Capital flows: Monitoring Risks to Financial Stability. Luis Opazo Financial Policy Division Central Bank of Chile

Transcription

1 Capital flows: Monitoring Risks to Financial Stability Luis Opazo Financial Policy Division Central Bank of Chile CENTRAL BANK OF CHILE NOVEMBER 211

2 Sources of Risk

3 Potential sources of risk In the global baseline scenario, the low interest rates in core economies and lower perceived relative risk in EMEs could lead to increased financial vulnerability due to: 1. Higher non resident demand pushing up the price of relatively illiquid local financial assets, eventually triggering deviations from fundamentals. Risks arise from the interaction of potential asset price corrections and the exposure of leveraged domestic agents to price corrections (housing prices and exchange rate are key concerns). 2. Increases in leverage, mismatches (term and currency) in financial intermediaries and/or end users of credit, raising concerns regarding higher credit risk, higher liquidity risk (specially for foreign currency rollover needs). 3

4 Potential sources of Risk In the current global context, a sequence of episodes of severe/very severe risk aversion by non resident investors is very likely, leading (potentially) to falling demand for local assets and hence high asset price volatility and difficulties accessing new sources of external finance. 3. This, and general equilibrium effects, make important to monitor vulnerabilities and markets broadly, and not only in those markets and agents directly connected to global markets (stock brokers, insurance companies, etc.) 4. That being said in this presentation I will concentrate on the vulnerabilities of banks and firms. 4

5 Banking Sector

6 External funding of banks increases, but still relatively small. Share of offshore bond financing increases (large banks) but share of short term financing still important. External funding of the banking system (millions of dollars, percent) Foreign liabilities of the banking system (2) (percent of private sector loans ) jul.8 jul.9 jul.1 jul.11 Foreign trade Bonds Other (1) % of assets UK Switzerland Turkey Australia Japan U.S. Mexico South Africa Peru South Korea Malaysia Israel Chile Brazil Indonesia Colombia Thailand 6 (1) Includes bank credit lines and syndicated loans. Source: Central Bank of Chile, SBIF and IMF. (2) Average from the first quarter of 28 to the third quarter 21.

7 Bank leverage has fallen due to significant capitalization Capital adequacy ratio (percent) Jul.6 Jul.7 Jul.8 Jul.9 Jul.1 Jul.11 7 Source: Central Bank of Chile, based on data from SBIF.

8 Funding liquidity risk Areas of concern Rising importance of foreign debt Most debt still short term Relatively high share of debt from European Banks Mitigators Relatively low by international standards Driven by substitution of pension fund investment But rising share of long term bonds issuance Aggregate liquidity position robust 28 episode shows capacity to substitute sources of funding Concentration has fallen a lot since July 8

9 Despite significant fluctuations in currency derivatives across agents, mismatches remain low Net position on foreign exchange derivatives by agent 3. (millions of dollars) 2 Foreign currency balance of the banking system (billions of dollars) Aug.7 Aug.8 Aug.9 Aug.1 Aug Oct.6 Oct.7 Oct.8 Oct.9 Oct.1 Oct.11 Non residents Pension funds Brokers Firms Net position Banking book liabilities Short derivatives (*) Fin. Inst. and banking book assets Long derivatives (*) Total mismatch 9 (*) Includes notional value of foreign currency forwards and swaps. Source: Central Bank of Chile and SBIF.

10 Corporate Sector

11 External debt has been an relevant source of firm financing 14 Sources of financing (contribution to annual growth) (1) Dec.5 Dec.6 Dec.7 Dec.8 Dec.9 Dec.1 Jun.11 Domestic bonds (2) External debt (3) Domestic bank loans 11 (1) Percentage points. (2) Corporate bonds (except Codelco), securitized with commercial papers and nonbank assets. (3) Includes foreign direct investment loans. Converted to pesos using the average exchange rate in the period from 22 to March 211. Source: Central Bank of Chile, based on data from Achef, SBIF, and SVS.

12 In the corporate sector most leverage and liquidity indicators have remained stable Total debt of corporate sector (1) (percent of GDP) Financial indicators of the corporate sector, 75th percentil (5) Average I II (times) (-) Indebtedness (6) (+) Interest coverage ratio (7) (+) Acid test (8) (percentage) (+) ROA (9) External bank debt External bond debt Nonfinancial ext. debt (2) Bank debt (3) Factoring and leasing Bonds (4) (5) Data from percentile 75 of registered firms in SVS, excluding mining sector. Consolidated financial statements. (6) Financial debt to equity. (7) Operating flow to financial expenses. (8) Current assets net of inventory to current liabilities. (9) Return on Assets. 12 (1) Total debt of nonfinancial firms. (2) FDI-related loans and commercial loans. (3) Commercial and foreign trade. (4) Corporate bonds (excluding Codelco), securitized bonds with nonbank underlying assets, and commercial papers. Sources: Central Bank of Chile, Achef, SBIF and SVS.

