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Chile in the Wake of COVID-19: Adjustments to the Financing Strategy and Commitment to Climate Action

The COVID-19 pandemic roiled financial markets, triggering important capital outflows in emerging markets. This increased the financing challenges at a time when countries need to roll out unprecedented emergency and recovery plans. Many believe this massive fiscal effort is also a unique opportunity to realign economies with climate goals and achieve the low carbon transition. Andres Perez M. is Head of Advisors & International Finance at the Ministry of Finance of Chile. He explained to us how Chile has adapted its sovereign debt strategy to face those intertwined challenges.

How has Chile adapted its debt management strategy when the pandemic struck, and then to support the economic recovery?

The COVID-19 shock has had an unprecedented impact on the global economy. As such, in Chile we implemented a large, transitory, fiscal policy package that was initially designed to support households and firms, ensure the credit channel continued to operate effectively, and provide the necessary resources for the public health sector. Since then, we have recalibrated fiscal policy towards measures that support the recovery, including subsidies to support job retention and creation, as well as state-guarantees for commercial loans for refinancing, investment, and working capital.

Naturally, these adjustments posed significant challenges on the financing side. First, Congress approved an increase in financing limits for the 2020 calendar year from USD9 billion up to USD13 billion. Separately, we shortened the maturity structure of the planned issuances, issuing bills (ranging in maturities from 3 months to a year) for the first time, and issuing medium-term bonds maturing only up to a five-year horizon. In order to increase the flexibility of the sovereign to changing market conditions, in the context of heightened COVID-19 related uncertainty, we decided to publish issuance calendars on a quarterly basis, rather than an annual calendar as had been done in the past.

We also continued to build on our efforts to diversify our investor base, by issuing local currency bonds through a book-building process, facilitating the participation of local and international investors. Moreover, we continued to issue green bonds, and further broadened the spectrum of debt instruments by also issuing social bonds, all in line with international best practice. Separately, we have stepped up our marketing activities with global investors, with the objective of further broadening our investor base. Finally, we continued to implement liability management operations throughout the year; in this dimension, in order to facilitate the participation of non-residents in these operations, we adjusted the procedures in order to facilitate their participation via Euroclear.

Chile has become one of the biggest sovereign Green Bond issuers. What was the motivation behind those issuances, and how did you engage with investors on this specific topic to ensure it was a success?

Chile has a strong commitment on climate action. The Ministry of Finance has led several initiatives on green finance, becoming the first sovereign in the Americas to issue green bonds, co-chairing the Coalition of Finance Ministers for Climate Action, publishing our Financial Strategy on Climate Change, among others.

Since the first issuance in June-2019, we have issued roughly USD7.7 billion in green bonds. The main motivation to issue green bonds was to demonstrate our commitment on climate action, while at the same time further diversify our investor base. We are proud to mention that these issuances broke with conventional wisdom, as they demonstrated that one can take concrete steps on climate action and also achieve important financial gains, both in terms of low yields and investor diversification.

We have also stepped up our efforts to engage with investors. First, we had special investor roadshows in Europe, Asia, and North America to describe our Green Bond Framework and present Chile’s overall credentials and efforts related to climate action. We have complemented these efforts with documentation with answers to frequently answered questions, presentations that describe the certified project portfolios and issuance results. In line with international best practice, we published our Green Bond Impact and Allocation Report last year, and are set to publish a new version in the next few months. Updates on our efforts are also disseminated in the investor community with regular newsletters sent out to our investor base. Finally, we actively give interviews to the local and regional financial press, participate in seminars and panels to disseminate knowledge, foster greater visibility of green bonds, and contribute towards a faster development of the green asset class.

Do you think sovereigns could issue more sophisticated ESG instruments such as ESG-linked bonds, whose payoffs are contingent on an ESG performance indicator?

While the global economy continues to struggle with the effects of the pandemic, financing needs remain large. In addition, investor demand for ESG instruments is on the rise. In this context, issuers could benefit from demonstrating their commitment on a given line of action with an issuance of an ESG instrument. However, since this is still a growing market in which standards are still not set in stone, it is important to ensure that issuers continue to transparently and regularly report on their commitments related to issued thematic bonds. Over time, investors are likely to require more, not less, information on a more frequent basis. In our case, we recently published our Sustainable Bond Framework, that builds on our previous Green Bond Framework, and provides guidance on the issuance of sustainable, social, and green bonds. As such, we believe it is important to ensure market participants remain confident in the use of proceeds implied in the issuance of thematic bonds. We take our commitments very seriously. In this context, in line with our commitments in the Green Bond Framework, last year we published the 2019 Green Bonds Allocation and Environmental Impact Report, the first annual report related to the 2019 Green Bond issuances. The report provides information to investors and the general public on the use of proceeds and impact of the green bond issuances, and was satisfactorily reviewed by a specialized international auditor. In addition, in line with the Climate Bonds Initiative (CBI) certification commitments, post-issuance verification of the issuance was also met satisfactorily, demonstrating alignment of the projects with CBI standards.

This first report contains detailed information on the progress in the allocation of the resources of the CBI certified 2019 portfolio and its corresponding environmental impact. Between 2018 and the end of 2019, a total of US$ 589 million had been allocated, equivalent to 24.8% of the total US$ 2,373 million in green bonds issued that year. We estimate that these resources will be fully allocated in the certified project portfolio over a five-year horizon since the year of the issuances. A five-year period is estimated due to the nature of the projects in the portfolio. We are set to update the report in the coming months with data through 2020.