Transcript Financial sector structure

Redemption Through Indexation:
The Chilean Experience
Rodrigo Valdés
Central Bank of Chile
IADB Conference - November 2002
Agenda
• Conceptual issues
• A bit of history
• Financial sector structure
• Moving forward
• A few lessons
Agenda
• Conceptual issues
• A bit of history
• Financial sector structure
• Moving forward
• A few lessons
• Indexation can be thought of as a compromise
 protects against nominal surprises (like FX denominated
debt)
 but allows for some flexibility (less than domestic currency
denominated debt, more than FX denominated)
• May enhance credibility, for it removes one source of
inflationary bias
• “Pillar A” for developing a long term debt market if there
is no reputation (“Pillar B”: demand or financial saving)
• Indexation is not a substitute for fiscal responsibility
Agenda
• Conceptual issues
• A bit of history
• Financial sector structure
• Moving forward
• A few lessons
• 1960’s
– Financially repressed system (caps to interest rates)
– CAR and UF (indexing unit) created to offer positive real
interest rates. Originally quarterly adjustments (with inflation)
• 1972-76
– Average annual inflation reached 312%
• 1977
– UF adjustments become daily with the daily-equivalent of
last months’ CPI inflation
– Many UF denominated financial transactions allowed
UF and Real Exchange Rate
(index, average 1990=100)
140
130
120
110
100
90
80
70
60
50
40
Dollars / UF
RER
77
82
87
92
97
02
Gross and Net Consolidated Public Debt
(% of GDP)
(Gross)
(Net)
80
50
60
40
Net
30
40
20
20
10
Gross
0
0
89
90
91
92
93
94
95 96
97
98
99
00
01
02
Agenda
• Conceptual issues
• A bit of history
• Financial sector structure
• Moving forward
• A few lessons
Domestic Public Debt Structure in 2002
UF denominated
• 17% of GDP
• Average maturity: 4.3 years
• Interest rates: 3.2 for BCU-5 and 4.8 for BCU-20
Peso denominated
• 8% of GDP
• Average maturity: 0.5 year
• Interest rates: 4.4 for BCP-2 and 6.3 for BCP-5
Dollar indexed
• 8% of GDP
• Average maturity: 1.8 years
• Interest rates: 3.2 for BCD-2 and 4.6 for BCD-5
Bank Lending to the Private Sector
(% of GDP)
65
60
55
50
45
40
35
30
91
92
93
94
95
96
97
98
99
00
01
02
(Nov.)
Bank Lending Structure
(% of GDP)
60
50
UF < one year
40
pesos < one year
pesos > one year
30
20
UF > one year
10
0
99
00
01
02
Stock of Corporate Bonds in Domestic Market
(% of GDP)
14
12
10
8
6
4
2
0
93
94
95
96
97
98
99
00
01
02
Corporate UF Debt Placements
(total amount and average term)
35
30
25
20
15
10
5
0
92
93
94
95
96
97
98
99
00
01
Typical Mortgage Contract in Chile
• 20 year loan for 75% of property value (5 to 25 years)
• UF indexed
• Monthly
• Interest rate in 2002Q3 = 6.5%
• Financing: institutional investors and banks
• Intermediaries: banks (give warranty and administer)
• Prepayment allowed at contracted interest rate
Institutional Investors Assets
(% GDP)
90
Mutual Funds
80
70
60
Insurance C.
50
40
30
20
Pension Funds
10
0
1994
1995
1996
1997
1998
1999
2000
2001
Agenda
• Conceptual issues
• A bit of history
• Financial sector structure
• Moving forward
• A few lessons
• Missing part: risk sharing from foreigners
• UF is not easily accepted internationally
– inflation accounting risk
– lack of successful experiences
– some money illusion (like higher carry)
• Nominalization and internationalization of the Peso
– monetary policy interest rate (overnight) a year ago
– short-end of the yield curve (5 years)
– full capital account opening and friendlier tax environment for
capital movements
• Use strong anti-inflation credibility to attract investors
2 and 5 Year Expected Inflation
(%)
4.5
4.0
Five years
3.5
survey
3.0
2.5
2.0
1.5
Mar
Two years
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Agenda
• Conceptual issues
• A bit of history
• Financial sector structure
• Moving forward
• A few lessons
• CPI indexation is way for redemption. Avoid FX
denominated domestic financial system.
• But it’s not easy to replicate. It needs...
– a long time to get used to it (35 years in Chile!)
– high inflation experience to value it
– demand side (institutional investors)
• Has some negative collateral effects: prevalent indexation
in other markets
• Imperfect substitute of full redemption:
– there is no risk sharing with the rest of the world
– but it is a way to start
• Challenge: issue sovereign debt in pesos to foreigners. Big
question mark: corporate debt?
Redemption Through Indexation:
The Chilean Experience
Rodrigo Valdés
Central Bank of Chile
IADB Conference - November 2002