13 Currency mismatches remain stable and partial indicators for small firms do no suggest higher currency mismatches 3 Currency mismatches (percent of total assets) (1) III 8 III 9 III 1 III (1) Dollar liabilities less dollar assets, less the net derivatives position over total assets. Asset-weighted average of an average sample of 19 firms. Source: Central Bank of Chile, SVS and SBIF.

14 Main points 1. Banks: 1. Higher capital ratios 2. Liquidity risk could be an issue, but there are several mitigators 3. Currency mismatches close to zero 2. Corporate sector: 1. Debt is stable 2. Financial indicators are stable 3. Currency mismatches low and stable 4. Main challenge: most of the data is for listed companies (biggest), therefore we should get a better view from the medium and small firms (work on progress with internal revenue service) 14

15 Capital flows: Monitoring Risks to Financial Stability Luis Opazo Financial Policy Division Central Bank of Chile CENTRAL BANK OF CHILE NOVEMBER 211

16 A general look at capital inflows CENTRAL BANK OF CHILE NOVEMBER 211

17 Capital inflows and outflows to Chile (1) (percent of GDP) 3 High gross inflows and outflows after mid 29, 2 where institutional investors plays a key role 1 specially during III 7 III 8 III 9 III 1 III 11 III Gross FDI inflows Gross portfolio and debt inflows Gross outflow of institutional investors (2) Gross outflow of other sectors (3) Net flows (1) Quarterly flow. (2) Includes pension funds, mutual funds, and insurance companies. (3) Includes CENTRAL firms, BANK banks, OF and CHILE the central government. NOVEMBER 211 Source: Central Bank of Chile.

18 1 Relative size of portfolio inflows (1) (2) (percent) Gross portfolio flows are high relative to the New Zealand stock of debt this potential vulnerability is 8 mitigated because a large share of this inflows Chile are related to new Indonesia debt issuance Portfolio debt flows (4) Thailand Australia Mexico Peru Norway Sweden Emerging economies Colombia Philippines and South Korea Smaller advanced economies (1) Annual flow of 21. (2) gross portfolio inflows. (3) Divided by free-float market capitalization. (4) Divided by both local and international Source: Central Bank CENTRAL of Chile BANK public and IMF OF CHILE and private debt stock. NOVEMBER 211 Turkey Brazil Portfolio equity flows (3) Emerging economies Smaller advanced economies

19 1 Availability of Foreign Liquidity (1) (percent of GDP) Public and private sector foreign liquid 8 assets exceed rollover needs I.1 III.1 I.11 Unrestricted reserves Other official reserves CBCh Other central gov. Assets Banks Firms and individuals Institutional investors Residual ST external debt (1) GDP at constant real exchange rate (baseline index Mar.11 = 1). External liquidity includes short-term loans, currency and deposits, and portfolio investment. CENTRAL It BANK does not OF include CHILE derivative positions. The dotted line distinguishes NOVEMBER annual 211 from quarterly data. Source: Central Bank of Chile and SP.

20 Main points 1. High gross outflows and inflows after Institutional investors (PF) plays a key role they could amplify or mitigate capital inflows fluctuations 3. Gross portfolio debt inflows high relative to stock of debt 4. Some mitigating factors: FDI represents around 5% of capital inflows Macro liquidity needs are covered by reserves and government external assets 2

21 Local and foreign currency money markets Liquidity pressure in the peso money market (1) 35 (basis points) 8 Liquidity pressure in the dollar money market (2) (percent) Jan.8 Nov.8 Oct.9 Sep.1 May Jan.8 Sep.8 Jun.9 Feb.11 Nov.1 Aug.11 Spread 9 d Spread 18 d Spread 36 d No arbitrage band Onshore rate Actual credit line rate (1) Measured by the average prime-swap spread. (2) One-year maturity. The dots represent the maximum rates recorded in the financing of local banks that use external credit lines, Opazo and Ulloa (28). Source: Central Bank of Chile and SBIF.

22 Sovereign spread EMBI Global Chile (basis points) ene.6 oct.6 jul.7 abr.8 ene.9 oct.9 jul.1 abr Source: JP Morgan Chase.