International reserves are a policy tool that the Central Bank of Chile has at its disposal to achieve its main objectives: to ensure the stability of the currency and the normal functioning of internal and external payments. In floating exchange rate regimes like the one in Chile, international reserves are used to provide liquidity in foreign currency in order to meet the aforementioned objectives.

The Constitutional Organic Law establishes the legal requirements to be met by the Central Bank in terms of its organization, functions and duties, and generically regulates its powers with regard to the management of international reserves. For this reason, the Board establishes the strategic framework employed in the reserves management process through the approval of an Investment Policy, which is periodically reviewed.

The management of international reserves has changed over the years in relation to the development of financial markets, the introduction of new technologies and the international regulatory framework. Thus, through the mandate and powers conferred by the Constitutional Organic Law, the Board has been developing, in cooperation with the Bank’s management, a set of rules, procedures and practices that seek to ensure the best standards for the management of international reserves.
 


Chart 1: Referential Composition of Currencies in the Investment Portfolio

For reserves to work as an effective tool for dealing with the situations described in the first paragraph, their absolute and liquidity levels must be adequate. When this is achieved, international reserves may vary according to movements in prices and parities, but these changes will never alter the Bank’s ability to meet its commitments. Thus, the objectives of liquidity and capital preservation constitute two central axes in the formulation of the Bank’s Investment Policy, which enables the Board to assert, with a some degree of certainty, that it will always have at its disposal the amount of resources needed for the implementation of its policies, within a limited period of time and at a reasonable cost.

 

Portfolio Structure

The current referential structure of the investment portfolio is composed of two portfolios: (a) liquidity (45% of international reserves); and (b) diversification (55%). The international reserves portfolio is made up of the investment portfolio, the cash portfolio (balances held in current account by the Treasury, public companies and banking companies) and other assets (Special Drawing Rights of the International Monetary Fund, certified gold and others).
 

As of the closing of June 2019, the investment portfolio reached US$ 35,084.8 million and the cash portfolio reached US$ 898.6 million. Considering the sum of these portfolios and other assets, the Bank’s international reserves closed the second half of 2019 at US$ 38,710 million.


 Chart 2:  Evolution of International Reserves

On that date, 51.9% of the international reserves investment portfolio was held in instruments in US dollars, 11.0% in euros, 9.1% in Canadian dollars, 9.0% in Australian dollars, 8.0% in pounds sterling, 8.0% in renminbis of the People’s Republic of China and 3.0% in wons of South Korea. The portfolio’s dominant risk classification was AAA and the average duration was 6.8 years. 79.8% was invested in nominal government fixed income, 17.1% in inflation-indexed government fixed income and 3.1% in other assets.

The management of international reserves includes a program of external administrators, which empowers them to manage a fixed income portfolio of long-term global governance with a structure equivalent to that of the diversification portfolio managed internally. There are currently two external administrators, each of which manages approximately US$ 500 million.

Summary of the International Liquidity Spreadsheet - June 2020



 
                       
I. Official reserve assets and other foreign currency assets        65.483,4
                       
  A. Official reserve assets 1/       36.390,2
    (1) Foreign currency reserves (in convertible foreign currencies)       35.165,9
      (a)  Securities         34.360,5
          of which: issuer headquartered in reporting country         
      (b) Total currency and deposits with:       805,4
        (i) Other national central banks, BIS and IMF       0,7
        (ii) Banks headquartered in the reporting country        
          of which: located abroad        
        (iii) Banks headquartered outside the reporting country       804,7
          of which: located in the reporting country        
    (2) IMF reserve position       565,6
    (3) SDRs             644,6
    (4) Gold (including gold deposits and, if appropriate, gold swapped)       14,0
      - Volume in millions of fine troy ounces       (0,0079)
    (5) Other reserve assets (specify)       0,0
      - Financial derivatives        
      - Loans to nonbank nonresidents        
      - Other           0,0
        - Reciprocal credit agreements ALADI (assets)       0,0
  B. Other foreign currency assets (specify) 2/       29.093,2
      - Securities not included in official reserve assets       23.579,6
      - Deposits not included in official reserve assets       5.513,6
      - Loans not included in official reserve assets       0,0
      - Financial derivatives not included in official reserve assets       0,0
      - Gold not included in official reserve assets       0,0
      - Other           0,0