Bloomberg — The International Monetary Fund approved an $18.5 billion flexible credit line for Chile to help the Latin American nation’s economy weather a marked increase in global risks, just over a month after the peso slumped to a record low.
The two-year credit-line will “augment buffers and provide insurance against adverse scenarios,” the Washington-based lender said in a statement on Monday. The credit line will be treated as precautionary.
The announcement comes less than four months after Chile agreed to a smaller $3.5 billion loan facility with the IMF. The decision to reverse course and expand the credit line with the fund is due to the fact “the Chilean economy is confronting a marked increase in global risks,” including slowing growth, commodity price shocks and the sharp tightening of global financial conditions, the IMF said.
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 boost central bank reserves unless the disbursement is requested. In the short-term, the announcement may help reduce weakening pressure on the currency, and help limit any potential additional weakening pressure after the referendum this weekend.” -- Felipe Hernandez, Latin America Economist
The peso fell to a record low last month amid a ballooning current account deficit, triggering a $25 billion intervention program from the central bank, which has lifted the currency by about 17%. The sale of dollars by the bank has fueled a decline in foreign currency reserves to $44.37 billion on Aug. 15 from a high of $55 billion at the end of October.
The new credit line will boost foreign currency liquidity by 40%, Chile’s central bank said in a separate statement Monday.
Central bank President Rosanna Costa said last month that Chile has the necessary reserves and credit lines to protect the peso.
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