## 1chlea2021001

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### Financial sector vulnerabilities and regulatory priorities
- Financial sector vulnerabilities should continue to be closely monitored.
- After the pandemic recedes, authorities should accelerate regulatory reforms, including:
  - strengthening bank resolution regimes;
  - establishing a national deposit insurance scheme funded by member banks;
  - strengthening regulation of insurance companies; and
  - regulating financial conglomerates.
- CMF measures introduced:
  - special treatment in the establishment of provisions for deferred loans;
  - use of mortgage guarantees to safeguard SME loans;
  - adjustments in the treatment of assets received as payment and margins in derivative transactions; and
  - revision of the timetable for the implementation of Basel III standards.
- BCCh relaxed the liquidity coverage ratio, allowing for temporary deviations on a case-by-case basis.

### Reform agenda to enhance inclusive growth
- Advancing reforms is crucial to enhance inclusive growth.
- Pension system adjustments and coverage:
  - Adjust contribution rate, retirement age (especially for women), and solidarity parameters; reduce informality.
- Health system reforms:
  - Improve efficiency, eliminate discrimination based on pre-existing conditions, increase competition, and reduce out-of-pocket cost of medicines.
- Financing additional spending, absorbing fiscal contingencies, and rebuilding buffers will require:
  - increasing direct taxation and green taxes;
  - strengthening tax administration;
  - reducing exemptions, deductions, and special regimes; and
  - rationalizing existing expenditure.
- Other structural measures:
  - Improve education quality and financial integration;
  - Reduce labor market inefficiencies and informality;
  - Continue to promote trade integration; and
  - Respond to climate change.

### Pandemic impact, macroeconomic context, and policy responses
- Public health and vaccination (as of mid-March 2021):
  - 942,958 confirmed Covid-19 cases and 22,384 deaths in a population over 19 million.
  - About 5.9 million have received their first dose; authorities plan to vaccinate most of the adult population (about 15 million people) during 2021H1.
- Economic contraction and recovery:
  - Economic activity projected to have declined by 5.8 percent in 2020.
  - Activity started recovering in 2020H2; yoy growth estimated to have reached almost zero in 2020Q4.
  - Medium term: growth projected to converge to potential of 2.5 percent and unemployment to decline to about 7 percent.
- Inflation and monetary environment:
  - Since Q3 2020, annual headline inflation hovers close to 3 percent; core inflation at 2.4 percent.
  - BCCh cut the policy rate twice in March 2020 totaling 125 basis points to 0.5 percent and introduced unconventional measures:
    - three funding-for-lending facilities (about US$40bn) extended in January 2021 to include refinanced loans;
    - banks bonds and special assets purchase programs (about US$16bn);
    - expansion of BCCh’s collateral framework through inclusion of corporate securities.
  - International reserves were US$39.6bn by end-2020 (above the US$36.8bn level at the time of approval of the FCL arrangement).
  - In January 2021 BCCh initiated a gradual program to increase FX reserves by US$12bn over 15 months.
- Fiscal measures and tax reform:
  - Government implementing multi-year fiscal package of about US$34bn (13 percent of GDP, after an addition of 2 percent of GDP announced in March 2021).
  - Main elements of 2020 tax reform include:
    - unifying CIT regime to semi-integrated system with 27 percent flat rate;
    - new simplified regime for SMEs (cash-flow based, fully-integrated, 25 percent rate);
    - higher top PIT marginal rate at 40 percent;
    - VAT for digital services by non-resident providers; and
    - digital sales receipts.
  - Fiscal package includes higher healthcare spending; enhanced subsidies and unemployment benefits; tax deferrals; credit provision for SMEs via Banco Estado; transfers for the most vulnerable and the middle-class; credit-guarantee schemes via FOGAPE; and enhanced public investment.
  - Employment Protection Law monthly payouts from the unemployment insurance: total payments of about 1.2 percent of GDP have occurred until February 2021.
- Fiscal accounts deterioration:
  - Structural deficit increased to 2.7 percent of GDP in 2020 from 1.7 percent in 2019.
  - Headline fiscal deficit rose to 7.3 percent of GDP from 2.9 percent in 2019.
  - About one third of the stimulus financed with debt issuance and the rest with disposal of assets.
  - Difference between overall and structural balance (about 4.6 percent of GDP) explained by cycle adjustments, copper prices, tax deferrals with automatic reversion, and other one-off events.

### Pension withdrawals and financial market effects
- Withdrawals from private pension funds:
  - Two rounds (July and December 2020) reached US$36 bn (about 14 percent of GDP, and 18 percent of June 2020 pension assets) by February 2021.
  - Over 10 and 7 million people used the first and second withdrawal, respectively.
  - About 3 million people exhausted their pension funds (or ¼ of pension system participants).
  - Withdrawals expected to lower pension replacement rates while raising public pension costs by a net present value of about 3½ percent of 2020 GDP in staff calculations.
  - BCCh included a facility with cumulative purchases of US$8.5bn in response.
- Pension withdrawal rules (summary as presented):
  - 1st Withdrawal / 2nd Withdrawal: Up to 10% of funds: ✔ / ✔
  - Maximum amount: US$ 5,593 (150 UF as of 23-Jul) / US$ 5,769 (150 UF as of 3-Dec)
  - Minimum amount: US$ 1,305 (35 UF as of 23-Jul) / US$ 1,346 (35 UF as of 3-Dec)
  - Those below minimum may withdraw all: ✔ / ✔
  - Earn < US$1,986 a month ($1.5 MM as of 3-Dec): ✔ / ✔
  - Earn > US$1,986 a month ($1.5 MM as of 3-Dec): ✔ / ✖
  - Legal Status: Constitutional reform / Law
  - Date of Publication: 30-Jul-20 / 10-Dec-20
  - Main Characteristics: Withdrawal Amount / Tax exempt

### Banking sector soundness and credit conditions
- Banking system resilience:
  - Capital adequacy ratio increased from 12.8 percent in 2019Q4 to 14.3 percent in 2020Q3.
  - Liquid assets account for about 20 percent of total assets.
  - Return on equity dropped below 8 percent (from 16.2 percent in 2019Q4).
  - Non-performing loan ratio at 1.6 percent in 2020Q3.
- Credit dynamics:
  - Credit growth slowed amid negative consumer loan growth in 2020H1.
  - Recovery in credit expected on the back of Central Bank measures and government guarantees (FOGAPE loans of about 5 percent of GDP were awarded in 2020).

### Outlook, risks, and resilience
- Outlook:
  - Economic activity expected to rebound strongly in 2021 as pandemic recedes.
  - Current account balance expected to remain close to zero in 2021 before slowly moving towards a small deficit.
- Risks:
  - External: pandemic dynamics and potential accelerating de-globalization.
  - Movements in copper price would significantly affect exports, fiscal revenues, and investment and growth prospects.
  - Domestic: uncertain outcome of New Constitution process and possible resurgence of social unrest.
  - Delay in recovery could increase delinquency rates, posing financial stability risks given leveraged non-financial corporates and households.
- Mitigating factors and resilience:
  - Strong policy track record, large policy response, remaining fiscal space, strong institutional policy settings, and low public debt by international standards.

### Fiscal position — status, near-term stance, and medium-term framework
- Debt and ratings:
  - Central government gross debt-to-GDP increased by almost 30 percentage points since 2007; at 33 percent of GDP remains low by international standards.
  - Sovereign rating downgrades: S&P to A in March 2021 and Fitch to A- in October 2020; limited impact.
- Near-term fiscal stance (staff view):
  - Fiscal stance in 2021 broadly appropriate.
  - Headline fiscal deficit expected to decline to 3.3 percent of GDP in 2021 from 7.3 percent in 2020.
  - Structural balance deficit expected to worsen from 2.7 to 5.1 percent of GDP in 2021.
  - 2021 fiscal impulse based on non-mining primary structural balance expected to be positive.
- Policy recommendations:
  - Caution against additional pension withdrawals; recommend fiscal measures if further support needed.
  - Consider simplifying and improving accessibility of transfer programs.
  - Consider reductions in deductible for FOGAPE guarantees for small firms to incentivize bank lending.
  - Extend tax deferrals if additional support needed, with firm viability assessments.
  - Deliver additional support via fiscal measures rather than further pension withdrawals.
- Medium-term framework:
  - Authorities plan gradual structural consolidation reducing structural deficit by about 1 percent of GDP per year starting in 2023 to reach 0.9 percent of GDP by 2025.
  - Authorities estimate gross debt stabilizing at about 43 percent of GDP.
  - Staff recommends stronger fiscal effort through permanent revenue and spending measures; enhance fiscal rule by adding explicit medium-term debt anchor (debt ceiling and buffer), introducing a formal escape clause, and establishing an adjustment mechanism.
  - Empower Autonomous Fiscal Council with own resources and broader mandate; IMF fiscal transparency evaluation requested.

### Monetary policy and FX operations
- Monetary policy assessment:
  - Response well-conceived, adequate, unprecedented in magnitude; supported liquidity, maintained low interest rates, contained adverse impact, and kept inflation expectations anchored.
- FX operations and reserve program:
  - Authorities did not engage in FX intervention during the pandemic; small interventions used during social unrest episode.
  - Staff supports plan to increase FX reserves by US$12bn over 15 months via fixed amount daily auctions; main goal to prepare timely exit from FCL arrangement in May 2022.
- Collateral and liquidity measures:
  - Inclusion of bank and corporate securities as eligible collateral; exposure mitigated through haircuts and limits.
  - FCIC operations to continue facilitating credit flows to SMEs and refinancing; eligibility broadened in line with FOGAPE-Reactiva.
- Policy guidance:
  - Monetary stimulus appropriate given large negative output gap, high unemployment, depressed labor participation, and well-anchored inflation expectations.
  - Future extent of stimulus should be guided by the inflation targeting framework and contingent on developments.

### Financial sector — regulation, supervision, and vulnerabilities
- Pandemic effects on reform timelines:
  - Implementation of Basel III delayed by one year; additional capital needs expected at about $2.3bn by 2025 (about ½ for Banco Estado).
  - Congress passed laws enhancing financial portability, regulating financial advisors, and strengthening CMF powers.
- Monitoring and supervision:
  - Emergency measures effective; stress tests indicate financial stability appears well guarded.
  - Continued monitoring essential; when normalcy returns, encourage prudential restructurings and maintain lending standards.
  - FSAP delayed to 2021 will focus on institutions, interlinkages, supervisory reorganization, and crisis management.
- FinTech and cybersecurity:
  - Recent cyberattacks prompted enhanced regulation and supervision.
  - CMF published a white paper and proposed legal text expanding CMF perimeter to crowdfunding, trading platforms (including digital assets), robo-advisors, etc.
  - Policy principles: proportionality, technological neutrality, comprehensiveness, flexibility, and modularity.
  - Central Bank created a technological observatory on digital payments, CBDC, and cryptoassets.
- AML/CFT:
  - Chile undergoing assessment against FATF AML/CFT standard by GAFILAT; assessment to be discussed in July 2021.
- Central Bank independence and safeguards:
  - 2019 external evaluation highlighted high standards of policy analysis and independence.
  - BCCh voluntarily undergoing pilot review under IMF Central Bank Transparency Code.
  - KPMG Chile issued an unmodified audit opinion on BCCh 2019 financial statements; no significant issues.

