP) and the FCC, currently only based on quota resources, would decline by another SDR 1.4 billion.
- If resources available under the FCL arrangement were fully drawn:
  - Fund credit to Chile would represent 19.8 percent of total GRA credit outstanding as of May 15, 2020, and 16.6 percent of GRA credit outstanding including Chile's purchase.
  - Chile would be the second largest Fund exposure after Argentina (SDR 31.9 billion) and before Egypt (SDR 10.6 billion).
  - The concentration of Fund credit among the top five users of GRA resources would increase marginally to about 68.5 percent, up from 67.1 percent, as of May 15, 2020.
  - Fund credit to Chile would be over 104 percent of the Fund's precautionary balances as of end-FY2020.
  - Chile's total external debt would rise to 93 percent of GDP at the end of this year under the adverse drawing scenario outlined in Section B, before falling gradually but steadily over the medium term.
- Staff judges risks to the Fund's credit exposures from Chile's FCL request to be manageable, with mitigating factors:
  - The Chilean authorities intend to treat the arrangement as precautionary.
  - Chile has robust institutions, a very strong policy implementation record, uninterrupted access to international capital markets at favorable terms for several decades, and maintains investment grade status.
  - Some capacity-to-repay indicators, assuming full drawing of 1,000 percent of quota under an adverse drawing scenario, would indicate relatively large credit exposure compared with recent exceptional access programs (e.g., stock of outstanding Fund credit as a share of exports of goods and services, or of gross official reserves, would be in the top quintile for exceptional access SBAs approved since 2008).

### Safeguards, staff appraisal, and recommendation
- FCL safeguards procedures are in progress: authorities authorized external auditors of the BCCh to hold discussions with staff; staff obtained copies of the central bank’s audited financial statements and the management letter for FY2019. Results will be included in the next staff report.
- Staff assessment: Chile meets the qualification criteria for access to FCL resources, given very strong economic fundamentals and institutional policy frameworks, sustained track record of strong macroeconomic policies, and commitment to maintain prudent policies.
- Staff recommends approval of the authorities’ request for an FCL arrangement for Chile and considers that access at 1,000 percent of quota is appropriate given the extraordinary downside risks currently weighing on the global outlook.
- Staff considers risks to the Fund from the proposed FCL arrangement to be significant but manageable, noting mitigation from Chile treating the arrangement as precautionary and its strong macroeconomic performance and institutional record.

*Source: 1chlea2020003 - 33.      Low and stable inflation in the context of a sound monetary and exchange rate policy*

