The Mandate

International reserves are liquid foreign currency assets held by the Central Bank to support its monetary and foreign exchange policies. They are one of the instruments available to the Bank to meet its permanent objective of safeguarding the stability of the currency and the normal operation of the internal and external payment systems.

The management of these reserves aims to guarantee efficient access to international liquidity and to safeguard the financial equity of the Bank. To achieve this, the Bank acts according to the legal framework stipulated in its Basic Constitutional Act and a set of internal practices and policies that are in line with international recommendations.

The objectives of the investment policy are as follows:

1. (i) To hold the reserves in highly liquid instruments, which can be called in the briefest period possible without incurring significant transaction costs;
2. (ii) To invest in instruments that present limited financial risks, in order to limit the risk of incurring capital losses;
3. (iii) To minimize the volatility of the value of the Bank’s equity as a result of changes in the exchange rates of the investment currencies vis-à-vis the peso, so as to reduce the negative effects on the Bank’s balance sheet; and
4. (iv) To reduce the cost of holding the reserves at the margin, which is achieved through the inclusion of a portfolio oriented toward obtaining higher absolute returns in the long run.

Since 2007, at the request of the Finance Minister, the Bank has acted as fiscal agent in the management of all or part of the fiscal resources held in the Economic and Social Stabilization Fund (ESSF) and the Pension Reserve Fund (PRF).

As of April 2011, the Bank also manages the Strategic Contingency Fund (SCF) in the name of the General Treasury.¹/

^1/ Details on the management of the SCF are not included in this report.

The Bank submits daily, monthly, quarterly, and annual reports to the corresponding government authorities, in accordance with the stipulations of the respective Fiscal Agency Decrees and the corresponding performance guidelines. These reports include measures of performance, risk, and compliance with the specifications in the current performance guidelines.

6.1 Performance in 2018

6.1.1 International Reserve Management

As of 31 December, the investment portfolio stood at US$34.8686 billion, while the cash portfolio held US$3.8642 billion. Taking the sum of these two portfolios plus other assets, total international reserves closed the year at US$39.8606 billion.

This balance was US$877.9 million higher than at year-end 2017. The increase is explained by a growth of US$987.2 million in the cash portfolio and US$93.1 million in the other assets portfolio, which was partially offset by a reduction in the investment portfolio of US$202.4 million. The decrease in the investment portfolio is mainly due to a general depreciation of the investment currencies against the U.S. dollar, while the increase in the other assets portfolio derives from transactions with the IMF.

In the case of the cash portfolio, the growth is explained by an increase in foreign currency deposits, mainly dollars, held by local banks at the Central Bank.

The liquidity of the reserves was ensured by investing in a portfolio of short-term deposits with international commercial banks and fixed-income instruments traded on highly liquid secondary markets. On 31 December 2018, time deposits and resources held in current accounts represented 11.7% of international reserves; short-term securities, 20.8%; bonds, 64.7%; and other assets, 2.8%.

To safeguard the Bank’s equity, the invested resources are managed under policies and controls designed to limit financial and operational risk, which are approved by the Board.

Credit risk is controlled through limits on issuers, instruments, intermediaries, and custodians. As of 31 December, 77% of reserves (excluding other assets) were invested in AAA-rated instruments issued by banks, sovereigns, foreign financial institutions, and supranationals. The remaining 23% was invested in instruments with a credit rating between A– and AA+, mainly in the sovereign sector.

Market risk is contained through the diversification of investment currencies, instruments, and maturities, taking into account the impact of decisions regarding these parameters on the Bank’s balance sheet.

At year-end, 65.3% of total reserves was held in instruments denominated in U.S. dollars, 15.1% in euros, 4.1% in Canadian dollars, 3.6% in Australian dollars, and the remaining 11.9% in other currencies. The average duration of the investment portfolio was around 21 months.

Operational risk was managed through the separation of functions and responsibilities and the application of internal and external controls. A portion of the investment portfolio was managed by two external managers, namely, BlackRock Institutional Trust Company N.A. and Amundi Asset Management.

These firms came on board in February and October 2016, respectively, with a mandate of US$500 million each. Both firms managed a long-term global government fixed-income mandate, with a structure equivalent to the internally managed diversification portfolio.

The total return obtained from international reserve management in 2018 was 1.70% measured in currency of origin (not considering changes in the portfolio currencies) and –0.35% measured in dollars.

