New Cycle of Capital Flows: A view from Chile

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1 New Cycle of Capital Flows: A view from Chile Pablo García Silva Member of the Board Central Bank of Chile Banco Central de Reserva del Perú Reinventing Bretton Woods Committee 7 th B A Annual N C O Conference C E N T R A L D E C H I L E 18 DE JUNIO JULY DE

2 Agenda Disclaimer and introduction The heterogeneous response to global volatility The case of Chile: capital inflows and capital outflows Coming challenges 2

3 Introduction Volatility remains prevalent Volatility in global financial markets (1) (percent; index) 12 Tapering Talk VIX (2) VXY G7 (3) VXY EM (3) FOMC meeting MOVE (4) 36 Sovereign spread in selected economies (*) (puntos base) 8 Mediana EMBI Chile Ene.13 Ago.13 Mar.14 Nov.14 Jun.15 Nov.15 May.16 Ene.11 Oct.11 Jul.12 Abr.13 Ene.14 Oct.14 Jul.15 Abr.16 (1) Dotted lines correspond to 214 averages. (2) VIX: One month ahead S&P 5 implicit volatility. (3) VXY: Implicit exchange rate volatility w eighted by turnover. (3) VXY: Implicit exchange rate volatility w eighted by turnover. Source: Bloomberg. (*) Includes Brasil, Chile, China, Colombia, Philippines, India, Indonesia, Lithuania, Malaysia, Mexico, Peru, Poland, Russia, South Africa and Turkey. Shades areas correspond to maximum, 9th percentile, 75th percentile, median, 25th percentile, 1th percentile, and minimum. Source: Bloomberg. 3

4 Introduction Volatility remains prevalent Portfolio flow s to emerging economies (*) (miles de millones de dólares, suma móvil 12 meses) 8 Bonos Acciones May.13 May.14 May.15 May.16 Source: Central Bank of Chile, based on EPFR.

5 Agenda Disclaimer and introduction The heterogeneous response to global volatility The case of Chile: capital inflows and capital outflows Coming challenges 5

6 The heterogeneous response to global volatility Source: Bloomberg 6

7 The heterogeneous response to global volatility Source: Bloomberg 7

8 Taper Tantrum effects Exchange rate and local yield responses 2 months after Taper Talk. 1 Nominal exchange rate depreciation, % y =.189x.1479 R² = year local currency sovereign yield, bp. 8 Source: De Gregorio and García (216), from Bloomberg and Cáceres, Carriere Swallow and Gruss (216), IMF WP 16/18

9 Taper Tantrum Patterns of response Clustering by ER and Yield responses to four episodes of global volatility Exchange rate and local yield responses 2 months after Taper Talk. Nominal exchange rate depreciation, % HKG ZAF CHN IDN AUS HUN BRA CAN JPN COL CHE MYS IND CHL PHL MEX CZE POL PER EUR ROM SGP GBR THA TUR ISR RUS KOR NOR NZL SWE USA TWN year local currency sovereign yield, bp. 9 Source: De Gregorio and García (216), from Bloomberg and Cáceres, Carriere Swallow and Gruss (216), IMF WP 16/18

10 Hardly a link with financial integration Clustering by ER and Yield responses to four episodes of global volatility Foreign participation and local yield responses 2 months after Taper Talk. Foreign participation in local bond market, % HKG ZAF CHN IDN AUS HUN BRA CAN JPN COL CHE MYS IND CHL PHL MEX CZE POL PER EUR ROM SGP GBR THA TUR ISR RUS KOR NOR NZL SWE USA TWN year local currency sovereign yield, bp. 1 Sources: De Gregorio and García (216), from Bloomberg and Cáceres, Carriere Swallow and Gruss (216), IMF WP 16/18 Foreign Participation: Arslanap, S. and T. Tsuda (212), (214), IMF WP 12/284 and 14/39

11 But a strong link with fiscal fundamentals Clustering by ER and Yield responses to four episodes of global volatility Financial integration and local yield responses 2 months after Taper Talk. Sovereign Credit Rating HKG ZAF CHN IDN AUS HUN BRA CAN JPN COL CHE MYS IND CHL PHL MEX CZE POL PER EUR ROM SGP GBR THA TUR ISR RUS KOR NOR NZL SWE USA TWN year local currency sovereign yield, bp. Sources: 11 De Gregorio and García (216), from Bloomberg and Cáceres, Carriere Swallow and Gruss (216), IMF WP 16/18 Sovereign credit rating: TER index (1=AAA, 5=BB+)

12 Agenda Disclaimer and introduction The heterogeneous response to global volatility The case of Chile: capital inflows and capital outflows Coming challenges 12

13 Capital flows to Chile have followed global patterns Gross capital inflow s to Chile (1) (porcentaje del PIB) 2 FDI Other (2) Equity Portfolio FE Portfolio Total III 7 III 1 III 13 III 16 (1) Accumulated yearly flow. Does not include derivatives. (2)Includes comercial credit, loans, deposits and other liabilities. Source: Central Bank of Chile.

14 Local yields and monetary conditions have remained remarkably stable Long term local sovereign bond yields (1) (percent) Peso money market spreads (1) (2) (promedio móvil mensual, puntos base) 11 BCP 5 BCP 1 BCU 5 BCU Spread 9 days Spread 18 days Spread 36 days Ene.5 Abr.7 Ago.9 Nov.11 Mar.14 Jun.16 (1) BCU: Indexed, BCP: nominal. Source: Central Bank of Chile. -5 Feb.7 Dic.8 Nov.1 Sep.12 Ago.14 Jul.16 (1) Prime-swap interbank spread. (2) Horizontal lines show averages. Source: Central Bank of Chile. 14

15 Portfolio shifts by institutional investors have been remarkably countercyclical Capital Inflows and Pension Fund's Change in Foreing Holdings (6 month m.a., USD bill.) PF Δ Foreign Holdings EPFR Bond Inflows 15 3 EPFR Bond and Stock Inflows Financial Account of the Balance of Payments in Chile (accumulated 12 month, USD mill.) 25, 2, , 1, 5, 5, 1, 15, Jun-8 Ene-1 Ago-11 Mar-13 Oct-14 May-16 2, 25, Pension Funds Other Source: Central Bank of Chile 15

16 Structural patterns in hedging forex risk Forward USD notional position by agents (USD mill.) 4, 3, 2, 1, 1, 2, Jan.27 Jan.29 Jan.211 Jan.213 Jan.215 Institutional Investors Non Resident Other non bank Source: Central Bank of Chile 16

17 Agenda Disclaimer and introduction The heterogeneous response to global volatility The case of Chile: capital inflows and capital outflows Coming challenges 17

18 Coming challenges Volatility in asset prices and capital flows will remain prevalent Policy responses and frameworks should aim at smoothing the domestic impact of volatility Rules (contrained discretion) are better than (unconstrained) discretion: IT, fiscal rule, flexible exchange rate Thus a sound and transparent macroeconomic policy framework will remain of paramount importance 18

19 New Cycle of Capital Flows: A view from Chile Pablo García Silva Member of the Board Central Bank of Chile Banco Central de Reserva del Perú Reinventing Bretton Woods Committee 7 th B A Annual N C O Conference C E N T R A L D E C H I L E 18 DE JUNIO JULY DE

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