### Annex IV. Debt Sustainability Analysis

### Annex IV. Debt Sustainability Analysis

### Macro-fiscal baseline projections and key indicators (as of May 14, 2020)
- Nominal gross public debt (percent of GDP) by year: 2018: 14.1; 2019: 25.6; 2020: 27.9; 2021: 33.3; 2022: 36.4; 2023: 39.4; 2024: 41.0; 2025: 41.9; (additional label 41.7 appears in figure).
- Public gross financing needs (percent of GDP) by year: 2018: 3.0; 2019: 4.9; 2020: 4.9; 2021: 8.5; 2022: 4.8; 2023: 3.0; 2024: 3.5; 2025: 1.2; (additional 1.8 appears in figure).
- Sovereign spreads: EMBIG (bp) = 271 (noted in figure); 5Y CDS (bp) = 114 (noted in figure).
- Real GDP growth (percent): 2018: 3.0; 2019: 3.9; 2020: 1.1; 2021: -4.5; 2022: 5.3; 2023: 3.2; 2024: 2.5; 2025: 2.5; later projection entries show 2.5.
- Inflation (GDP deflator, percent): 2018: 4.4; 2019: 2.4; 2020: 2.7; 2021: 3.9; 2022: 1.9; 2023: 2.7; 2024: 2.8; 2025: 2.8.
- Nominal GDP growth (percent): 2018: 7.5; 2019: 6.4; 2020: 3.8; 2021: -0.8; 2022: 7.3; 2023: 6.0; 2024: 5.4; 2025: 5.4.
- Effective interest rate (percent) defined as interest payments divided by debt stock at end of previous year: 2018: 6.3; 2019: 3.8; 2020: 3.7; 2021: 3.8; 2022: 2.6; 2023: 2.6; 2024: 3.0; 2025: 2.6; later 2.5 noted.
- Change in gross public sector debt (percent of GDP) cumulative projection: annual values 2018: 2.1; 2019: 2.0; 2020: 2.3; 2021: 5.4; 2022: 3.1; 2023: 3.0; 2024: 1.6; 2025: 0.9; 2026?: -0.2; cumulative: 13.7.
- Identified debt-creating flows (percent of GDP): total identified 1.9, 1.5, 2.4, 5.3, 3.4, 3.2, 1.7, 1.0, -0.2, cumulative 14.5.
  - Primary deficit (percent of GDP): 1.3, 1.3, 2.5, 7.4, 2.0, 2.3, 1.1, 0.6, 0.5, cumulative 14.1.
  - Primary (noninterest) revenue and grants (percent of GDP): 20.6, 21.5, 20.7, 18.5, 21.5, 21.0, 21.3, 21.2, 21.1, cumulative 124.5.
  - Primary (noninterest) expenditure (percent of GDP): 21.8, 22.8, 23.2, 25.9, 23.5, 23.3, 22.5, 21.8, 21.7, cumulative 138.6.
- Automatic debt dynamics (percent of GDP) by year: -0.2, 0.0, 0.3, 1.3, -1.4, -1.2, -0.9, -1.1, -1.1, cumulative -4.4.
  - Interest rate/growth differential contribution: -0.2, -0.6, 0.0, 1.3, -1.4, -1.2, -0.9, -1.1, -1.1, cumulative -4.4.
    - Of which: real interest rate contribution: 0.1, 0.3, 0.2, 0.0, 0.2, -0.1, 0.0, -0.1, -0.1, cumulative 0.0.
    - Of which: real GDP growth contribution: -0.3, -0.9, -0.3, 1.3, -1.6, -1.1, -0.9, -1.0, -1.0, cumulative -4.4.
  - Exchange rate depreciation contribution: 0.0, 0.5, 0.4, (no further entries shown).
- Other identified debt-creating flows (percent of GDP): 0.9, 0.3, -0.4, -3.4, 2.9, 2.1, 1.5, 1.4, 0.4, cumulative 4.8.
  - Net acquisition of financial assets (negative) (percent of GDP): 0.3, 0.0, -0.6, -3.6, 2.7, 1.9, 1.4, 1.4, 0.4, cumulative 4.2.
  - Contingent liabilities (percent of GDP): 0.0 across relevant years.
  - Net Repayment of Recognition Bond (percent of GDP): 0.6, 0.3, 0.2, 0.2, 0.2, 0.1, 0.1, 0.1, 0.0, cumulative 0.7.
- Residual, including asset changes (percent of GDP): 0.1, 0.4, 0.0, 0.1, -0.4, -0.2, -0.2, -0.1, 0.0, cumulative -0.8.
- Assumption note: key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

