Yet the risk of further market correction remains high. 6. The global economy remains highly vulnerable and we cannot fully assess the extent of the crisis yet, due to three factors: uncertainty over the dynamics of the pandemic; high spillovers on several fronts, and weakened international and domestic institutions. 7. The Covid-19 poses major challenges to emerging-market economies (EME). The spread of the disease finds them with worse living conditions and less resources. EMEs remain heavily exposed to spillovers due to dependence on capital inflows, commodities and remittances. Economic informality, limited social safety nets, and shallow financial markets limit the effectiveness of shock absorbers and policy responses. 8. Yet not all EMEs are the same. Some face this crisis with stronger fundamentals, broader policy space and more credible and effective institutions. 9. Chile has been hit hard by the pandemic. The first cases emerged in early-March and contagion seemed to stabilize by end April, only to rapidly escalate over the last month and a half. The country is now in its 15th week of the pandemic, with 250.000 confirmed cases and active cases stabilizing again. While Chile currently stands 8th in number of cases in the world, mortality rates remain low and testing broad, thanks to its stronger health system compared with other EMEs. 10. The spread of contagion has led authorities to adjust their NPC strategies. This has included stricter and broader quarantines, which have grown from 20% of the population in April to 49% these days.
The MPR is likely to be held at its technical minimum over the next 24 months; FCIC funds are provided over a 4-year horizon, and even short-term liquidity facilities will remain in place until early 2021. 16. Still, some challenges remain on three fronts: a. Lending to large corporations. For a number of years, big corporations have been tapping international and domestic corporate bond markets. They faced the Covid-19 crisis with rather sizeable cash holdings from bond issuing in the first quarter and the drawdown of bank credit lines. Yet this liquidity will not last forever. Reactivating the corporate bond market is key to prevent largescale corporations from crowding out SMEs from access to bank lending. The government and the CMF have adjusted regulations to speed up bond issuing and the Central Bank asset purchase program is likely to trickle down to corporate bonds, but more government action may be needed in order to reduce risk over these assets. b. Expanding non-conventional tools. Right now, the Central Bank has limited reach in the asset market, since the Constitution forbids it from buying Treasury bonds even in the secondary market as well as nonfinancial corporate bonds. A Constitutional reform is making good progress in Congress to remove the first constraint. c. Recovering private consumption and investment. Consumer and firms’ expectations have plummeted in the last eight months, responding to the social crisis, first, and to the risk-off mood of the Covid-19 pandemic, later. Private consumption and Investment are expected to drop 6% and 12% this year.