Alarms in the financial market – La Tercera

By Pablo Paniagua, Senior Researcher at the Foundation for Progress

A few days ago, the president of the Central Bank, Mario Marcel, acknowledged that “we have a structural change in the capital market, as a result of retirement savings withdrawals.” This means that the financial market has undergone serious changes in its structure and in its financing dynamics, as a result of the string of withdrawals by the AFPs. Well, last week, the Central Bank (BC) presented the latest Financial Stability Report (IEF), which thoroughly analyzed the negative effects that pension withdrawals have had on the financial system. What is worrying is that the BC issued a series of warnings and alarms regarding the state of our financial system and that they affect the quality of life and the possibility of progress for many Chileans.

First, the IEF shows that the negative structural changes that the system is undergoing respond exclusively to internal or endogenous dynamics in the country and that this deterioration occurs in the absence of a crisis abroad. In other words, we have generated this disaster in the financial system with our demagoguery and political short-termism. Second, the report warns that the prices of financial assets have undergone significant variations – high instability in price formation – and have suffered from high volatility in recent months. All this, as a result of the strong liquidity tensions and shortages in the sovereign bond market. Third, medium and long-term interest rates have risen significantly, with a special emphasis on long-term rates, affecting mortgage loans and large investments (which are more sensitive to rate hikes).

From the point of view of macroeconomic stability, the IEF makes it clear that, due to the strong pressure of the public debt and the deterioration of our fiscal health, the greater political and institutional uncertainty and the withdrawals of pension funds, it has generated greater fear in the capital market. The political crisis has driven these capitals out of the country, towards Miami and other financial markets more stable than ours. In fact, capital outflows from Chile have been reported to have skyrocketed. The expatriation of resources in the last 24 months (ended August 2021) totaled US $ 50 billion, the highest levels of capital flight in recent decades. The same BC has recognized this expatriation of capital as something historical. The possible deepening of this flight of capital, a product of the New Constitution and the next presidential elections, may further exacerbate all those negative structural changes in our financial system.

These alarm signals in the financial market should be cause for concern for the future of the country, since these markets are now signaling the probable forecasts regarding the future. Chicago Nobel Laureate in Economics Eugene Fama has noted that financial markets are valuable predictors as they look ahead (they are forward-looking): Your ratings today reflect available information and expectations for the future. Simply put, capital markets are the fastest and most reliable red flags we have today to get some light on tomorrow. So if those markets are sounding big warning alarms, this should be of great concern.

Furthermore, structural changes in the capital market have a negative impact on the financing capacity and economic dynamism of both individuals and companies. Well, as Joseph Schumpeter, one of the most famous economists of the twentieth century, will point out, the capitalist system and the virtuous process of creative destruction are based, not on the accumulation of capital, but rather on the banking and credit system. capital that is capable of introducing liquidity and credits to promote the business creation process. Unfortunately, this is precisely what in Chile we have been destroying through withdrawals, capital flight and all this change in the structure of the financial market.

All in all, these changes have had negative effects on the financing capacity of innumerable investment projects, such as infrastructure, machinery and construction projects, as well as having a negative impact on the possibilities of obtaining mortgage loans. In fact, according to INE data, a 47% drop in building permits for new works has been reported, which indicates an accelerated postponement of investments. Also, the dream of home ownership is becoming less and less viable in the country due to rate hikes. A recent study by Enlace Inmobiliario has shown a sharp rise in rejections of mortgage loan pre-approvals, as a result of the strong increases in interest rates and the reduction in payment terms. Those most affected by this situation have been the young and the emerging middle class.

In conclusion, on a structural and financial system level, we have passed the backhoe to it, deeply damaging it and backtracking its sophistication. In just a few months we have pushed back, the equivalent of a decade of work, the sophistication of our capital market. Repairing such structural changes is going to take years or perhaps decades hard work. Regarding the possibility of being able to reverse these changes in the financial system, the president of the BC was quite pessimistic: “the fact that there has been this outflow of capital from local investors is a phenomenon that will not be easy to reverse. Once that mechanism is opened… it is not very easy to reverse it ”. It is now up to the presidential candidates to listen to the alarms coming from the capital markets.

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Alarms in the financial market – La Tercera