### Fiscal revenues, taxation, green taxation, and revenue mobilization
- Tax structure and reform suggestions:
  - Reliance on indirect taxation; direct taxation close to Latin American EM peers but below most OECD countries.
  - Commission of Experts recommended gradually reducing tax exemptions, deductions, and special regimes (January 2021 report) including renta presunta, VAT exemptions to professional services and construction, excise on diesel, cooperatives, investment funds, mortgage interest payments, and some housing rental income.
  - Additional revenue options:
    - increase direct taxation (revisit PIT exemption threshold and rate schedule, reconsider capital gains tax exemption, strengthen tax administration, revisit mining taxation);
    - raise green taxes (carbon tax currently at $5 per ton of CO2 emission should be gradually brought towards levels consistent with Paris commitments).
  - Authorities should sustain efforts to increase spending efficiency.

### Pension system adequacy, reform, and fiscal implications
- Current replacement rates and drivers:
  - Expected replacement rates average about 40 percent even with government-funded supplement; about 70 percent of pensioners receive the public supplement.
  - Key drivers of low pensions:
    - contribution rates low at 10 percent;
    - contribution density about 60 percent for males and 50 percent for females;
    - retirement age 65/60 for men/women unchanged despite life expectancy increases;
    - global decline in interest rates affected returns on pension assets.
  - Recent withdrawals of US$36bn (about 18 percent of June 2020 pension assets) will compound problems.
- Demographic projections and potential costs:
  - People after retirement age expected to rise from about 3 million at present to about 6 million in 2050.
  - Working age population expected to decrease from 13 to 12 million over same period.
  - A flat pension equal to 50 or 75 percent of the 2020 real minimum wage—if constant in real terms—can imply in 2050 a cost of about 5-8 percent of GDP.
- Authorities’ pension proposal (in Congress):
  - Increase contribution rate from 10 to 16 percent (funded by employer);
  - Half of this increase (3 percent) to employees’ individual pension savings; the rest to new collective contributory pillar for solidarity benefits and dependency care insurance.
- Assessment and recommendations:
  - Increase of 3 percentage points to individual account insufficient to adequately raise replacement rates; gradual retirement age changes needed.
  - Prefer financing solidarity components via the general budget rather than a labor tax.
  - Ensure efficient management of assets from the 6 percentage points increase; new management entity should operate in competitive environment and be strictly scrutinized.
  - Revisit rules and fees to increase competition among pension managers; consider portfolio allocation and switching rules' impacts.
  - Broaden mandatory contributions to informal sector and intensify efforts to reduce informality.
  - Consider mechanisms to broaden contribution base such as small increase in VAT from 19 to 20 percent with extra accruing to individual pension account or fees at permits renewal accruing to individual pension account.

### Health care reform priorities
- System issues:
  - Adequate health outcomes but criticism for complexity, limited competition, elevated out-of-pocket costs of medicines, inferior public sector service, and private insurance discriminatory practices.
  - About 80 percent rely on public system (FONASA) and 20 percent on private providers (ISAPRES).
- Policy actions and proposals:
  - January 2020: allow import of all medicines approved for consumption in Chile and expand generics.
  - Government proposals to require prescriptions by International Common Denomination and to have pharmacies charge fixed amounts rather than percentage mark-ups.
  - Government proposal (in Congress) includes strengthening FONASA governance, creating a basic universal health plan with same coverage in public and private sectors, eliminating pre-existing conditions and gender discrimination in ISAPRES via a compensation fund, and ensuring equal pricing to men and women of same age.

### Education, labor market, informality, and inclusion
- Education:
  - Expanded higher education access; focus on improving quality.
  - Student performance better than Latin American peers but significantly below OECD (PISA).
  - Recommendations: expand teacher performance monitoring, align teacher incentives to student performance, promote employer-education engagement, pilot centralized job placement and training platform.
- Labor market and inclusion:
  - Welcome 2019 law facilitating formal youth employment and 2020 tele-work law.
  - Authorities should implement universal childcare to promote female labor force participation.
  - Introduce flexibility in working schedule and location, review severance costs and dismissal procedures, and widen severance benefits eligibility to support job creation.
- Informality:
  - Almost one third of workforce informal.
  - 2019: Congress extended pension and health contribution obligation to self-employed, to be phased in over eight years.
  - Further measures: reduce administrative burden of dismissal regulation, incentivize formal work via earned income tax credit, enhance training for vulnerable workers.

### Competition, access to finance, digitalization, and climate finance
- Trade and competition:
  - Chile has 30 free trade agreements with 64 economies.
  - Regulatory burdens disproportionately affect new and small firms; restrictive regulation in key sectors impedes global value chain integration and investment.
  - Policies should streamline regulation, reduce barriers, and level playing field in services.
- Finance and digitalization:
  - Promote FinTech and digitalization training; law allowing financial collateral portability should increase competition and inclusion for SMEs.
- Climate and sovereign bonds:
  - Chile issued green bonds for energy efficiency, green buildings, and electric buses; several social bonds issued during pandemic.
  - Financial strategy for climate change (December 2019) aims to develop green budget measures and capacity building.
  - Ministry of Finance initiative to transform Chile into a regional financial center; Central Bank agenda on peso internationalization supports cross-border peso use.

### External sector assessment (Annex II) — key findings
- Overall assessment:
  - External position in 2020 assessed as moderately stronger than indicated by medium-term fundamentals and desirable policies.
  - Current account (CA) balance 2020: 1.4 percent of GDP (from -3.9 in 2019).
  - Net international investment position (NIIP) improved by US$5.6bn during first three quarters of 2020.
  - International reserves assessed as adequate; BCCh program to increase reserves by US$12bn over 15 months announced January 2021.
- 2019 (% GDP) key statistics:
  - NIIP: –14.1
  - Gross Assets: 143.8
  - Reserve Assets: 14.4
  - Gross Liab.: 158.0
  - Debt Liab.: 65.7
- Real exchange rate and CA assessment:
  - REER (CPI-based) appreciated by 3.5 percent in 2020 (yoy December).
  - EBA CA Norm for 2020: -0.8 percent of GDP; EBA CA Gap: 1.7 percent of GDP.
  - Staff CA Gap: 1.7 percent of GDP after adjustments.
  - Staff assessment implies a slight REER undervaluation of 6 percent in 2020.
- Reserves and external buffers:
  - Stock of international reserves: US$39bn (end-2020).
  - Predetermined net short-term drains < US$2bn as of Nov-2020.
  - FCL arrangement and bilateral swap with PBoC provide additional buffers of about US$24bn and US$7bn respectively.
  - Staff assesses reserves as adequate.

### Data standards, recovery outlook, and recent projections
- Data standards:
  - Chile adhered to the IMF SDDS Plus in March 2020; second country in Latin America to do so.
- Recovery and growth projections:
  - Real GDP contracted 5.8 percent in 2020.
  - Real GDP projected to grow between 6 to 7 percent in 2021 and 3 to 4 percent in 2022.
  - Activity recovery uneven; only half of jobs lost since pandemic recovered.
- Vaccination progress (as of April 12):
  - 48 percent of adult population received at least one dose.
  - 31 percent received two doses.
  - If continued as planned, most adults expected to be fully inoculated by mid-2021.
- Terms of trade and commodities:
  - Terms of trade expected to be on average more than 10 percent higher than in 2020.
  - Copper prices peaked above USD4/lb.
- Fiscal outcomes and targets:
  - Headline deficit reached 7.4 ppt of GDP by end-2020.
  - Gross debt increased to 32.5 ppt of GDP.
  - Authorities aim to stabilize gross debt below 45 ppt of GDP by 2025.
  - Administration passed tax reform at start of 2020 to increase revenues by 1 ppt of GDP.

### Policy recommendations and priorities (consolidated)
- Fiscal:
  - Keep fiscal policy data driven; consider targeted additional stimulus if pandemic prolonged.
  - Shift progressively from near-term recovery support to medium-term sustainability.
  - Implement permanent revenue and spending adjustments once health crisis controlled.
  - Enhance fiscal framework: explicit medium-term debt anchor, formal escape clause, adjustment mechanism.
- Monetary and financial:
  - Maintain monetary stimulus guided by inflation targeting framework and contingent on developments.
  - Continue to monitor financial sector vulnerabilities and prepare to intervene if stress emerges.
  - Proceed with Basel III implementation per revised timeline; strengthen bank resolution and deposit insurance frameworks.
- Social and structural:
  - Finalize pension reform to improve adequacy and coverage; consider retirement age, contribution rates, and solidarity parameters; reduce informality.
  - Reform health system to create basic universal plan, eliminate pre-existing condition discrimination, and lower medicine out-of-pocket costs.
  - Improve education quality, labor market flexibility, competition, digitalization, and climate-related financial frameworks.

_International Monetary Fund — content unit 1chlea2021001._

### Annex III).  Financial sector vulnerabilities  should continue to be closely monitored. After the

### 1chlea2021001 - Annex III).  Financial sector vulnerabilities  should continue to be closely monitored. After the

### Financial sector vulnerabilities and regulatory priorities
- Financial sector vulnerabilities should continue to be closely monitored.
- After the pandemic recedes, the authorities should shift focus towards accelerating needed regulatory reforms including:
  - strengthening bank resolution regimes;
  - establishing a national deposit insurance scheme funded by member banks;
  - strengthening regulation of insurance companies; and
  - regulating financial conglomerates.
- The Financial Market Commission (CMF) introduced measures including:
  - special treatment in the establishment of provisions for deferred loans;
  - use of mortgage guarantees to safeguard SME loans;
  - adjustments in the treatment of assets received as payment and margins in derivative transactions; and
  - revision of the timetable for the implementation of Basel III standards.
- The BCCh relaxed the liquidity coverage ratio, allowing for temporary deviations on a case-by-case basis.

