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Scope Of Policy Responses To COVID-19 Varies Among Latin America's Central Banks

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Scope Of Policy Responses To COVID-19 Varies Among Latin America's Central Banks

The COVID-19 outbreak, and its associated economic and financial implications, will push Latin America into a deeper recession than the 2008-2009 global financial crisis did. We forecast Latin America's GDP to contract just over 5% in 2020. However, we expect growth to bounce back to slightly more than 3% in 2021. The regional regulators in Latin America's six largest financial systems--Argentina , Brazil, Chile, Colombia, Mexico, and Peru--have been taking a raft of initiatives in order allow financial systems to cope with the impact from lockdown and social-distancing measures to contain COVID-19, while trying to reduce the damage on local economies and disruptions in the chain of payments. This is occurring while the regional governments have loosened monetary and fiscal policies. The size and effectiveness of the policy responses varies from country to country. Peru and Chile have approved fiscal stimulus packages (including sovereign guarantees) that amount to about 12% and 7% of each countries' GDP, respectively, while that of Brazil accounts for about 5%. However, the other countries' fiscal response has been smaller, such as Argentina's because of its economic and debt malaise, along with those of Colombia and Mexico. We expect stronger economic recoveries for 2021 in Chile and Peru, because their more effective virus containment policies and robust economic responses will help more rapidly repair the damage to labor market and investment dynamics. Conversely, we expect a weaker recovery in Mexico because its stimulus measures have been limited in scope, while its economy already stalled prior to the COVID19 pandemic. Brazil and Colombia fall in the middle of the pack.

A Closer Look At Each Country's Measures

The measures regulators in Latin America are deploying largely align with those in advanced economies. They include liquidity facilities for banks from the central banks, as well as looser liquidity requirements, such as lower deposit reserves requirements. Additional responses include deferred loan payments for individual and corporate borrowers, along with loosening the classification and provisioning requirements for these loans. Regulators have also permitted the use of some capital conservation buffers but have also suggested limited--or in some cases even restricted--the payments on dividends. In most Latin American countries, governments or public banks have recapitalized financial trusts created to provide loan guarantees to micro-, small-, and medium-size companies, and new trusts have been created in some countries to grant loans directly to these companies.

These measures aim to mitigate the downturn's impact on financial systems, but also to prevent a deeper economic contraction if banks were pull back from lending. Nonetheless, regulators shouldn't lose focus and continue monitoring the financial systems' stability, ensuring transparency and solvency. Banks should remain sufficiently capitalized, liquid, and profitable, despite the mentioned measures, in order to help bolster economic growth for coming years. This is because a fragile financial system could hinder the economy from recovering.

On the other hand, although most financial regulators in the region have provided similar sets of measures to counter the pandemic-induced economic shock, some have been more effective than others. For instance, we believe that Chile, Peru, and Brazil have come up with the most comprehensive and timely policies, followed by Colombia. Mexico has been lagging the other five countries in implementing such measures. Argentina's banking regulator largely focused on increasing lending to small- to mid-size enterprises (SMEs) and to lower-income borrowers.

The effectiveness of these measures is uncertain, because they will depend on implementation, particularly keeping credit flowing to segments that are more vulnerable to the pandemic.


Prior to the outbreak in Argentina, domestic banks enjoyed extremely high liquidity and adequate capitalization levels partly due to the absence of risk-weighted assets (RWAs) for exposures to the central bank securities (Leliqs, short-term central bank notes) and peso-denominated sovereign debts. However, the country is suffering from a prolonged economic contraction, which increased past-due loans sharply and eroded its coverage for past-due loans. In response, the regulator focused on increasing lending, which has been contracting in real terms for the past two years, to help companies and individuals cope with the impact of social-distancing measures and limit damage to an already extremely weak economy. This includes providing some incentives to banks in extending credit (lower reserves requirements on new loans and higher limits allow for proprietary positions in Leliqs varying on the share of new loans to SMEs). These special credit lines to the SME and healthcare segments have a maximum rate of 24%, compared with an expected inflation of 40% for 2020.

