The share of GDP in quarantined areas has moved from 11% to 52% in the same period. Page 1 of 3  Central Bank of Chile June 2020  11. This has intensified the impact on economic activity. GDP growth remained in positive ground in the first quarter, but economic activity declined 3.5% in March and 14.1% in April. Figures are likely to be worse for May and June in line with the broadening of lockdowns. Central Bank estimates from last week set the contraction of GDP between -5.5% and -7.5% in 2020, with the range broadened to take into account uncertainty around the persistence of constraints. 12. Assuming that constraints will begin to roll back in the third quarter, we estimate GDP to grow between 4.75% to 6.25% in 2021, and 3%-4% in 2022. 13. While the drop in GDP in 2020 will be the deepest in 35 years, prospects remain better than in other Latin American and Caribbean (LAC) countries. This owes to five factors: a. Structural factors are more favorable than in other EMEs. Chile has a deeper domestic financial market, where institutional investors play a major role; remittances have never been a source of foreign revenue, and the composition of foreign trade means that the terms of trade are improving rather than worsening. Even the informal sector, while bigger than in advanced economies (AE), at 30% of the labor force is smaller than it is in other LAC countries. b.
The exchange rate remains operative as a shock absorber due to the low FX exposure of households, government, financial institutions and the non-financial corporate sector. c. Foreign liabilities are appropriately matched by sound and liquid foreign assets. The latter include not only Central Bank reserves, but also sovereign wealth funds and foreign assets of domestic institutional investors. This has been recently enhanced by access to a USD 24 bn FCL from the IMF, membership of the Fed’s Temporary Foreign and International Monetary Authorities (FIMA) Repo Facility and a swap facility with the People’s Bank of China. d. Policy space is broader, thanks to sound management of fiscal, monetary and financial policy over many years. e. Institutions are stronger, including high credibility of the Central Bank and a stronger social safety net. 14. These favorable factors outweigh some shortcomings, most notably the effect of social unrest in the last quarter of 2019. In fact, in the last three months markets have fully reversed the relative erosion of Chilean asset prices at the end of last year. 15. So, how has the Central Bank used policy space? What challenges have emerged and how are these being resolved? a. The Central Bank has been largely proactive since November 2019. Over the last eight months we have cut the policy rate by 125 bp to its effective zero lower bound at 0.5% and have implemented a dozen measures to provide liquidity to markets and to foster lending to firms most affected by the lockdown. b.