### Composition of public debt and alternative scenarios
- Under the Baseline, Historical, Constant Primary Balance, and Contingent Liability Shock scenarios the report provides year-by-year underlying assumptions (percent):
  - Baseline Real GDP growth: 2020: -4.5; 2021: 5.3; 2022: 3.2; 2023: 2.5; 2024: 2.5; 2025: 2.5.
  - Historical Real GDP growth: 2020: -4.5; 2021: 3.3; 2022: 3.3; 2023: 3.3; 2024: 3.3; 2025: 3.3.
  - Constant Primary Balance Real GDP growth: 2020: -4.5; 2021: 5.3; 2022: 3.2; 2023: 2.5; 2024: 2.5; 2025: 2.5.
  - Contingent Liability Shock Real GDP growth: 2020: -4.5; 2021: 3.3; 2022: 1.3; 2023: 2.5; 2024: 2.5; 2025: 2.5.
- Baseline Inflation (percent): 2020: 3.9; 2021: 1.9; 2022: 2.7; 2023: 2.8; 2024: 2.8; 2025: 2.8.
- Primary balance (percent of GDP) under scenarios:
  - Baseline: 2020: -7.4; 2021: -2.0; 2022: -2.3; 2023: -1.1; 2024: -0.6; 2025: -0.5.
  - Historical: 2020: -7.4; 2021: -1.1; 2022: -1.1; 2023: -1.1; 2024: -1.1; 2025: -1.1.
  - Constant Primary Balance: primary balance held at -7.4 for 2020–2025.
  - Contingent Liability Shock: 2020: -7.4; 2021: -11.0; 2022: -2.3; 2023: -1.1; 2024: -0.6; 2025: -0.5.
- Effective interest rate assumptions under scenarios (percent): Baseline: 2020: 3.8; 2021: 2.6; 2022: 2.6; 2023: 3.0; 2024: 2.6; 2025: 2.5. Historical and other scenarios report alternative effective rates (examples: Historical 2021: 2.9; 2022: 3.5; Contingent Liability Shock 2021: 2.2; 2022: 2.5; etc.).
- Composition charts (figures) show:
  - Net debt (percent of GDP) path 2018–2025 (visual series).
  - Gross nominal public debt (percent of GDP) projection 2018–2025.
  - Public gross financing needs (percent of GDP) projection 2009–2025.
  - By maturity: medium and long-term vs short-term shares 2009–2025.
  - By currency: local currency-denominated vs foreign currency-denominated shares 2009–2025.

### Macro-fiscal stress tests and scenario outcomes
- Stress tests analyzed (figures): Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Real Interest Rate Shock, Combined Shock.
- Selected scenario assumptions (percent):
  - Primary Balance Shock: real GDP growth path similar to baseline; primary balance path: 2020: -7.4; 2021: -4.7; 2022: -2.3; 2023: -1.7; 2024: -0.9; 2025: -0.6; effective interest rate: 3.8, 2.6, 2.6, 2.9, 2.6, 2.5.
  - Real GDP Growth Shock: real GDP growth path: 2020: -4.5; 2021: 3.3; 2022: 1.3; 2023: 2.5; 2024: 2.5; 2025: 2.5; inflation and effective interest rate paths noted in figure.
  - Real Interest Rate Shock: inflation: 2020: 3.9; 2021: 7.3; effective interest rate rises to 3.5, 4.4, 4.5, 4.5 in later years under shock.
  - Combined Shock: resulting projections include gross nominal public debt series rising across 2020–2025 under combined macro-fiscal shock; figures show debt in percent of GDP and percent of revenue and public gross financing needs (percent of GDP) under shocks.
- Additional stress-test outputs (figures): time series bands of projected gross nominal public debt percentile ranges (10th–90th percentiles) under symmetric and restricted asymmetric distributions for shocks.

### Risk assessment and early-warning indicators
- Risk-assessment heat map logic:
  - Debt burden benchmark: 70 percent (cell coloring rules described).
  - Gross financing needs benchmark: 15 percent of GDP.
  - Other benchmarks: bond spreads 200 and 600 basis points; external financing requirement 5 and 15 percent of GDP; change in share of short-term debt 0.5 and 1 percent; public debt held by non-residents 15 and 45 percent; share of foreign-currency denominated debt 20 and 60 percent.
- Market perception and indicators (as reported):
  - EMBIG average over 14-Feb-20 through 14-May-20: 266 bp (figure shows 266 bp).
  - External financing requirement (percent of GDP) highlighted values: 5 and 15 benchmarks; Chile shown at 12 (figure context).
  - Public debt held by non-residents: reported at 22 percent (figure).
  - Share of public debt in foreign currency and other indicators displayed across 2018–2025 percentiles in figures.