The government recapitalized a special trust, FoGar, which backs loans to SME at a total of ARP30 billion (about $430 million at the official exchange rate) but it's significantly lower than similar trusts in Peru or Chile. Additionally, the regulator loosened criteria for classifying past-due loans, established an automatic refinancing of credit card arrears, capped rates banks could charge, as well as deferred payments on late loans (excluding credit card debts).

Liquidity Loans moratorium Capital SME loan guarantees
Limits on financial institutions' holdings of LELIQs in proportion to special loans granted to micro-, small-, and medium-size enterprises at a 24% rate - MiPyme. BCRA - Issued March 19. Until September 2020, 60 additional days will be added to each borrower's classification category. BCRA - Issued March 19. Dividend payments suspended at least until June 30, 2020. BCRA - Issued March 19. Government injected AR30 billion in capital into Fondo de Garantías Argentino (FoGar), a public trust administrated by Banco de Inversion y Comercio Exterior, to provide credit guarantees to micro-, small-, and medium-size enterprises for up to ARP120 billion.
Reduction in reserves requirements on local currency deposits to grant MiPyme loans (for working capital lines, salary payments, and check discounts) as well as for loans to households under the program, Ahora 12. BCRA - Issued March 19 Unpaid loan balances due between April 1 and June 30 will be refinanced as a new installment at the end of the loan with only a compensatory rate (will not accrue punitive interest). BCRA - Issued April 1. Banks are obligated to lend to micro-, small-, and medium-size enterprises that normally don't have access to the banking system if the company has a FoGar guarantee. These loans will be funded with reduction in Leliqs and lower deposit reserve requirements. BCRA - Issued May 10.
Lower local currency deposit reserve requirements for MiPyme loans directed to salary payments as well as provisioning incentives. BCRA - Issued March 26 Unpaid balances of credit card installments between April 13 and April 30 will be automatically refinanced for a minimum of one year with a three-month grace period in nine monthly installments, equal and consecutive at a max rate of 43%. BCRA - Issued April 10.
Banks are obligated to lend to self-employed workers (with certain tax classification) at zero rate. The interest rate of 15% perceived by banks will by subsidized by FONDEP. This line will also provide lower reserve requirement on deposits. BCRA - Issued April 24.


Currently, Brazil has the highest number of reported COVID-19 cases and deaths in Latin America. However, mandatory lockdowns has been implemented in some states and cities. Nonetheless, the responses taken by the banking system regulator to the COVID-19 pandemic and economic impact of the lockdowns have been timely and in line with measures other countries have taken since mid-March. Some measures were implemented faster than others, but this is because Brazil has a more complex financial system with a higher number of banks than in other countries in the region. As a result, some measures required more time to be crafted. Additionally, Congress passed some regulatory changes, which also required time to do so.

Measures include liquidity support to banks, lower reserve requirements for time deposits, and credit lines from the central bank in local currency backed by debentures through a Special Temporary Liquidity Line (LTEL) or possibility of banks to issue DPGEs. Additionally, the central bank started to carry out repurchase agreements (repos) of Brazilian sovereign bonds denominated in dollars (global bonds). The central bank has also reduced the capital conservation buffer to 1.25% from 2.5% and deferred the return to the previous level until 2022. In addition, the central bank capped dividend payments at the legal minimum of 25% until September 2020.

Moreover, banks are allowed to renegotiate existing loans without providing additional provisions for such loans for the next six months. The government has also recently created the guarantee program, Programa Nacional de Apoio às Microempresas e Empresas de Pequeno Porte (Pronampe), which will provide up to 85% of loan guarantees to micro and small enterprises. The money can be used to pay employees' salaries or for working capital, and for utility bills. The program could extend a total of R$15.9 billion (approximately $3 billion) in credits.

