Chile, June 16, 2020 – The Chilean central bank (BCCh) announced a $16 billion expansion of its Conditional Financing Facility for Incremental Lending (FCIC) program and introduced an $8 billion special asset purchase program as the coronavirus pandemic continued to spread across Chile, raising the prospect of an extension of the lockdowns. These measures together represent 10% of GDP and will add toBCCh’s original $8 billion bond purchase program and previously approved credit lines under the FCIC program totaling $24 billion. The central bank’s new funding will complement a recent $12 billion emergency plan announced by Chile’s President Sebastián Piñera on 14 June.
The expansion of the FCIC will provide Chilean banks with low-cost funds that will support their ability to lend to clients despite the ongoing crisis. Meanwhile, the asset-purchase program will allow banks to convert bonds issued by the BCCh and other banks into cash, supporting liquidity needs related to large-scale interest or principal payment deferrals.
Access to financing will also support companies’ liquidity position, which has worsened significantly because of the crisis and ultimately will increase the future expected recovery for banks on loans to small and midsize enterprises (SMEs) and their employees. Although the additional facility targets higher-risk SME financing, the government’s executive branch earlier announced the expansion of the guarantees offered by the Small Entrepreneur Guarantee Fund (Fogape), which will mitigate asset risks and encourage the further use of the new funding.
The FCIC offers banks cheap financing at the policy rate, which the central bank on 16 June kept unchanged at 0.5%. This rate is well below the average funding rate for Chilean banks of about 2.4% as of March. The lower rate will support profitability at a time when we expect credit costs to remain high because of the higher risks posed by pandemic’s continued spread in Chile, which may extend lockdowns beyond second-quarter 2020. Banks’ loan-loss provisions have already increased to 1.7% of gross loans as of April 2020, from 1.3% in 2019.
Fogape guarantees cover 30%-80% of a loan, mitigating asset risks for banks and have contributed to a robust 6% expansion of banks’ commercial portfolios between April and February. The use of the original FCIC credit lines had already reached about $20 billion, or 83% of the original limit, indicating high demand by Chile’s largest banks. According to the Chilean Bankers Association (ABIF), banks have approved $8.8 billion of loans with a Fogape guarantee, of which $6.4 billion had been disbursed as of 12 June.
Credit Outlook: 22 June 2020. Pg. 8
Moodys
Atlantic Investors Service 