### Written communication and authorities' request (Santiago, May 21, 2020)
- Authorities' assessment points:
  - COVID-19 pandemic could cause a significant impact on Chile’s economy; liquidity stress could turn into solvency problems in corporate sector, particularly SMEs.
  - Immediate consequences justified a considerable revision of economic growth outlook; Chile expected one of the fastest recoveries in region in 2021 given policy frameworks and swift monetary and fiscal measures.
  - Chile is a small open economy, commodity-dependent, with comfortable external position; current account financed mainly by private creditors; capital outflows not as massive due to confidence of foreign investors and domestic institutional investors.
  - Flexible exchange rate regime acts as shock absorber; corporate sector well hedged against exchange rate volatility.
  - Constitutional process postponed; expected to begin in last quarter of 2020 and, if not delayed, could take two years to complete.
  - Downside risks: global economic coping with pandemic, external demand, international financial markets, and ongoing targeted and progressive lockdown.
- FCL request specifics:
  - Chile requested an FCL arrangement in the amount of SDR 17.443 billion, equivalent to 1000 percent of quota, covering 24 months.
  - Intends to treat arrangement as precautionary and temporary; Central Bank will manage financial operations associated with FCL.
  - Financing gap under a severe adverse scenario estimated at US$23.8 billion.
  - Policy response toolkit: low policy interest rates, non-conventional monetary measures, possible FX intervention in case of excess real exchange rate volatility, measures to stimulate credit, accommodative fiscal policy via automatic stabilizers funded by debt and drawdowns of sovereign wealth fund.
  - Chile intends to exit FCL at completion of 24-month period conditional on reduced risks and start exit preparations well in advance.
- Institutional context and commitments:
  - Chile has long track record and strong policy frameworks: inflation targeting with free-floating exchange rate, responsible fiscal policy based on structural budget measure aiming to stabilize debt in medium term, deep and solid financial system strengthened by recent General Banking Law aligning with Basel III.
  - Chile plans to revisit reserve accumulation policy and revenue/spending policies in medium term as needed.
  - Chile’s current position in NAB: SDR 691 million; bilateral agreement SDR 960 million.
  - Chile will complete procedures for continuing provision of credit under the amended New Arrangements to Borrow and new bilateral borrowing agreements.

### Impact on the Fund’s finances and liquidity; assessment context
- Proposed FCL arrangement to Chile: 24-month period, access SDR 17,443 million (1,000 percent of quota).
- The note assesses impact on Fund finances and liquidity in accordance with FCL policy and is prepared by Finance and Strategy, Policy, and Review Departments (contributors listed in document).
- Background on Chile-Fund relations:
  - Historical arrangements: EFF Aug 1985–Aug 1989 (SDR 825 million, 187 percent of quota at approval); SBAs Jan 1983–Jan 1985 (SDR 500 million, 154 percent of quota) and Nov 1989–Nov 1990 (SDR 64 million, 14.5 percent of quota).
  - Chile has no outstanding credit with the Fund as of the report.
- Macroeconomic context: staff revised down growth projections for 2020 and 2021 from January 2020 WEO forecasts (0.9 percent and 2.7 percent) to -4.5 percent and [text truncated in source], reflecting COVID-19 impact.

*Source: IMF staff.*

### 5.3 percent (respectively) in its latest forecast.

### 1chlea2020003 - 5.3 percent (respectively) in its latest forecast.

### Total external and public debt: recent levels and medium‑term projections
- Chile’s total external debt has been broadly stable around 58–66 percent of GDP over the past 6 years.
- External public debt amounted to about 6.1 percent of GDP at end-2019.
- Public sector gross debt stood between 17 and 28 percent of GDP in 2015-2019; about one fifth of public sector gross debt was denominated in foreign currency in 2019.
- Total public debt is projected to reach 36.4 percent of GDP in 2021, reflecting fiscal impact of government responses to social unrest and the COVID-19 outbreak.
- Debt sustainability analyses suggest that both external and public debt would remain sustainable with high probability.