Liquidity Loans moratorium Capital SME loan guarantees Monetary measures
Reserve requirement reduction to 25% from 31% for time deposits. BCB - March 16. On March 23, it was reduced to 17%. Flexibility to renegotiate loans without constituting additional provisions for the next six months. BCB - April 9. Capital conservation buffer requirement reduced to 1.25% from 2.5% with the gradual return in 2022. BCB - March 16. Government created the guarantee program, Programa Nacional de Apoio às Microempresas e Empresas de Pequeno Porte (Pronampe), which will provide up to 85% of guarantees to micro and small enterprises. May 19. Cut Selic rate to 3.75% (-50 bpt) on March 18. Cut Selic rate to 3% (-75 bpt), the lowest level in the country´s history. May 6.
Banks are allowed to issue DPGEs without pledging any assets. Individuals are allowed to buy thme (minimum amount of R$1 million. Limits: 1x the bank's total equity or up to R$2 billion). BCB - March 23. Deferred tax assets from tax losses created from over hedges for foreign investments won't be deducted for capital adequacy ratios. BCB - March 18.
BCB authorized to grant loans in local currency backed by debentures through a Special Temporary Liquidity Line (LTEL). In addition to the debentures, this line establishes that the BCB will reserve, as an additional guarantee, the institution’s reserve requirements in the same amount as that of the transaction. BCB - March 23. The central bank limited the dividends payments to the legal minimum of 25% until September 2020. It also restricted share buybacks. BCB - April 6.
BCB authorized to grant loan operations to financial institutions through LTELs, by means of direct acquisition, in the primary market, of LFs with financial assets or securities as collateral. BCB - April 2. Reduced the regulatory capital requirement for credit transactions with small- and medium-size companies. It also allows the restructuring of credit transactions for these firms . The risk weight is reduced from 100% to 85% and applies to new or restructured transactions until the end of 2020. BCB - April 9.
BCB started to carry out repurchase agreements (repos) of Brazilian sovereign bonds denominated in dollars (global bonds).
BCB--Banco Central fo Brasil.


Prior to the pandemic, Chile's banking system was absorbing the impact of massive social protests that started in late October 2019. At that time, the central bank of Chile (BCCh for its Spanish acronym) provided liquidity to banks. After the pandemic reached the country, BCCh and Comision para el Mercado Financiero (CMF) provided additional measures to the system. BCCh relaxed its liquidity rules for banks, while the CMF adjusted the provisions for deferred loans. Additionally, the Ministry of Finance increased sharply state guarantees in its FOGAPE program to $3 billion, injected capital into Banco Estado, and initiated legislation to provide a special line of credit to companies to finance working capital. Finally, BCCh created two credit line facilities: Conditional Credit Facility to Increase Loans (FCIC), and a complementary liquidity line (LCL), which disburses funding to banks so that they can grant financing to households and companies.

Liquidity Loans moratorium Capital SME loan guarantees Monetary measures
Flexibility on reserve requirements for banks and cooperatives, including the capacity to integrate them in any currency ($, EUR, JPY, CLP) and usage of excess of local currency requirements to be computed for the foreign currency requirements. BCCh - Issued March 18. Possibility to defer up to three installments on mortgages that will be rescheduled for the end of the loans, without extra provisioning requirements for clients current at the beginning of the sanitary emergency. CMF - Issued March 23. Delays on the implementation of Basel III capital requirements. Including the implementation of market and operational risk requirements. Systemic banks capital requirements. As well as, Pillar 3 requirements. The overall implementation of Basel III has been postpone to 2025 from 2024. CMF - Issued March 30. Sovereign capitalized the SME trust FOGAPE by $3 billion, which will provide guarantee to new loans to SMEs for up $24 billion at a 3.5% rate and 60%-85% guarantee (Covid-19 credit facility). Issued on April 21. Reduction of reference rate (TPM) by 75 bps to 1%. BCCH - March 16. Cut TPM to technical minimum of 0.50%, same levels as during the great financial crisis of 2008. BCCH - March 31.
New Conditional Financing Facility Fund (FCIC). loans granted under this facility can be for up to four years and the financial entities have to confer collaterals to the central bank, which include the central bank notes, sovereign and corporate bonds and more recently banks' commercial loans with good credit quality. This liquidity line could be up to 3% of the bank's loan portfolio (with possibility to increasing it to 12%). BBCh - Issued March 16. Maturities extension of up to six month on loans to SMEs and individuals, without extra provisioning requirements. CMF - Issued March 23. Exceptional extension of tenor for the sale of assets received in payment by 18 months to avoid the obligation to sale during this period of economic contraction. CMF - Issued March 23. Possibility of using surplus mortgage guarantees to guarantee loans to SMEs. CMF - Issued April 24.
Extension on the FCIC and activation of a complementary liquidity line (Línea de Crédito de Liquidez - (LCL). BCCh - Issued March 26. On a second stage, the regulator allowed maturities extensions and grace periods of up to six, four, and three months for mortgages, commercial and consumer loans, respectively, without additional provisions required. CMF - Issued April 2. Change in treatment of cash margins calls in bilateral transactions. In regular conditions, margin calls deposited in foreign banks have a 100% capital charge. The CMF now allows deducting the guarantee to the value of the derivative. CMF - Issued March 23.
Flexibility on liquidity measure requirements, including maintaining at 70% liquidity coverage ratio requirement and suspension for up to 90 days the limits on maturity mismatches (30 and 90 days ratios). March 26. On a third stage, the regulator allowed maturities extensions and grace periods of up to six months for commercial (versus four months, previously), without additional provisions required. CMF - Issued April 27. A proportion of the guarantees granted by the Chilean Treasury, CORFO, and the FOGAPE, that cover the loans granted by the banks will be allowed to be computed as part of the voluntary provisioning part of regulatory capital. CMF - Issued April 20.
The central bank increased the limit to purchase banks' bonds up to the equivalent of $8 billion. BCCh - March 31.