### Reform agenda to enhance inclusive growth
- Advancing the reform agenda would be crucial to enhance inclusive growth.
- Pension system adjustments and coverage:
  - Ensuring adequate pension coverage will require adjustments to the contribution rate, retirement age (especially for women), and solidarity parameters, coupled with reforms to reduce informality.
- Health system reforms:
  - Reforming the health system should remain a key priority, to improve its efficiency, eliminate discrimination based on pre-existing conditions, increase competition, and reduce the out-of-pocket cost of medicines.
- Financing additional spending, absorbing fiscal contingencies, and rebuilding buffers will require:
  - increasing direct taxation and green taxes;
  - strengthening tax administration;
  - reducing exemptions, deductions, and special regimes; and
  - rationalizing existing expenditure.
- Other structural measures to foster productivity and inclusiveness:
  - Improving education quality and financial integration;
  - Reducing labor market inefficiencies and informality;
  - Continuing to promote trade integration; and
  - Responding to climate change.

### Pandemic impact, macroeconomic context, and policy responses
- Pandemic and public health:
  - As of mid-March 2021, Chile confirmed 942,958 cases of Covid-19 and 22,384 deaths, in a population over 19 million.
  - About 5.9 million have received their first dose by mid-March and the authorities plan to vaccinate most of the adult population (about 15 million people) during 2021H1.
- Economic contraction and recovery:
  - Economic activity is projected to have declined by 5.8 percent in 2020.
  - Activity started gradually recovering in 2020H2 and yoy growth is estimated to have reached almost zero in 2020Q4.
  - Over the medium term, growth is projected to converge to its potential of 2.5 percent and the unemployment rate to gradually decline to about 7 percent.
- Inflation and monetary environment:
  - Since Q3 2020, annual headline inflation keeps hovering close to 3 percent, the policy target, while core inflation continues to remain below target, at 2.4 percent.
  - The BCCh cut the policy rate twice in March 2020 (totaling 125 basis points) to 0.5 percent—considered as the “effective lower bound”—and introduced unconventional measures.
  - Unconventional measures included:
    - three funding-for-lending facilities for banks (in the total amount of about US$40bn) extended in January 2021 to include refinanced loans;
    - banks bonds and special assets purchase programs (in the total amount of US$16bn);
    - expansion of BCCh’s collateral framework through inclusion of corporate securities.
  - International reserves were US$39.6bn by end-2020 (above the US$36.8bn level at the time of approval of the FCL arrangement).
  - In January 2021 the BCCh initiated a gradual program to increase FX reserves by US$12bn over 15 months.
- Fiscal measures and tax reform:
  - The government is implementing a multi-year fiscal package of about US$34bn (13 percent of GDP, after an addition of 2 percent of GDP was announced in March 2021).
  - The main elements of the 2020 tax reform include:
    - unifying the CIT regime to a semi-integrated system with a 27 percent flat rate;
    - a new simplified regime for SMEs (cash-flow based, with a fully-integrated system and a 25 percent rate);
    - a higher top PIT marginal rate at 40 percent;
    - a VAT for digital services by non-resident providers; and
    - digital sales receipts.
  - The fiscal package to counter the effects of the pandemic includes:
    - higher healthcare spending;
    - enhanced subsidies and unemployment benefits;
    - a set of tax deferrals;
    - credit provision for SMEs, via Banco Estado;
    - transfers for the most vulnerable and the middle-class;
    - a credit-guarantee scheme for firms (via the public credit-guarantee fund FOGAPE) and for the households; and
    - enhanced public investment.
  - Employment Protection Law monthly payouts from the unemployment insurance: total payments of about 1.2 percent of GDP have occurred until February 2021 (footnote context).
- Fiscal accounts deterioration:
  - In 2020, the structural deficit increased to 2.7 percent of GDP from 1.7 percent in 2019.
  - The headline fiscal deficit rose to 7.3 percent of GDP from 2.9 percent in 2019.
  - About one third of the stimulus is financed with debt issuance and the rest with disposal of assets.
  - The large difference in the overall and structural balance (about 4.6 percent of GDP) is explained by adjustments to the cycle, copper prices, tax deferrals with automatic reversion, and other one-off events.

### Pension withdrawals and financial market effects
- Withdrawals from private pension funds:
  - Congress allowed in July and December 2020 two rounds of withdrawals, which reached US$36 bn (or about 14 percent of GDP, and 18 percent of June 2020 pension assets) by February 2021.
  - Over 10 and 7 million people have used the first and second withdrawal, respectively.
  - About 3 million people exhausted their pension funds (or ¼ of pension system participants).
  - Withdrawals are expected to lower pension replacement rates while raising public pension costs by a net present value of about 3½ percent of 2020 GDP in staff calculations.
  - The BCCh included a facility with cumulative purchases of US$8.5bn in response.
- Pension withdrawal rules (summary as presented):
  - 1st Withdrawal / 2nd Withdrawal: Up to 10% of funds: ✔ / ✔
  - Maximum amount: US$ 5,593 (150 UF as of 23-Jul) / US$ 5,769 (150 UF as of 3-Dec)
  - Minimum amount: US$ 1,305 (35 UF as of 23-Jul) / US$ 1,346 (35 UF as of 3-Dec)
  - Those below minimum may withdraw all: ✔ / ✔
  - Earn < US$1,986 a month ($1.5 MM as of 3-Dec): ✔ / ✔
  - Earn > US$1,986 a month ($1.5 MM as of 3-Dec): ✔ / ✖
  - Legal Status: Constitutional reform / Law
  - Date of Publication: 30-Jul-20 / 10-Dec-20
  - Main Characteristics: Withdrawal Amount / Tax exempt (labels preserved as in source)

### Banking sector soundness and credit conditions
- Banking system resilience:
  - Capital adequacy ratio increased from 12.8 percent in 2019Q4 to 14.3 percent in 2020Q3.
  - Liquid assets account for about 20 percent of total assets.
  - Return on equity dropped below 8 percent (from 16.2 percent in 2019Q4).
  - Non-performing loan ratio remains low at 1.6 percent in 2020Q3.
- Credit dynamics:
  - Credit growth slowed amid negative consumer loan growth in 2020H1.
  - Recovery in credit expected on the back of Central Bank measures and government guarantees (FOGAPE loans of about 5 percent of GDP were awarded in 2020).

### Outlook, risks, and resilience
- Outlook:
  - Economic activity is expected to rebound strongly in 2021 as the pandemic fallout recedes and mobility restrictions are relaxed.
  - Thanks to improvement in Chile’s terms of trade the current account balance is expected to remain close to zero in 2021 before slowly moving over the medium term towards a small deficit.
- Risks:
  - External risks largely related to the dynamics of the pandemic and potential accelerating de-globalization.
  - Movements in the price of copper would significantly affect exports, fiscal revenues, and prospects for investment and growth.
  - Domestic risks primarily from the uncertain outcome of the New Constitution process and possible resurgence of social unrest.
  - A delay in the recovery could increase delinquency rates, posing a source of risk to financial stability given leveraged non-financial corporates and households.
- Mitigating factors and resilience:
  - Strong policy track record, large policy response, remaining fiscal space, strong institutional policy settings, demonstrated sound record of policy reaction, and the low level of public debt by international standards.

*International Monetary Fund — Chile staff report discussions took place virtually during February 22 – March 5, 2021; team and mission participants listed in the source.*

### 17.      Chile’s fiscal position remains very strong notwithstanding the debt increase over the

### 17.      Chile’s fiscal position remains very strong notwithstanding the debt increase over the

### Fiscal position — current status and indicators
- The central government gross debt-to-GDP ratio has increased by almost 30 percentage points since 2007, but at 33 percent of GDP it remains low by international standards.
- Sovereign rating downgrades: S&P to A in March 2021 and Fitch to A- in October 2020; these downgrades had a limited impact.
- The country has maintained some fiscal space and steady access to international markets at low rates; spreads have returned to pre-pandemic levels, as shown in recent Environmental Social and Governance issuances.

### Near-term fiscal stance and pandemic-related measures
- Staff view: the fiscal stance in 2021 is broadly appropriate.
- Fiscal balances and structural metrics:
  - Headline fiscal deficit: expected to decline to 3.3 percent of GDP in 2021 from 7.3 percent in 2020.
  - Structural balance deficit: expected to worsen from 2.7 to 5.1 percent of GDP in 2021.
  - The 2021 fiscal impulse based on the non-mining primary structural balance is expected to be positive.
- Rationale: copper prices are higher, some tax deferrals expire, and economic growth improves.
- Targeting and social impact concerns:
  - Pandemic’s adverse impact on poverty and inequality (including across gender, see SIP).
  - Inadequate targeting from pension withdrawals; staff cautions against additional pension withdrawals and recommends fiscal measures if further support is needed.
- Recent and ongoing initiatives (March 2021 and January 2021 actions):
  - Extension of FOGAPE in January 2021 to include refinancing for existing loans and for investments to allow firms to rollover debt and finance the recovery.
  - New round of family benefits, middle-class bonus, concessional loans, support for SMEs, employment protection measures introduced in March 2021, and the extension of household transfers until June 2021.
  - Reopening of schools in communes where the pandemic is contained to facilitate women returning to the labor force and reduce human capital scarring.
  - March 2021 enhancements to employment subsidies for females, youth, and workers with disabilities.
- Additional possible steps, conditional on developments:
  - Simplify and improve accessibility of transfer programs.
  - Consider reductions in the deductible for FOGAPE public guarantees for small firms to incentivize banks to extend credit to riskier firms.
  - Extend tax deferrals if additional support to firms is needed, accompanied by assessments of firm viability and network externalities.
  - Deliver any additional support via fiscal measures rather than further pension withdrawals.

### Medium-term fiscal framework and sustainability
- Authorities’ plan:
  - Gradual structural consolidation reducing the structural deficit by about 1 percent of GDP per year starting in 2023, to reach a structural deficit target of 0.9 percent of GDP by 2025.
  - Authorities estimate this path would stabilize gross debt at about 43 percent of GDP (close to staff estimates, see Annex IV).
- Staff view: the consolidation path is appropriate but must remain contingent on developments.
- Medium-term fiscal pressures to be tackled once the health crisis is controlled:
  - Possible additional spending to address social needs.
  - Risk that expected revenues from the 2020 tax reform may not materialize.
  - Contingent liabilities, including from the health sector.
  - Fiscal implications of the pension reforms.
  - Need to rebuild buffers.
- Recommendation: stronger fiscal effort through permanent revenue and spending measures to achieve a higher fiscal balance target while accommodating larger spending needs and ensuring macro stability.
- Fiscal rule enhancements recommended:
  - Complement the structural balance rule with an explicit medium-term anchor — a debt ceiling coupled with a buffer — to enhance credibility and support medium-term planning.
  - Introduce a formal escape clause to clarify criteria for responding to large shocks and to allow temporary relaxation or suspension of the structural balance target in specified circumstances (e.g., serious natural disasters, shocks that temporarily lower growth significantly below trend, or threats to macroeconomic stability).
  - Establish an adjustment mechanism to offset deviations from fiscal targets in the medium term and to revert debt paths if debt rises above the ceiling due to significant or persistent cyclical factors.
- Cyclical adjustment bias: authorities need to address a bias in the cyclical adjustment for output that has been mainly one-sided since the rule’s inception; staff suggests asking the Committee of experts to project potential GDP and an output gap closing in the medium term.
- Institutional strengthening:
  - Empowerment of the Autonomous Fiscal Council with own resources and broader mandate is welcomed.
  - Ministry of Finance requested an IMF fiscal transparency evaluation to further raise standards.
- Authorities’ stance:
  - Agree that 2021 fiscal position is broadly appropriate; composition changes may be necessary depending on pandemic evolution.
  - Considering Commission of Experts’ recommendations on changes to tax expenditures, including deductions and exemptions.
  - Agree on making the fiscal rule more binding and look forward to Autonomous Fiscal Council recommendations on a medium-term debt anchor, a formal escape clause, and an adjustment mechanism.