### Baseline and adverse scenario macroeconomic assumptions (selected indicators)
- Baseline scenario:
  - Real GDP growth (percent): 2019 = 1.1; 2020 = -4.5; 2021 = 5.3; 2022 = 3.2; 2023 = 2.5; 2024 = 2.5; 2025 = 2.5.
  - Nominal GDP (in millions of US dollars): 2019 = 282,271; 2020 = 240,741; 2021 = 272,011; 2022 = 298,064; 2023 = 320,178; 2024 = 341,175; 2025 = 361,948.
  - Gross international reserves: 40,657 (2019–2025, constant in baseline).
  - Exports of goods and services (in millions of US dollars): 2019 = 79,309; 2020 = 71,875; 2021 = 73,082; 2022 = 76,265; 2023 = 79,126; 2024 = 82,444; 2025 = 85,661.
  - Total external debt (in percent of GDP): 2019 = 65.7; 2020 = 76.0; 2021 = 70.9; 2022 = 69.7; 2023 = 66.4; 2024 = 64.3; 2025 = 62.8.
  - Public external debt (in percent of GDP): 2019 = 6.1; 2020 = 8.9; 2021 = 8.3; 2022 = 10.5; 2023 = 9.8; 2024 = 9.7; 2025 = 9.9.
- Adverse scenario (illustrative downside shock concentrated in 2020):
  - The shock reduces the real GDP growth rate by 4 percentage points relative to baseline in 2020 (i.e., real GDP growth = -8.5 percent in 2020).
  - Real GDP growth picks up in 2021 and 2022 by 2 and 1 percentage points relative to baseline (2021 = 7.3; 2022 = 4.2).
  - Exports of goods and services decrease by 15.5 percent in 2020 and remain slightly lower than baseline during 2021–2024.
  - Gross international reserves decrease relative to baseline by US$5.7 billion in 2020, US$3.8 billion in 2021, and US$1.9 billion in 2022.
  - Nominal GDP (in millions of US dollars): 2019 = 282,271; 2020 = 212,124; 2021 = 253,479; 2022 = 291,392; 2023 = 313,656; 2024 = 334,631; 2025 = 355,311.
  - Exports of goods and services (in millions of US dollars): 2019 = 79,309; 2020 = 60,700; 2021 = 72,968; 2022 = 76,179; 2023 = 79,074; 2024 = 82,428; 2025 = 85,684.
  - Total external debt (in percent of GDP): 2019 = 65.7; 2020 = 92.8; 2021 = 81.6; 2022 = 76.0; 2023 = 70.3; 2024 = 64.3; 2025 = 61.2.
  - Public external debt (in percent of GDP): 2019 = 6.1; 2020 = 21.3; 2021 = 18.3; 2022 = 18.9; 2023 = 15.7; 2024 = 11.7; 2025 = 10.1.

### Impact of a full drawdown of the proposed FCL under the adverse scenario
- Proposed FCL arrangement: SDR 17,443 million (1,000 percent of quota), 24‑month period.
- If Chile were to draw all resources available under the FCL in the illustrative downside scenario:
  - Total external debt would rise to about 92.8 percent of GDP in 2020.
  - Public external debt would rise to about 21.3 percent of GDP in 2020.
  - Chile's outstanding use of GRA resources would account for 12.2 percent of total external debt and about 53.3 percent of public external debt.
  - Fund credit would initially reach 11.4 percent of GDP and nearly 68.9 percent of Chile’s gross international reserves.
  - Peak Fund exposure relative to GDP or total external debt would be close to the median of recent exceptional access arrangements; peak Fund exposure relative to gross international reserves would be well above the median.
  - Projected outstanding Fund credit in percent of quota around the peak would be above those expected in other recent FCL arrangements in the event of full drawdown, but below that of most exceptional access cases approved since September 2008.