Colombia's central bank provided new credit facilities for financial institutions, including expansion of the liquidity overnight and long-term facilities in terms of amounts, duration, applicable securities and eligible counterparties, as well as reduced reserve requirements on savings accounts and time deposits. The regulator has allowed banks to reschedule loans without changing the loan classification and to use their countercyclical loan-loss provisions.

Additionally, in line with other countries, the government increased the credit guarantees--through Fondo Nacional de Garantias (FNG)--to SMEs to 90%-80%, with new credit lines for payroll and loan payments for SMEs for a total of COP16 billion (of which COP12 billion is directed to salary payments, and the remainder for working capital and self-employed workers).

Liquidity Loans moratorium Capital SME loan guarantees Monetary measures
An expansion of the liquidity overnight and long-term facilities in terms of amounts, duration, applicable securities and eligible counterparties. Banrep - March 18. SFC has allowed supervised entities to reschedule all loans that were less than 30 days overdue on Feb. 29, 2020, without changing the loan classification and financial entities can't charge any penalties for borrowers. SFC - March 17. Countercyclical provisions have been released. SFC - March 17. Government to 90%-80% guarantee provided by Fondo Nacional de Garantias (FNG). New credit lines for payroll and loan payments for SMEs trough the FNG. Cut policy rate to 3.75% from 4.25%. Banrep - March 30. Cut policy rate to 3.25% from 3.75%. Banrep - May 4. Cut policy rate to 2.75%. Banrep - June 1.
A COP10 trillion program to purchase securities issued by credit institutions and TES purchases in the secondary market. Banrep - March 23.
Reserve requirements lowered for savings and checking accounts from 11% to 8%; and for fixed term (less than 18 months) savings accounts, from 4.5% to 3.5%. Banrep - April 14.
Central Bank extended repurchase agreement to certain loan portfolio as underling assets for a total of COP 6.3 billion. Banrep - May 8.


In addition to the pandemic-induced economic crisis, Mexico was hit by the global selloff in financial markets as investor confidence and oil prices plunged. However, the country's policy response has been relatively weak, with fiscal stimulus so far amounting to about 1% of GDP, mostly focused on direct transfers and limited support to SMEs.

Furthermore, the country held off on lockdowns because the executive branch initially resisted social-distancing measures, which risks prolonging the duration of the health and economic crisis. On May 14, the government announced plans to begin the reopening of economy through a green-yellow-orange-red color system for individual states (e.g. states with most active cases are red and would remain under a quarantine).

The measures that the central bank of Mexico (Banxico) and banking regulator (Comision Nacional Bancaria y de Valores – CNBV) adopted are similar to those of other financial systems in the region, with liquidity facilities from the central bank as well as reductions on deposit reserve requirements. In addition, although banks are allowed to use their regulatory capital buffer, the regulator recommended the suspension of dividend payments and share buybacks.