The return on fixed-income instruments in local currency was offset by the negative exchange rate effect of measuring returns using the U.S. dollar as the base currency. This is due to the appreciation of the dollar against the other currencies in which the international reserves are invested.

The differential return relative to the benchmark (which is used to guide and evaluate investment performance) was –2.6 basis points.

Appendix II presents a more detailed report, in accordance with institutional policy on the provision of information on the management of international reserves.

6.1.2 General Treasury Fund Management

In the period, the ESSF investment guidelines approved in 2015 remained in effect. On 13 December 2018, the Bank accepted new investment guidelines for the PRF, which include a new strategic asset allocation. Also in 2018, the Bank accepted new custody guidelines for the ESSF and the PRF.

In 2018, the Bank implemented a passive management approach to the fiscal fund portfolios. The investment objective was to obtain monthly returns in line with the benchmarks, within the risk parameters defined by the Finance Ministry in the investment guidelines. At the same time, the Bank applied the same principles and standards to managing the General Treasury funds that it uses for its international reserves.

The market risk of the ESSF and PRF portfolios, relative to the market risk implicit in the benchmark portfolios established by the Finance Ministry, was primarily controlled through risk budgets (associated with a given ex ante tracking error). Credit risk was mainly controlled through limits on issuers and intermediaries. At year-end 2018, the market value of the ESSF was US$14.1338 billion, of which US$13.2043 billion was managed directly by the Bank.²/ In the period, there was a withdrawal from ESSF of US$354.6 million, which was executed by the Bank as fiscal agent.³/ At year-end, the market value of the PRF was US$9.6632 billion, of which US$6.0541 billion was managed directly by the fiscal agent.⁴/ In 2018, withdrawals from the PRF totaled US$261.5 million and were executed by the Bank.⁵/

^2/ The remaining ESSF resources are managed by external portfolio managers under an equity mandate.
^3/ The withdrawal, on 27 September 2018, was used to finance part of the annual contribution to the PRF.
^4/ The remaining PRF resources are managed by external portfolio managers under corporate bond and equity mandates.
^5/ The total withdrawal is the sum of a net withdrawal of US$31.6 million on 27 September 2018 and a withdrawal of US$229.8 million on 13 December 2018.

In 2018, the Bank continued to use the services of a global custodian, which also measured the performance, risk, and benchmark compliance of the management of the funds, in accordance with the standards and parameters outlined in the investment guidelines.

In 2018, the absolute return measured in dollars on the funds managed by the Bank was 0.21% for the ESSF and –1.60% for the PRF.⁶/ The differential return attributable to the Bank’s management, relative to the benchmark portfolios established by the Finance Ministry, was 8.8 and 10.4 basis points, respectively, for the ESSF and PRF portfolios managed by the Bank.

^6/ Both figures were obtained using the time-weighted rate of return (TWRR) methodology, which delivers a rate of return adjusted for the impact of possible contributions (of capital or generated by the securities lending program) and withdrawals (of capital or associated with payments to third parties. This methodology thus isolates the management result from the effect of changes that are exogenous to the size of the portfolio, thereby allowing a comparison of the portfolio management and the benchmark performance

With regard to fiscal agency fees,⁷/, the costs of managing the funds were charged to the General Treasury. In 2018, the annual charges for the ESSF and PRF were 0.9 and 1.8 basis points, respectively, of the total resources under the direct management of the Bank.

^7/ The annual fiscal agency fees for the ESSF and PRF are associated with direct expenses and costs incurred by the Bank in the management of the funds and does not consider other expenses, such as those associated with the external portfolio managers or the custodian.

As in past years, the Central Bank accepted the role of fiscal agent in the placement of Treasury bonds to be issued during the year. This involved auctioning peso- and UF-denominated Treasury bond series issued in 2018 (with maturity dates of 5, 12, 20, and 30 years in each case) and the reopening of series issued in 2014 and 2015 for UF-denominated bonds and in 2013 and 2014 for peso bonds.

Also in its role of fiscal agent, the Bank implemented a Treasury bond buyback program, in which additional bonds in the aforementioned series were auctioned, with other Treasury bonds from earlier series received in payment.

The Treasury bonds were all issued in accordance with the provisions of Article 104 of the Income Tax Law.

In accordance with both the Bank’s information disclosure policy and the stipulations of the Fiscal Agency Decree, Appendix III provides more details on the Bank’s management of the ESSF and the PRF.