### Monetary policy
- Monetary response described as well-conceived, adequate, and unprecedented in magnitude; supported liquidity, maintained low interest rates, contained the pandemic’s adverse impact, and kept inflation expectations well-anchored.
- Foreign exchange operations:
  - Authorities did not engage in FX intervention during the pandemic, though small interventions were used during the social unrest episode (see SIP).
  - Staff supports the plan to increase foreign exchange reserves.
  - FX purchases will be conducted through a prolonged 15 months period using fixed amount daily auctions in line with a flexible and market-driven exchange rate.
  - Main goal of the reserve accumulation program announced in January is timely preparation to exit the FCL arrangement in May 2022.
- Collateral and liquidity measures:
  - Inclusion of bank and corporate securities as eligible Central Bank collateral helped provide ample liquidity; exposure was mitigated by imposing a haircut and limits on the stock of collateral accepted.
  - FCIC operations to continue facilitating credit flows to SMEs and refinancing of current debt; eligibility broadened in line with modifications to FOGAPE (FOGAPE-Reactiva).
- Policy guidance:
  - Monetary stimulus appears appropriate given a large negative output gap, still high unemployment, depressed labor participation, and well-anchored inflation expectations.
  - Future extent of monetary stimulus should be guided by the inflation targeting framework and contingent on developments, the policy mix, and risks.
- Authorities’ view:
  - At the January 2021 policy meeting, BCCh reaffirmed intention to keep the policy rate at its technical minimum for most of the next two years and to maintain reinvestment of coupon payments on its bank bond holdings in coming months.

### Financial sector — regulation, supervision, and vulnerabilities
- Pandemic effects on reform timelines:
  - Implementation of Basel III delayed by one year; additional capital needs expected at about $2.3bn by 2025 (of which about ½ for Banco Estado).
  - Congress passed legislation enhancing financial portability, improving financial market functioning, regulating financial advisors, and strengthening CMF powers to prevent financial market abuse.
  - Pending legislation aims to enhance personal data protection; Ministry of Finance indicated legislation to expand scope of the public credit registry.
- Regulatory gaps to address post-pandemic:
  - Strengthen bank resolution regimes.
  - Establish a national deposit insurance scheme funded by member banks.
  - Enhance regulation of insurance companies.
  - Regulate financial conglomerates (CMF is working on most initiatives).
- Monitoring and supervision:
  - Emergency measures supporting lending and refinancing have been effective; stress tests indicate financial stability appears well guarded.
  - Continued monitoring essential to identify early signs of stress and to intervene to avoid disorderly conditions.
  - When situation normalizes, encourage prudential commercial restructurings, maintain prudential lending standards, and ensure adequate reporting and careful assessment of credit quality.
  - FSAP delayed to 2021 will focus on financial institutions and interlinkages, supervisory reorganization, and crisis management/ bank resolution/ deposit insurance.
- FinTech and cybersecurity:
  - Recent cyberattacks prompted enhanced regulation and supervision of cybersecurity risks.
  - CMF published a white paper and proposed legal text on FinTech expanding CMF perimeter to crowdfunding, trading platforms (including digital assets), robo-advisors, etc.
  - Policy principles proposed: proportionality, technological neutrality, comprehensiveness, flexibility, and modularity.
  - Central Bank created a technological observatory investigating digital payments, Central Bank Digital Currencies, and cryptoassets.
  - Policy challenge: promote innovation, competition, and efficiency while minimizing financial stability risks and protecting consumer rights.
- AML/CFT:
  - Chile undergoing assessment against FATF AML/CFT standard by GAFILAT; assessment planned to be discussed and adopted in July 2021 at GAFILAT’s Plenary meeting.
  - The report’s recommendations should aim at further strengthening the AML/CFT regime.
- Central Bank independence and safeguards:
  - 2019 independent external evaluation highlighted high standards of policy analysis, conduct, and independence comparable to advanced economies.
  - BCCh voluntarily undergoing a pilot review of its transparency system under the new IMF Central Bank Transparency Code.
  - Staff completed safeguards procedures for Chile’s FCL arrangement: KPMG Chile issued an unmodified (clean) audit opinion on BCCh financial statements for 2019 prepared and audited in accordance with international standards; no significant issues emerged.

### Advancing the reform agenda
- Need for broad agreements on policy reforms to improve inclusiveness, address social needs, and support domestic confidence amid uncertainty.
- Structural and social agenda aims:
  - Deepen efforts to enhance productivity and investment.
  - Support economic and social conditions of vulnerable groups to ensure more equitable sharing of growth and stronger social cohesion.
- Fiscal implication:
  - The agenda may need to be complemented in the medium term by higher revenues and spending rationalization so the debt ratio can stabilize at the level envisaged in authorities’ projections.

*Source: IMF staff report chapter on Chile (content unit: 1chlea2021001).*

### 37.      A more developed social support system would require higher revenues and a

### 37.      A more developed social support system would require higher revenues and a rationalization of expenditure, in the medium term, when the recovery is well-advanced.

### Fiscal revenues, taxation, and green taxation
- Chile relies largely on indirect taxation; reliance on direct taxation is close to levels prevailing in Latin American and most EM countries, but below most OECD countries.
- Need for additional permanent sources of revenues exposed by higher demand for public provision and copper’s price volatility; recent comeback in copper prices should not delay revisiting beneficial tax treatments given a declining trend in ore grade.
- Commission of Experts (first report January 2021) recommended gradually reducing tax exemptions, deductions, and special regimes, including:
  - (i) presumptive income (renta presunta, which could be substituted by the recent SME regime);
  - (ii) VAT exemption to professional services and construction;
  - (iii) excise on diesel;
  - (iv) cooperatives;
  - (v) investment funds;
  - (vi) mortgage interest payments;
  - (vii) some housing rental income.
- Beyond curtailing exemptional tax treatments, overall revenues could be raised by (see SIP):
  - (i) increasing direct taxation, including via revisiting the PIT exemption threshold and rate schedule, reconsidering the capital gains tax exemption, strengthening tax administration and tax enforcement, and possibly revisiting mining taxation in light of international practices; and
  - (ii) raising green taxes (e.g., gradually bringing carbon tax—currently at $5 per ton of CO2 emission—towards levels consistent with Chile’s commitments under the Paris agreement).
- Authorities should sustain efforts towards increasing efficiency in spending.

### Pension system: adequacy, reforms, and fiscal implications
- Current expected replacement rates reach on average only about 40 percent even with the government-funded pension supplement; pensions would be significantly lower in the absence of such a supplement.
- About 70 percent of pensioners receive the public pension supplement.
- Key drivers of low pensions:
  - contribution rates are low at 10 percent;
  - contribution density about 60 percent for males and 50 percent for females;
  - retirement age (65/60 for men/women) has not followed increases in life expectancy;
  - historical global decline in interest rates affected returns on pension assets.
- Recent withdrawals of US$36bn (about 18 percent of June 2020 pension assets) will compound problems.
- Demographic projection and fiscal cost notes:
  - People after retirement age are expected to raise from about 3 million at present to about 6 million in 2050;
  - working age population will decrease from 13 to 12 million over the same period;
  - a flat pension equal to 50 or 75 percent of the 2020 real minimum wage—even if remaining constant in real terms—can imply in 2050 a cost of about 5-8 percent of GDP.
- Authorities’ pension proposal (in Congress) envisages:
  - increase in the contribution rate from 10 to 16 percent (funded by the employer);
  - half of this increase (3 percent) going to employees’ individual pension savings;
  - the rest to a new collective contributory pillar to support solidarity benefits and dependency care insurance.
- Assessment of proposal and recommendations:
  - An increase of 3 percentage points to the individual account would not be enough to adequately increase replacement rates; gradual changes to the retirement age should also be urgently considered.
  - Preferable to finance solidarity components via the general budget rather than a labor tax to avoid distortions that increase labor costs and informality.
  - Ensure efficient management of assets from the 6 percentage points increase in the contribution rate: the new management entity should operate in a competitive environment (without monopoly power) and be subject to strict scrutiny.
  - Revisit rules and fees to increase pension managers competition; consider portfolio allocation and switching rules' impacts on long-run returns and systemic liquidity.
  - Broadening mandatory contributions to the informal sector and intensifying efforts to reduce informality; facilitate employment for senior people.
  - Future adjustments to contribution rates, retirement age, and solidarity parameters should be done at regular intervals (say 5 years), possibly via a commission of experts.
- Potential mechanisms to broaden pension contribution base:
  - small increase in the VAT from 19 to 20 percent, with the extra amount accruing to the individual pension account; or
  - fees at permits renewal accruing to the individual pension account.

### Health care reform priorities
- Chile has adequate health outcomes for its level of development, but the system faces criticism for complexity, limited competition, elevated out-of-pocket costs of medicines, inferior public sector service (long wait times), and linkage of private insurance access/costs to gender and pre-existing conditions.
- System segmentation: about 80 percent of the population relies on the public system (FONASA), while 20 percent are served by private providers (ISAPRES).
- Policy actions taken and proposed:
  - January 2020: government aimed to lower out-of-pocket medicine costs by allowing import of all medicines approved for consumption in Chile and expanding generic brands.
  - Government proposal in Congress to require doctors to prescribe medicines based on the key active ingredient (International Common Denomination) rather than brand; alternative proposal to have pharmacies charge a fixed amount rather than a percentage mark-up.
  - Government proposal (under consideration by Congress) includes:
    - i) strengthening FONASA in efficiency, autonomy, governance, and risk management;
    - ii) creating a basic universal health plan with same coverage in both private and public sectors to increase transparency and competition;
    - iii) increasing solidarity of ISAPRES by eliminating pre-existing conditions and gender discrimination and creating a fund to compensate providers based on age, gender, and health conditions of insured population;
    - iv) ensuring private providers guarantee the same price to men and women of a given age.
- Contextual note: In 2018 there were 18,000 judicial complaints (80 percent of the total) regarding the increase in ISAPRES premia.

