Chile obtains an 18.5 billion dollar line of credit from the IMF to face weather risks

(Bloomberg) – Chile has received an $18.5 billion flexible line of credit from the International Monetary Fund, bolstering the central bank’s ability to defend the beleaguered peso amid rising global risks and uncertainty Politics.

The two-year line of credit “will increase buffers and provide insurance against adverse scenarios,” the Washington-based lender said in a statement Monday. The line of credit will be processed on a preventive basis.

The central bank needs help. The peso fell to a record low last month amid a soaring current account deficit, triggering a $25 billion intervention program from the bank. While dollar sales boosted the peso, they also fueled a decline in foreign exchange reserves to $44.37 billion on August 15 from a high of $55 billion in late October.

The bank said in a separate statement on Monday that the loan facility would bring its total reserves to $70 billion. This should help reduce volatility ahead of the September 4 referendum on a new constitution. Fears that the charter could undermine growth and fuel a jump in fiscal spending was one reason for the peso’s weakness.

What Bloomberg Economics says

“The credit gives the central bank access to additional external financing if necessary to cover external financing needs. It does not increase central bank reserves unless disbursement is requested. In the short term, the announcement could help reduce weakening pressure on the currency and help limit any potential further weakening pressure after this weekend’s referendum.

— Felipe Hernandez, economist for Latin America

The IMF announcement comes less than four months after Chile agreed to a smaller $3.5 billion loan facility with the IMF, abandoning a previous credit line of $23.4 billion. The decision to reverse course and extend the credit line with the fund is due to “a marked increase in global risks”, including slowing growth, commodity price shocks and sharp tightening of global financial conditions, the IMF said.

Read more: Chile accepts reduction in IMF support after emergency pandemic easing

The Ministry of Finance declined to comment immediately. Central Bank President Rosanna Costa said last month that Chile has the necessary reserves and lines of credit to protect the peso.

(Adds the central bank’s estimate of foreign exchange buffers in the fourth paragraph.)

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