Liquidity Loans moratorium Capital SME loans guarantees Monetary measures
Provide dollar liquidity (via auctions) to banks by drawing on the $60 billion swap line with the Fed. Banxico - March. Debt moratorium program is applicable to consumer, mortgage, and commercial borrowers whose income and debt payment capacity has been affected by the coronavirus pandemic. These restructured loans won’t be considered nonperforming loans and would not be required to be provisioned. CNBV - March 25. Banks can use their regulatory capital buffer. Banks can't use their regulatory capital buffer to distribute dividends, or pay bonus to emloyees. CNBV - April 8. The central bank has opened financing facilities for commercial and development banks (MXN350 billion) to allow them to channel resources to micro-, small- and medium-size enterprises and individuals affected by the COVID-19 pandemic. Banxico - April 21. The central bank has cut rates by 150 basis points since the pandemic break, from March (7.00%) until May 2020 (5.50%). Banxico - May 14.
Assets that, as of Feb. 28, 2020, were classified as Eligible Liquid Assets, will remain even if after this date they would not be eligible anymore, during the exception period (until August 31, 2020). CNBV - April 8. Recommended suspension of dividend payments and share buybacks. CNBV - March 30.
Reduce the mandatory regulatory deposit (DRM – depósito de regulación monetaria) held by commercial and development banks with Banxico (by MXN50 billion, or about 15% of the current stock). Banxico - April 21.
Banxico has substantially expanded its liquidity facilities making them more affordable, accepting a broader range of collateral and expanding eligible institutions, while establishing a corporate securities repo facility to support the corporate bond market. Banxico - April 21.
Credit will be provided in exchange for conventional repo collateral as well as banks’ corporate loans, which would free up liquidity in the banks’ balance sheets currently used especially by corporate credit lines for new credit extension. Banxico - April 21.


Peru was among the first countries in the region to put in place stringent social-distancing measures despite a relatively low number of cases at the time (although they have been escalating until recently and still haven't plateaued). The government acknowledges that the healthcare system is in a precarious condition due to lack of investments in the past. The government has passed a stimulus package equivalent to 12% of GDP (PEN90 billion) that includes increased healthcare spending, fiscal measures, and loan guarantees.

Additionally, the central bank and banking regulator (Superintendencia de Banco y Seguros) provided credit lines, and capital and lending to micro firms and SMEs. The government created a new program to provide guarantees for new working capital loans, Reactiva Peru, for a total of PEN30 billion (about $8 billion). This program is among the largest of its kind in Peru's history and is equivalent to 4% of GDP. Additionally, the government created a special trust to bank loans to micro and small enterprises (Fondo de Apoyo Empresarial a la MYPE) for PEN300 million (about $90 million), which the development bank--Corporación Financiera de Desarrollo S.A.--will administer.

Liquidity Loans moratorium Capital SME loan guarantees Monetary measures
Temporary inapplicability of liquidity coverage ratios limits both in local and in foreign currency. SBS - March 16. Banks may modify terms of loans without arrears to households and enterprises without this constituting a refinancing, with a max loan extention of up to six month. SBS - Issued March 16. Rescheduling of consumer and mortgages loans don't increase risk weight requirements for those loans. SBS - March 26. Sovereign created a new trust 'Fondo de Apoyo Empresarial a la MYPE (FAE-MYPE)' for a total of PEN300 million (about $90 million) to provide loans guarantees to micro and small enterprises. MEF - March 20. - FAE- MYPE was later amended to assign COFIDE as its administrator. MEF - April 27 Cut policy rate by 100 bps to 1.25%. BCRP - March 19. Cut policy rate by 100 bps to 0.25%, a lowest level in Peru's history. BCRP - April 20.
Request banks to identify loan portfolio that could be used as collateral in repos operations with BCRP. SBS - March 23. Reactiva Peru loans will have 0% provisioning requirements. SBS - April 27. Use of countercyclical capital buffer; lowering of required capitalization ratios. SBS - March 26. Sovereign created a new trust 'Reactiva Perú' for a total of PEN30 billion (about $8 billion) to provide loan guarantees. The guarantee will cover 80%-98%. Loans should be have maturities of up to 36 months (including a grace period of up to 12 months). Requests for this guarantee will be available until June 30, 2020. MEF - April 6.
Reduction of reserve requirements for deposits in local and foreign currency in addition to other measures such as reduction on reserves requirements for loans in foreign currency. BCRP - March 26. FAE-MYPE loans will have 0% provisioning requirements and will also have 0% risk weight for the credit risk requirements. SBS - April 27. Request banks to limit dividend payouts and to capitalize 100% of 2019 results. SBS - March 26.
Increase the assets accepted as collateral for operations of liquidity injections as well as amply the entities that have this facility available. BCRP - April 4. One-year extension on the authorization to use standard method on operations capital requirement. SBS March 26.