### Education, labor market, informality, and inclusion
- Education:
  - Chile expanded higher education access over past decades; focus now on improving quality.
  - Student performance ranks better than Latin American peers but significantly below OECD countries (PISA and basic competencies).
  - Returns to education are heterogeneous and often quite low.
  - Recommendations: expand and strengthen teacher performance monitoring and align teacher career incentives to student performance; provide transparent career information to students; promote employer-education engagement (internships); centralized platform pilot for job placement and training is welcome.
- Labor market flexibility:
  - Staff welcomes 2019 law facilitating formal youth employment and 2020 law regulating tele-work.
  - Authorities should implement plans for a universal childcare system to eliminate discrimination and promote female labor force participation.
  - Introduce flexibility in working schedule and location to facilitate labor participation for women and senior citizens and improve pension contribution density.
  - Consider reviewing severance costs and dismissal procedures, and widening severance benefits eligibility to support job creation and labor mobility.
- Informality:
  - Almost one third of the workforce is in the informal sector.
  - 2019: Congress extended the obligation of pension and health contribution to self-employed, to be gradually introduced over eight years.
  - Further measures: make dismissal regulation less administratively burdensome, incentivize formal work (particularly among women) through earned income tax credit, and enhance training programs for vulnerable workers.

### Competition, regulation, access to finance, and digitalization
- Chile has 30 free trade agreements with 64 economies.
- Competition and regulatory issues:
  - Time and cost to comply with regulation is disproportionately larger for new and small firms; restrictive regulation in sectors (maritime transport services, railway, telecommunication) and state involvement weigh on integration in global value chains and investment.
  - Policies should streamline regulation, reduce barriers to entry, promote public sector efficiency, and level playing field in key services sectors.
- Finance and digitalization:
  - Promote FinTech initiatives and digitalization training; recent law allowing financial collateral portability should help change finance provider, particularly for SMEs, increasing competition and inclusion.
- Additional initiatives:
  - Chile issued green bonds for energy efficiency, green buildings, and electric buses; issued several "social" bonds to finance programs supporting households, health, education, and social services amid the pandemic.
  - Financial strategy for climate change (December 2019) aims to develop a framework for measuring green components in the budget and capacity building in green finance.
  - Ministry of Finance initiative to transform Chile into a regional financial center by simplifying procedures and adopting international best practices; Central Bank agenda on internationalization of the peso supports cross-border use of the peso.

### Outlook, risks, and staff appraisal
- Economic outlook:
  - Economic activity is recovering; expected to expand by 6.5 percent in 2021 and to converge to its potential of 2.5 percent in the medium term.
- Risks:
  - External risks: pandemic dynamics (mitigated by fast vaccination process), potential de-globalization reducing trade and growth opportunities, large movements in copper price affecting exports, fiscal revenues, investment, and growth.
  - Domestic risks: uncertain outcome of the New Constitution process and possible resurgence of unrest; a delay in the recovery could increase delinquency rates.
- Resilience and policy frameworks:
  - Chile maintains very strong economic fundamentals and institutional policy frameworks; policy buffers have narrowed due to crisis response but macroeconomic policies and institutional frameworks remain very strong.
  - Country exhibits significant resilience due to large policy response, remaining fiscal space, strong institutional frameworks, sound policy reaction record, and low public debt by international standards.

*Source: 1chlea2021001 - 37.*

### 52.      The authorities have implemented a wide-ranging and largely appropriate set of fiscal,

### 1chlea2021001 - 52.      The authorities have implemented a wide-ranging and largely appropriate set of fiscal,

### Policy response overview
- The authorities implemented a wide-ranging set of fiscal, monetary, and financial policy actions in response to the pandemic.
- Close coordination occurred between the Ministry of Finance, the Central Bank, and the CMF.
- The government is implementing a multi-year fiscal package to:
  - safeguard health,
  - protect incomes and jobs,
  - promote credit,
  - facilitate refinancing and repayments,
  - buttress the recovery.
- Main fiscal policies include additional health spending, transfers to households, tax deferrals, employment subsidies, and state guarantees for credit to firms.
- The Central Bank of Chile (BCCh) greatly expanded monetary stimulus and introduced unconventional measures: funding-for-lending facilities, asset purchase programs (APP), and an expanded collateral framework.
- Financial sector policies were adjusted to facilitate credit flow, especially to households and SMEs; implementation of Basel III standards has been delayed.

### Fiscal position, stance, and recommendations
- Chile’s indebtedness: 33 percent of GDP.
- The multi-year fiscal stimulus package is viewed by staff as effectively helping counter the crisis.
- Fiscal deficit impact in 2020: deterioration by about 3.7 percent of GDP.
- Tax deferrals lowered tax revenues by about 1.2 percent of GDP in 2020.
- Additional spending in 2020: 2.5 percent of GDP; about 1/4 of that was health related.
- Additional spending envisaged in 2021: 3.3 percent of GDP.
- Government flexibility to spend up to US$18bn, financed with debt issuance and from accumulated savings in the Sovereign Wealth Fund.
- The overall multi-year fiscal package size: US$34bn or 13 percent of GDP.
- About 1/2 of the stimulus package was allocated in 2020; remaining part for 2021 and 2022 is contingent on pandemic developments.
- Staff cautions against additional pension withdrawals: July and December 2020 withdrawals are supporting recovery but were poorly targeted, regressive, and have weakened the pension system.
- Policy recommendations:
  - Keep fiscal policy data driven; consider additional stimulus if the pandemic is prolonged (targeted household transfers, extension of tax deferrals).
  - Progressively shift fiscal policy from near-term inclusive recovery support to medium-term sustainability.
  - Authorities committed to reducing the structural deficit towards a target of 0.9 percent of GDP by 2025.
  - Once the health crisis is under control, implement permanent revenue and spending adjustments to provide space for social needs, absorb revenue risks, and rebuild buffers.
  - Enhance the fiscal framework by:
    - adding an explicit medium-term debt anchor (encompassing a debt ceiling and buffer zone),
    - introducing a formal escape clause for temporary relaxation or suspension of the structural balance target,
    - adopting an adjustment mechanism to offset temporary deviations from targets.

### Monetary policy assessment and guidance
- The monetary policy response described as well-conceived, adequate, and unprecedented in magnitude.
- BCCh measures helped contain adverse pandemic impact while maintaining well-anchored inflation expectations.
- Monetary stimulus appears appropriate and should continue to be guided by the inflation targeting framework and contingent on developments and risks.
- Underlying economic weaknesses cited as rationale for continued stimulus: large negative output gap, high unemployment, and depressed labor participation, amid well-anchored inflation expectations.

### Financial sector monitoring and reforms
- Continued monitoring of financial sector vulnerabilities is critical.
- Temporary emergency measures are preventing deterioration in credit quality but require close monitoring to identify early signs of stress and to stand ready to intervene.
- As normalcy returns, recommendations for financial institutions:
  - assess credit quality carefully,
  - be encouraged to restructure loans prudently if needed,
  - maintain prudential lending standards and adequate reporting.
- Financial sector reforms and implementation priorities:
  - Proceed with implementation of the new Banking Law in compliance with Basel III in line with the revised timeline.
  - Legislation enhancing financial portability, improving financial market functioning, regulating financial advisors, and strengthening CMF powers is welcome.
  - Important focus areas: bank resolution, deposit-insurance, regulation of insurance companies and financial conglomerates.
  - Regulation should keep pace with FinTech expansion and looming cybersecurity threats.
  - The upcoming 2021 Financial Sector Assessment Program (FSAP) will conduct a detailed analysis of financial stability policies and risks.

### Structural and social reform agenda
- Rapidly reaching broad agreement on structural and social reforms while preserving macroeconomic stability would stimulate investment, productivity, confidence, and social convergence.
- Pension reform (urgent):
  - Finalize pension reform to improve adequacy and coverage.
  - End-2019 legislation increased the solidarity pillar; recent government proposals aim to increase contribution rates and further strengthen the solidarity pillar.
  - Essential future adjustments: contribution rates, retirement age (especially for women), and solidarity parameters based on demographics, employability, economic developments, expected replacement rates, and expected returns on pension assets.
  - Reduce informality to increase contribution density.
  - Ensure competition in pension management to promote efficiency and contain costs.
- Health system reform (pressing):
  - Create a basic universal health plan (pooling risks from public and private members).
  - Eliminate discrimination based on pre-existing conditions in the private system.
  - Improve efficiency in the public system, increase competition, and reduce out-of-pocket spending on medicines.
- Fiscal sustainability and revenue measures:
  - Address medium-term fiscal needs by increasing revenues and rationalizing expenditure when recovery is well-advanced.
  - Implement recommendations to gradually reduce tax exemptions, deductions, and special regimes.
  - Additional efforts: increase direct taxation (including revisiting PIT exemptions thresholds and strengthening tax administration) and raise green taxes.
  - Sustain efforts to increase spending efficiency.
- Broader structural reforms to boost productivity and inclusiveness:
  - Enhance quality of education,
  - Address labor market mismatches,
  - Promote labor market flexibility,
  - Reduce informality,
  - Strengthen competition,
  - Streamline bureaucracy,
  - Continue trade and financial integration,
  - Support policy actions in response to climate change.

### Annex I — Fiscal measures and details (selected)
- The government implemented a multi-year fiscal package of US$34bn or 13 percent of GDP.
- The package combines:
  - temporary liquidity measures (expired throughout 2020, no end-year fiscal deficit impact),
  - tax deferrals (provide liquidity in 2020 and expire in 2021),
  - additional spending (health-related expenses, transfers to vulnerable households, employment subsidies),
  - below-the-line measures (capitalization of public institutions to provide loan guarantees and concessional loans).
- Timeline and composition:
  - Initial measures announced mid-March 2020; complemented in June 2020 and March 2021.
  - About 1/2 of the stimulus package allocated in 2020; remaining contingent on pandemic developments for 2021 and 2022.
  - As contagions surged and mobility restrictions tightened, the government enlarged the package and expanded measures, including transfers for vulnerable segments and the middle class.
  - As vaccination progresses and mobility restrictions ease, planned additional resources include subsidies for firms that formalize workers, create jobs, or rehire workers with suspended contracts.
- Below-the-line measures:
  - In 2020, below-the-line measures amounted to 1.1 percent of GDP, funding liquidity provisions for SMEs (via Banco Estado), a credit-guarantee scheme for firms (via FOGAPE, extended in January 2021), and a solidarity loan for the middle class.
  - In 2021, below-the-line measures of about 1.3 percent of GDP are expected, including solidarity loans for the middle class and capital transfers to both FOGAPE and Banco Estado depending on demand.