### Capacity to repay, debt service, and risk mitigation
- External debt service:
  - Would be high in 2020, then decline and remain manageable under staff's medium-term projections.
  - Projected debt service to the Fund would represent 0.2 to 0.3 percent of GDP in 2020-2022, peaking at about 3.8 percent of GDP in 2024 (reflecting large repurchases).
  - Chile’s peak total external debt service and peak debt service obligations to the Fund as a share of exports of goods and services would be in the top quintile for exceptional access SBAs approved since September 2008.
  - Debt service due on GRA credit (in percent of GDP): 2020 = 0.2; 2021 = 0.3; 2022 = 0.2; 2023 = 2.2; 2024 = 3.8; 2025 = 1.7 (Table 3).
  - Debt service due on GRA credit (in percent of Exports of Goods and Services): 2020 = 0.6; 2021 = 0.9; 2022 = 0.9; 2023 = 8.6; 2024 = 15.4; 2025 = 7.2 (Table 3).
- Risk mitigating factors:
  - Strong policy and institutional frameworks.
  - Most capacity to repay indicators suggest moderate credit risk to the Fund.
  - Track record of uninterrupted access to international capital markets at favorable terms for several decades.
  - Investment grade status according to the three major rating agencies; consistently among the highest-rated emerging market countries.
  - Authorities intend the FCL to be precautionary and temporary.
- Private external debt:
  - Projected to rise to 21.5 percent of GDP in 2020 before falling.
  - Much of non‑financial corporations’ external debt is FDI‑related and hedged against exchange rate risk, reducing roll‑over and exchange rate risks.

### Impact on Fund finances, liquidity, and concentration
- Forward Commitment Capacity (FCC):
  - Current FCC: 190,000 (SDR millions).
  - FCC on approval (current FCC minus access under the proposed arrangement): 172,557 (SDR millions).
  - Change in percent: -9.2.
- Prudential and concentration measures, assuming full FCL drawing:
  - Fund credit to Chile would represent 19.8 (in percent? presented as table value) and 16.6 in percent of total GRA credit outstanding after taking into account Chile's FCL arrangement (Table 4).
  - Fund credit to Chile would be 104.4 percent of the estimated level of precautionary balances (PBs) at end‑FY2020.
  - Fund credit to Chile would represent 19.8 (Table 4 memo) and place Chile as the second largest Fund exposure after Argentina (SDR 31.9 billion) and before Egypt (SDR 10.6 billion).
  - Concentration among the top five users of GRA resources would increase marginally to about 68.5 percent, up from 67.5 percent as of May 15, 2020.
- Regional and instrument concentration:
  - Regional concentration to Latin America would increase slightly; Western Hemisphere share of GRA credit and undrawn balances would rise from about 62 percent to 66 percent with the proposed FCL for Chile.
  - Share of FCL commitments among total GRA commitments would rise from around 49 percent to 57 percent with the proposed FCL for Chile.
- Overall assessment:
  - The proposed FCL would have a significant but manageable impact on the Fund's finances.
  - The immediate impact would be a decline of about 9 percent in the Fund’s lending capacity going forward.
  - The Fund’s overall liquidity position is expected to remain adequate after approval, but close monitoring is warranted given highly elevated global risks and uncertain potential demand for Fund resources.

### Policy stance and authorities' intentions
- The authorities consider access to the FCL to be temporary, with exit dependent on the evolution of external risks.
- The requested level of access is meant to provide insurance against a wider range of adverse external shocks, preserve investor confidence, and support the authorities’ macroeconomic strategy.
- The authorities intend to treat the arrangement as precautionary and temporary, exiting as soon as the 24‑month period is completed, conditional on evolution of external risks; they intend to reassess the external risk situation and the requested level of access at the mid‑term review.

*Source: IMF staff report chapter (Chile), as provided in the supplied content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1chlea2020003.pdf_