How Effective Are These Measures So Far?

As of mid-May, Argentina's central bank reported the total amount of special loans to SME that banks have granted was ARP217.8 trillion (about 8% of total loans). Companies have used 27% of this amount for salary payments, 17% discount of documents (paychecks), and the remainder for working capital. As we previously mentioned, banks have to originate these loans in order to maintain a proprietary position in Leliqs above the minimum regulatory proportion computed as deposit reserve requirements. In addition, special trust, FoGar, has provided approved about ARP92.046 million in SME loans. Moreover, we have seen that the 60-day extension on each past-due loan has already impacted the nonperforming loans rate (NPLs) in the system. As of March 2020, NPLs declined to 5.3% from 6.1% at the end of February.

In Brazil, the banking industry association is monitoring the granting of new loans and refinancing existing ones. In this sense, between March 16 and May 8, a total of R$540.3 billion in loans was disbursed. In addition, banks have deferred payments on 8.5 million existing loans between 60 and 180 days, totaling R$468.2 billion (approximately 14% of total loans). These factors are bringing immediate financial relief to businesses and individual borrowers. Additionally, during the first quarter of 2020, provisions among the country's largest banks increased 50% over the prior quarter amid the deteriorating credit conditions in Brazil, because of the COVID-19 pandemic and the pernicious economic impact from its containment measures. This figure was the second largest these banks have posted in a single quarter since 2008.

Chile's CMF has been disclosing data on loan rescheduling mechanisms, on an individual lender (banks, cooperatives, and credit card providers) and on a consolidated basis. As of May 22, the support measures for deferred loans were applied to 16% of consumer loans, 34% of mortgages, and 34% of the commercial loans (group portfolio). The amount of loan deferrals has varied among each lender. In addition, as of the same date, banks have provided CLP388.7 billion (about $475 million) in special loans and have approved additional ones totaling CLP683.7 billion. As of May 11, the FCIC program injected nearly $14 billion into the banking system, equivalent to 9% of total consumer and commercial loans at the end of February.

Finally, despite debt-relief measures, most Chilean banks have increased provisions to prepare for bad loans, with cost of risk increasing to 1.7% over the first quarter of 2020 from 1.1% for the same period a year before.

Colombia's banking regulator has also been reporting the status of various measures taken on a weekly basis but mainly on consolidated basis. As of May 28, COP8.32 trillion in loans with FNG guarantees have been approved and COP2.46 trillion disbursed. These loans have been extended for salary payments.

As of May 27, loan rescheduling and grace periods for payments have benefited 10 million borrowers with approximately COP198.2 trillion in loans, about 38% of total loan portfolio. The rescheduling have mainly occurred in the commercial and consumer portfolios, and to a lesser extent, in microfinance and mortgages.

Finally, as of May 28, the Reactiva Peru program has provided PEN27.6 billion in credits to 22 financials entities (nine banks, two finance companies, and 11 credit unions), which represents 92% of the total program committed by the government. Of these funds, PEN18.8 billion has already been disbursed by the financial institutions.

This report does not constitute a rating action.

Primary Credit Analyst:Maria M Cangueiro, Buenos Aires + 54 11 4891 2149;
Secondary Contacts:Cynthia Cohen Freue, Buenos Aires +54 (11) 4891-2161;
Alfredo E Calvo, Mexico City (52) 55-5081-4436;

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