*International Monetary Fund — content unit 1chlea2021001 (excerpt).*

### 6.      The most important measures, both in terms of allocated resources and economic

### 6.      The most important measures, both in terms of allocated resources and economic significance, are:

### Fiscal measures — size and composition of stimulus
- Total size of the stimulus package (percent GDP): 11.3 Announced 1/; 13.3 Revised 2/; 12.5 Cumulative 3/; breakdown by periods: 6.1 2020-2021; 4.2 2022-2025; 2.1 Total
- 1. On Budget: 8.7 Announced; 10.8 Revised; 10.0 Cumulative; period breakdown: 5.0 2020-2021; 2.9 2022-2025; 2.0 Total
  - a. Temporary (no effect on end-year deficit): 1.3 Announced; 1.3 Revised; 1.3 Cumulative; period breakdown: 1.3 2020-2021
    - Deferred taxes: 0.5 Announced; 0.5 Revised; 0.5 Cumulative; period breakdown: 0.5 2020-2021
      - CIT for SMEs: 0.2 Announced; 0.2 Revised; 0.2 Cumulative; period breakdown: 0.2 2020-2021
      - Property taxes: 0.3 Announced; 0.3 Revised; 0.3 Cumulative; period breakdown: 0.3 2020-2021
    - Accelerated pay of liabilities (no affect on the accrual deficit): 0.8 Announced; 0.8 Revised; 0.8 Cumulative; period breakdown: 0.8 2020-2021
      - Early CIT refunds for SMEs: 0.4 Announced; 0.4 Revised; 0.4 Cumulative; period breakdown: 0.4 2020-2021
      - Accelerated pay of public procurement obligations: 0.4 Announced; 0.4 Revised; 0.4 Cumulative; period breakdown: 0.4 2020-2021
  - b. Permanent: 7.4 Announced; 9.5 Revised; 8.7 Cumulative; period breakdown: 3.7 2020-2021; 2.9 2022-2025; 2.0 Total
    - i. Revenues: 2.5 Announced; 1.6 Revised; 0.8 Cumulative; period breakdown: 1.2 2020-2021; -0.4 2022-2025; 0.0 Total
      - Suspension of CIT payments: 1.0 Announced; 0.9 Revised; 0.3 Cumulative; period breakdown: 0.9 2020-2021; -0.5 2022-2025; -0.1 Total
      - VAT delay: 0.6 Announced; 0.2 Revised; 0.0 Cumulative; period breakdown: 0.0 2020-2021; 0.2 2022-2025; -0.2 Total
      - Reduction of the stamp & seals tax: 0.2 Announced; 0.2 Revised; 0.2 Cumulative; period breakdown: 0.2 2020-2021
      - Reduction CIT rate to 12.5%: 0.3 Announced; 0.0 Revised; 0.0 Cumulative; period breakdown: 0.0 2020-2021; 0.0 2022-2025; 0.0 Total
      - Instantatenous 100% depreciation: 0.4 Announced; 0.4 Revised; 0.4 Cumulative; period breakdown: 0.4 2020-2021; 0.0 2022-2025
      - 0.3 Announced; 0.1 Revised (entry listed without label)
    - ii. Spending: 4.9 Announced; 7.9 Revised; 7.9 Cumulative; period breakdown: 2.5 2020-2021; 3.3 2022-2025; 2.0 Total
      - Additional Fiscal Resources for health expenditures: 0.9 Announced; 0.6 Revised; 0.6 Cumulative; period breakdown: 0.5 2020-2021; 0.1 2022-2025; 0.0 Total
      - Other spending: 0.0 Announced; 0.2 Revised; 0.2 Cumulative; period breakdown: 0.2 2020-2021; 0.1 2022-2025; 0.1 Total
      - Transfers for most vulnerable: 1.8 Announced; 2.9 Revised; 2.9 Cumulative; period breakdown: 1.5 2020-2021; 1.3 2022-2025; 0.0 Total
      - Middle-class bonus: 0.4 Announced; 0.9 Revised; 0.9 Cumulative; period breakdown: 0.4 2020-2021; 0.5 2022-2025; 0.0 Total
      - Public investment: 1.2 Announced; 1.2 Revised; 1.2 Cumulative; period breakdown: 0.0 2020-2021; 0.4 2022-2025; 0.8 Total
      - Employment subsidies: 0.6 Announced; 1.0 Revised; 1.0 Cumulative; period breakdown: 0.0 2020-2021; 0.7 2022-2025; 0.3 Total
      - Unallocated: 0.0 Announced; 1.1 Revised; 1.1 Cumulative; period breakdown: 0.0 2020-2021; 0.2 2022-2025; 0.9 Total
- 2. Off-Budget (below the line): 2.6 Announced; 2.5 Revised; 2.5 Cumulative; period breakdown: 1.1 2020-2021; 1.3 2022-2025; 0.1 Total
  - Injection to the UI Solidarity Fund: 0.8 Announced; 0.0 Revised; 0.0 Cumulative
  - Banco Estado capitalization: 0.2 Announced; 0.3 Revised; 0.3 Cumulative; period breakdown: 0.1 2020-2021; 0.2 2022-2025; 0.0 Total
  - Public loan guarantees (FOGAPE), including Fogape Reactiva: 1.2 Announced; 0.8 Revised; 0.8 Cumulative; period breakdown: 0.4 2020-2021; 0.3 2022-2025; 0.1 Total
  - Solidarity loan for middle class: 0.4 Announced; 1.2 Revised; 1.2 Cumulative; period breakdown: 0.6 2020-2021; 0.6 2022-2025; 0.0 Total
  - Unallocated: 0.0 Announced; 0.2 Revised; 0.2 Cumulative; period breakdown: 0.0 2020-2021; 0.2 2022-2025; 0.0 Total

Notes:
- 1/ Announced as of June 2020.
- 2/ Revised in March 2021 with outturns for 2020.
- 3/ Nets out the effect of tax deferrals.

### Fiscal measures — specific instruments and uptake
- Tax deferrals and tax-related measures:
  - CIT (April 2020): suspension of monthly preliminary payments for companies that experienced a reduction of their income of at least 30 percent in 2020Q2; final declaration occurs in April 2021 when deferred amount must be balanced out.
  - VAT: suspension for 6 months of monthly VAT payments for SMEs (that experienced a reduction of their income of at least 30 percent in 2020Q2). Payments are due in 2021 in 6 or 12 installments (depending on the companies’ size).
  - Stamp tax: suspended between April and September 2020 (applies to mortgages, consumer loans, promissory notes, and bills of exchange).
  - CIT for SMEs: reduction of monthly preliminary payments and CIT rate to 10 percent (from 25 percent) for income generated in 2020-2022.
  - Instantaneous depreciation: introduced in June 2020, allows firms to reduce for tax purposes the value of fixed assets acquired until 2022.
- Transfers to households:
  - IFE (emergency family income): introduced in April 2020, provides monthly payments to vulnerable households; payments have varied between 60 and 140 USD per person; about 8.3 mn persons have benefitted.
  - Middle-class bonus: introduced in August 2020, one-time payment for individuals with monthly income between US$500 and 2,500 (before the pandemic) whose income fell by at least 30 percent; amounts gradually fall from about US$630 to zero as pre-pandemic income increases; about 1.7 mn persons have benefited. In March 2021, a new payment was approved with amounts increased by about ¼ for families with kids, seniors, or persons with disability.
- Employment protection and subsidies:
  - Employment Protection Law (April 2020): temporary suspension of work contracts (up to six months) or reduction up to 50 percent of work schedule; at peak about 600 thousand workers had a suspended contract; about 90 thousand remain; workers maintain contractual rights and receive monthly payouts from the unemployment insurance system; temporary suspension extended until June 2021 (as of March 2021) and withdrawal rules amended.
  - Employment Subsidies (September 2020): for firms with a fall in sales of at least 20 percent in 2020Q2; government pays ½ of the wage up to US$350 for new hires or about US$200 for rehires; subsidies paid for 8 months (large firms) and 10 months (SMEs); higher subsidy (60 percent of the wage up to US$350) if worker is young, female, or has disability; about 600 thousand subsidies requested (80 percent new hires, 20 percent rehires). March 2021: new subsidies for employment formalization paid directly to workers amounting to 15% of the minimum salary or 20% for women, youth, and workers with disabilities; expected to benefit about 500 thousand workers.
- Measures to support credit:
  - FOGAPE-COVID (April 2020, 12 months): state guarantees 60 to 70 percent for large companies (with a 2.5 percent deductible), 80 percent for medium-size companies, 85 percent for small companies; eligible SMEs with annual sales up to 40mn usd; maximum loan about ¼ of annual sales; grace period 6 months; no pre-payment charges; maximum maturity 4 years (increased to 5 years in January 2021); maximum interest rate 300bps above the monetary policy rate. At end-February, about 13bn usd of financing awarded.
  - FOGAPE-Reactiva (January 2021, 10 months): guarantees for SMEs for working capital, investments, or refinancing prior program loans; maximum loan increased to ½ of annual sales (for most affected sectors); maximum interest rate raised to 7.2 percent (0.6 per month) above the monetary policy rate; maximum maturity increased to 7 years (no grace period).
  - Mortgage Payment Delays (January 2021): Fogape provides guarantees for banks to delay up to six months of mortgage instalments for properties with commercial value below about US$400,000 and for persons with a fall of at least 25 percent in their monthly income.
  - Commercial Loan Payment Delays for SMEs (March 2021): allowing SMEs to delay up to three installments of loans with Banco Estado at zero interest rate.
  - Middle-Class Loans (August 2020): loans up to US$3,500 to cover up to 70 percent of the fall in monthly income for about four months (for persons with monthly earnings of at least US$500 whose income fell by at least 30 percent); requested to tax authority and paid by the treasury in four installments; one-year grace period, maturity of four years, zero real interest rate; have benefitted about 3.3mn persons (2.4mn workers, 0.8mn self-employed, 0.1mn entrepreneurs). March 2021: new round approved with maximum loan lowered to about US$2,600 (to cover three months of lost income).

### Monetary policy measures (BCCh)
- Policy rate reductions:
  - BCCh cut the monetary policy rate twice for a total of 125 bps to 0.5 percent (considered the “effective lower bound” by BCCh).
    - March 16: reduced by 75 bps to 1 percent.
    - March 31: reduced by additional 50 bps to 0.5 percent—a historical minimum also reached during the GFC in 2009.
- Funding-for-lending facilities (FCIC): total up to US$40bn
  - FCIC1 (March 2020): total amount US$24bn (fully employed). Two parts:
    - Initial line: 3 percent of banks’ base portfolio (commercial + consumer loan portfolio, measured at end-February 2020).
    - Additional line: conditional on increase in banks’ lending, additional limit of 12 percent of base portfolio.
  - FCIC2 (June 2020, started July): maximum lending capacity up to US$16bn, allocated depending on growth of banks’ credit portfolios; about US$5.3bn employed until early February 2021.
  - FCIC3 (announced January 2021, starting March, active for 6 months): total up to about US$10bn (equivalent to unused amount from FCIC1 and FCIC2); novelty: applies to refinanced loans, aligning with FOGAPE-Reactiva to prevent sudden stops in access to credit during recovery.
- Asset purchase programs: up to US$16bn total
  - March 20: bank bonds purchase program for SOMA participants equivalent of US$8bn (initial US$4bn expanded by additional US$4bn at end-March); about US$3.9bn purchased under this program.
  - June 22: special assets purchase program (bank bonds and buyback of BCCh securities) total US$8bn; about US$4.8bn purchased so far (US$4bn in bank bonds and about US$0.8bn in buyback of BCCh securities).
- Collateral and FX reserve requirement adjustments:
  - Expanded collateral framework to incorporate corporate bonds and corporate loans as eligible collateral.
  - Temporary modification to FX reserve requirements allowing banks to meet FX requirements in Euros, Japanese yen, and Chilean pesos in addition to US dollars.
- Measures to smooth impact of pension withdrawals on markets:
  - July 30, 2020: purchase of bank bonds for up to US$10bn with sale back within 1 to 3 months; purchase of banks’ term deposits up to US$8bn.
  - December (second withdrawal): re-activated measures: purchase of bank securities (resale within 3 months) up to US$8.5bn (remaining unused portion of US$10bn); purchase of bank term deposits up to US$7.75bn (remaining unused portion of US$8bn).
  - Cumulative purchases of bank securities amounted to US$8.5bn, outstanding amount about US$2.8bn (as of early February 2021); about US$0.5bn of bank term deposits purchased until early February 2021.

### Financial policy and regulatory measures (CMF and other authorities)
- CMF measures to facilitate credit flow:
  - Mortgage rescheduling: borrowers paying their mortgage at State of Emergency declaration could reschedule up to three mortgage installments without being treated as renegotiations for provisioning purposes.
  - Exemption from adding provisions corresponding to rescheduling and refinancing operations for banks and cooperatives.
  - Maximum grace/deferral extension: 6 months (mortgage loans), 4 months (commercial loans, later extended to 6 months), 3 months (consumer loans) for debtors up to date or with default no more than 30 days; implemented April 2, 2020; set to expire July 31, 2020 (later extended to August 31, 2020 for mortgage and commercial loans).
  - Financial institutions allowed to use surplus mortgage collaterals to guarantee commercial loans to SMEs (implemented May 25, 2020).
  - Exceptional extension of 18 months for banks’ disposition of assets received as payment to avoid sales at depressed prices.
  - Amendment to treatment of cash posted as collateral for variation margin of bilaterally cleared derivatives.
  - Postponement of Basel III risk-weighted-assets requirement by one year to become effective December 2021; additional capital charges for systemically important banks also postponed by one year.
- Regulatory changes to promote FOGAPE credit flow:
  - June 26: Ministry of Finance lowered deductible for banks participating in FOGAPE and increased maximum loan amount for firms with sales less than UF 1,000.
  - August 21: CMF allowed banks to recognize up to 15 percent of state guarantees as part of voluntary provisions that make up effective capital (applied to guarantees by Treasury, CORFO, and FOGAPE); later replaced by mitigation treatment reducing risk weights on guaranteed part from 100 to 10 percent.
- Liquidity and market issuance facilitation:
  - BCCh liquidity measures: suspension of liquidity requirement for maturity mismatch on bank assets for 90 days since March 2020 (later extended until April 15, 2021); delayed strict implementation of LCR 70 percent in 2020 as per 2019 plan.
  - CMF eased issuance/placement of securities:
    - June 15, 2020: temporarily exempted presentation of required documents for registration of publicly offered securities (effective June 15, 2020 until June 30, 2021).
    - October 19, 2020: streamlined process for issuing debt securities in stock market.
    - January 25, 2021: eased requirements to record securities under automatic registration system.
    - February 23, 2021: adjusted conditions, requirements, and parameters governing securities offerings that did not require CMF registration.
- Banco Estado capitalization:
  - April 2, 2020: Congress enacted legislation approving a US$500mn capital contribution to Banco Estado to provide financing to individuals and SMEs; Banco Estado's lending capacity increased by about US$4,400mn.

*Italic: IMF — Chile chapter (content unit 1chlea2021001, selected section 6).*

### Annex II. External Sector Assessment

### Annex II. External Sector Assessment

### Overall Assessment
- The external position of Chile in 2020 is assessed as moderately stronger than indicated by medium-term fundamentals and desirable policies.
- The CA balance increased significantly from the 2019 level, due to lower imports coupled with broadly steady exports of goods, in a context of a relatively larger fiscal expansion in advanced economies.
- The net international investment position is expected to improve, while international reserves are assessed as adequate.
- Potential policy responses: The authorities responded promptly to the sequence of shocks (social unrest late 2019/early 2020 and the Covid-19 outbreak in early 2020) with substantial fiscal and monetary stimuli, and accommodative financial policies.

### Foreign Asset and Liability Position and Trajectory
- Background: Chile’s net international investment position (NIIP) increased by US$5.6bn during the first three quarters of 2020 (close to 2 percentage points of GDP, from -14 percent of GDP in 2019), reflecting a current account surplus and some valuation effects, as the local equity market fell by about 20 percent, while safe-haven markets (US equities in particular) gained.
- Assessment:
  - Chile has large gross external liabilities, but these are largely offset by gross foreign assets.
  - The weight of FDI (and equities broadly) in gross liabilities is significant.
  - Most sectors have positive net positions: the public sector, pension funds, and other non-bank financial institutions all have positive NIIPs.
  - Banks and non-financial corporations have negative net positions of about -10 and -50 percent of GDP, respectively.
  - About 60 percent of NFC’s liabilities are FDI.
  - FDI represents 60 percent of gross liabilities by instrument.
  - Conclusion: external vulnerability due to the negative NIIP is limited.
- 2019 (% GDP) key statistics:
  - NIIP: –14.1
  - Gross Assets: 143.8
  - Reserve Assets: 14.4
  - Gross Liab.: 158.0
  - Debt Liab.: 65.7

### Current Account
- Background:
  - The 2020 CA balance is 1.4 percent of GDP (from -3.9 in 2019).
  - This turnaround is exceptional and Chile’s largest CA balance and the first surplus in a decade (Chile had a CA deficit each year since 2011, averaging 3 percent of GDP).
  - The switch reflects weak domestic demand induced by Covid-19 and strong demand for copper.
  - Imports fell by about US$10bn, or 4 percent of 2020 GDP, while exports of goods held steady.
  - The current account is expected to return to deficit in the near term, by 2022.
- Assessment (EBA model and staff):
  - Est 2020 (% GDP):
    - Actual CA: 1.4
    - Cycl. Adj. CA: 0.9
    - EBA CA Norm: -0.8
    - EBA CA Gap: 1.7
    - Staff Adj.: -0.01
    - Staff CA Gap: 1.7
  - The EBA model estimates a CA norm of -0.8 percent of GDP, against a cyclically adjusted CA of 0.9 percent of GDP, a gap of 1.7 percent of GDP.
  - Multilaterally consistent adjustors for temporary Covid-19 effects are approximately -0.01 percent of GDP (negligible for Chile).
  - Staff assesses the overall 2020 external position to be moderately stronger than indicated by fundamentals and desired policies, mainly owing to the relatively larger fiscal expansion in advanced economies.

### Real Exchange Rate
- Background:
  - The REER (CPI-based) appreciated by 3.5 percent in 2020 (yoy December), reversing some of the 10 percent drop in 2019.
  - The REER had appreciated on average 2.2 percent per annum in each preceding year since 2016.
  - The main driver in 2020 was a nominal appreciation in the peso-dollar rate of approximately 10 percent, tied to the boost to copper prices from the rebound in China.
  - The NEER increased by 2.3 percent.
- Assessment:
  - Staff assesses the real exchange rate gap to be small.
  - The EBA REER index model suggests an undervaluation of 12.5 percent for 2020 (after multilateral consistency adjustments).
  - The EBA REER level model implies an undervaluation of 26.2 percent for 2020 (after multilateral consistency adjustments).
  - Both EBA estimates are associated with very large residuals.
  - Staff’s assessment anchored by the REER gap derived from the current account gap, using an estimated elasticity of 0.27 (elasticity of the CA-to-GDP ratio to change in the REER), which implies a slight real exchange rate undervaluation of 6 percent in 2020.

### Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - Portfolio flows accounted for the bulk of net inflows in 2019 (3 percent of GDP), followed by FDI.
  - In 2020 non-residents were net sellers of Chilean assets—gross inflows were minus US$7.2bn.
  - These flows were offset by gross outflows of minus US$7.1bn: residents were net sellers of foreign assets, particularly long-term debt securities held abroad.
  - Residents had sharply increased holdings of portfolio securities and deposits abroad after the social unrest in late 2019 to early 2020.
- Assessment:
  - Chile has demonstrated ample capacity to absorb short-term capital flow volatility.

### FX Intervention and Reserves Level
- Background:
  - The peso is free floating and FX interventions have been limited to preventing disorderly market conditions.
  - Authorities sold reserves totaling US$2.55bn between December 2019 and January 2020 in response to social unrest and Covid-19.
  - In January 2021, the BCCh announced a program of gradual reserve accumulation—US$12bn over fifteen months—to lift these towards circa 18 percent of GDP.
  - Stock of international reserves: US$39bn (end-2020); year-end stocks have oscillated between US$38bn and US$42bn since 2011.
  - Predetermined net short-term drains are less than US$2bn as of Nov-2020.
- Assessment:
  - Gross international reserves in 2020 were approximately 90 percent of the IMF’s adequacy metric for EMs.
  - The reserve accumulation program will gradually lift reserves to 108 percent of 2019 ARA.
  - In Nov-2020 the central government held approximately US$24bn in usable liquid external assets, including US$10bn in the sovereign wealth fund for economic stabilization which, if counted as reserves, raise these to over 100 percent of ARA.
  - Chile is classified as a mature market economy for reserve assessment purposes (IMF, 2015): reserves may need to act mainly as a second line of defense against potential FX funding needs of the financial sector.
  - Banks’ external debt in Nov-2020 was US$24.9bn (from 31.2bn at end-2020), with a significant part covered by the most liquid segments of banks’ US$24.9bn in external assets.
  - The FCL arrangement with the IMF and a bilateral swap facility with the PBoC provide additional buffers of about US$24bn and US$7bn, respectively.
  - Taking all factors into account, staff assess Chile’s official reserves are adequate.

### Notes on Related Annexes (as presented in the source)
- Annex III: Risk Assessment Matrix — describes risks that could alter the outlook and staff’s subjective likelihood categories.
- Annex IV: Debt Sustainability Analysis — staff’s assessment is that debt in Chile is sustainable with a high probability; authorities committed to medium-term structural fiscal consolidation; withdrawal of private pensions and expansion of credit guarantees (FOGAPE) expected to result in modest medium-term fiscal costs.
- Annex V: Recommendations of 2018 Article IV Consultation and Authorities’ Actions — summary of fund recommendations and authorities’ policy actions across Monetary Policy, Fiscal Policy, Structural Reforms, and Financial Sector reforms.

*Source: Annex II. External Sector Assessment (1chlea2021001) — IMF staff report content provided in the supplied document.*

### 8.10 of the Sustainable Development Goals (SDGs).

### 8.10 of the Sustainable Development Goals (SDGs).

### II. Data Standards and Quality
- Chile completed the requirements for adherence to the IMF’s Special Data Dissemination Standard (SDDS) Plus in March 2020.
- Chile was the second country in Latin America to adhere to the SDDS Plus.
- A data ROSC was published September 17, 2007.
- Selected entries from the Table of Common Indicators Required for Surveillance (As of March 17, 2021):
  - Exchange Rates: Date of Latest Observation March 4, 2021; Date Received March 4, 2021; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation February 19, 2021; Date Received March 1, 2021; Frequency W W W.
  - Reserve/Base Money: Date of Latest Observation January 29, 2021; Date Received February 8, 2021; Frequency W W W.
  - Broad Money: Date of Latest Observation January, 2021; Date Received February 8, 2021; Frequency M M M.
  - Central Bank Balance Sheet: Date of Latest Observation February, 2021; Date Received February 23, 2021; Frequency M M M.
  - Consolidated Balance Sheet of the Banking System: Date of Latest Observation December, 2020; Date Received February 23, 2021; Frequency M M M.
  - Interest Rates: Date of Latest Observation March 4, 2021; Date Received March 4, 2021; Frequency D D D.
  - Consumer Price Index: Date of Latest Observation February, 2021; Date Received March 9, 2021; Frequency M M M.
  - Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of Latest Observation Q3 2020; Date Received December 30, 2020; Frequency Q Q Q.
  - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of Latest Observation January, 2021; Date Received March 2, 2021; Frequency M M M.
  - Stocks of Central Government and Central Government–Guaranteed Debt: Date of Latest Observation December, 2020; Date Received February 16, 2021; Frequency M M M.
  - External Current Account Balance: Date of Latest Observation Q3 2020; Date Received November 18, 2020; Frequency Q Q Q.
  - Exports and Imports of Goods: Date of Latest Observation January, 2021; Date Received February 8, 2021; Frequency M M M.
  - GDP/GNP: Date of Latest Observation Q3 2020; Date Received November 18, 2020; Frequency Q Q Q.
  - Gross External Debt: Date of Latest Observation December, 2020; Date Received February 8, 2021; Frequency M M M.
  - International Investment Position: Date of Latest Observation Q3 2020; Date Received November 18, 2020; Frequency Q Q Q.

### Recent developments and economic outlook
- Recovery status and projections:
  - Real GDP contracted 5.8 percent in 2020.
  - Real GDP is projected to grow between 6 to 7 percent in 2021.
  - Real GDP is projected to grow 3 to 4 percent in 2022.
  - The recovery is uneven across sectors; contact-intensive activities lag and employment recovery lags activity.
  - Only half of jobs lost since the outbreak of the pandemic have been recovered.
- Short-term risks and policy stance:
  - A temporary setback in output is likely amid a new surge of infections and tightening of lockdown measures.
  - Authorities are prepared to maintain policy support until the recovery takes hold.

### Vaccination progress
- As of April 12:
  - 48 percent of the adult population in Chile has received at least one dose of a COVID-19 vaccine.
  - 31 percent has received two doses.
- Expectation:
  - If vaccination continues as planned, most of the adult population is expected to be fully inoculated by mid-2021.

### External conditions, terms of trade, and commodities
- Terms of trade are expected to be – on average – more than 10 percent higher than in 2020.
- Copper prices have peaked above USD4/lb, its highest since 2011.
- Sovereign debt placements continued in local and international markets at very favorable terms since mid-2020.

### Domestic demand, consumption, and investment
- Domestic demand expected to lead the recovery in 2021 and 2022.
- Consumption turnaround driven by government emergency support and pension fund withdrawals; projected contribution to real growth above 11 percent in 2021 from these impulses.
- Investment outlook:
  - Investment expected to bounce back supported by public infrastructure investment and large mining and energy projects.
  - Non-mining private investment remains slow due to high uncertainty and heavier corporate financial burdens.
- Current account:
  - Authorities expect the current account balance to turn into a moderate deficit in 2021 and beyond.

### Labor market and social measures
- Employment recovery:
  - Employment lags activity; labor-intensive sectors (commerce, services, transportation) have not fully recovered.
  - Inactivity remains high for women.
- Policy measures:
  - Government implemented a temporary hiring subsidy with special incentives for women and youth.
  - Emergency fiscal package exceeding 2 ppt of GDP approved in early April to support households in the second quarter.

### Monetary policy, exchange rate, and external buffers
- Inflation:
  - Chile has maintained inflation around 3 percent for the last two decades.
  - Headline and core inflation expected to converge to the 3 percent target by the end of 2022.
  - Headline inflation expected to post a transitory increase to nearly 4 percent in the coming months, then resume converging to 3 percent in the second half of the year.
  - Core inflation expected to fall to 2.6 percent by year-end, and then return to 3 percent.
- Monetary policy stance:
  - Monetary policy rate (MPR) at its technical lower bound of 0.5 percent.
  - The MPR will be held at its 0.5 percent minimum until the recovery takes hold and spreads to lagging expenditure components.
  - Unconventional measures have mobilized resources equivalent to 13 ppt of GDP and include:
    - A “funding-for-lending” facility (FCIC) operating with the public credit guarantee-scheme (FOGAPE).
    - Asset purchase programs.
    - An expanded collateral framework.
    - Temporary repo facilities to smooth financial impact of pension fund withdrawals.
- Exchange rate and FX policy:
  - Peso is free floating; flexible exchange rate used as shock absorber.
  - FX interventions have been rare; CBC did not intervene in 2020.
- External liquidity arrangements and reserve program:
  - Access to the Flexible Credit Line (FCL) is being treated as precautionary and temporary.
  - Participation in the FIMA Repo Facility of the NY Federal Reserve and a Bilateral Swap Agreement with the People’s Bank of China for three years.
  - January announcement: program of reserve accumulation – USD12 billion over fifteen months – to lift reserves to approximately 18 percent of GDP; aims to prepare for exit of the FCL in May 2022.

### Fiscal policy
- Pre-pandemic fiscal strength enabled a multi-year fiscal package amounting to 13 ppt of GDP.
- Fiscal outcomes and targets:
  - Headline deficit reached 7.4 ppt of GDP by the end of 2020.
  - Gross debt increased to 32.5 ppt of GDP.
  - Deficit expected to decline in 2021 as revenues recover and copper-related revenues rise.
  - Structural deficit expected to increase in 2021 reflecting accommodative fiscal stance.
  - Authorities plan to phase out extraordinary measures beyond 2021 and aim to stabilize gross debt below 45 ppt of GDP by 2025.
- Fiscal framework and reforms:
  - Government asked the CFA to prepare proposals to enhance the fiscal framework.
  - CFA recommendations include adoption of a dual rule on net public debt and the structural balance, formal escape clauses, and correction mechanisms.
  - Authorities requested a Fund review considering the Fiscal Transparency Code.
  - Administration passed a tax reform at the start of 2020 to increase revenues by 1 ppt of GDP.
  - A Commission of Experts reviewed tax deductions and exemptions; recommendations issued last January and are under consideration.

### Financial sector
- Regulatory flexibility during the pandemic:
  - Measures included easing the liquidity coverage ratio; transitory regime for provisions on deferred loans; improvements in capital treatment of public credit-guarantees; delay in phasing in additional capital requirements under Basel III.
- System soundness:
  - Financial system remains liquid, solvent and well capitalized.
  - Banks’ profitability hurt due to compressed interest margins and increased credit provisions; non-performing loans remain low.
  - Corporate credit accelerated strongly in mid-2020 but slowed since then.
  - Stress tests show banks remain adequately capitalized though buffers for severe stress have been reduced.
  - Liquidity in the banking sector remains high and well above regulatory requirements.
- Regulatory reform agenda:
  - In December 2020, CMF finalized issuing all new Basel III regulations; phasing-in schedule delayed by a year with completion planned in 2025.
  - Ongoing priorities include strengthening bank resolution framework, regulation of financial conglomerates, expanding scope of the public credit registry, implementing risk-based capital and enhanced supervision for insurance, and FinTech legislation to Congress.
  - Authorities await conclusions and recommendations of the ongoing FSAP.

### Social agenda and structural policies
- Pensions and social policy:
  - Government implemented a 50 percent increase in the minimum pension and a 34 percent increase in private pensions that receive a public supplement.
  - A new scheme tops up wages to guarantee a minimum labor income above the minimum wage.
  - Near-term priority: pass a pension reform that increases the contribution rate gradually from 10 to 16 percent (funded by the employer) and further extends coverage of the solidarity pillar.
  - Massive withdrawals of pension savings approved by Congress deepen deficiencies in the contributory pillar.
- Climate and sovereign debt instruments:
  - Chile has issued sovereign green bonds since 2019; proceeds primarily finance clean transportation projects and support Paris Agreement commitments.
- Constitutional reform process:
  - Deep reform to write a New Constitution began following a November 2019 agreement in Congress.
  - Institutional process progressing despite pandemic-related delays; expected to culminate with a ratification plebiscite in mid-2022.
  - Authorities anticipate uncertainty about content but expect the process to follow procedures and safeguards of the November 2019 constitutional amendment.

### Relations with other international financial institutions
- Mentioned institutions:
  - World Bank.
  - Inter-American Development Bank.

*Source: 1chlea2021001 - 8.10 of the Sustainable Development Goals (SDGs).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1chlea2021001.pdf_