Published: March 01, 2012
Managing treasury and financing operations in Latin America remains more complicated than in many other places in the world. This is mainly due to cumbersome financial regulations, tax burden and lack of regional integration. On the South American continent, however, three countries offer a friendlier environment than others for treasurers to manage cash, liquidity, foreign exchange risks and cross-border transactions. They are Chile, Peru and Uruguay.
Those three countries are at very different stages of development. Chile is clearly one apart with its AA rating and its OECD membership (Chile and Mexico are the only Latam members). As a result of more budgetary discipline, a boom in commodities exports and very strong foreign direct investments, Peru for its part has registered an unprecedented growth in the last four years, making it a true economic miracle. Finally Uruguay, recovering from the 2001 Argentinean crisis, even if still dependent on its neighbour, is managing a strong economic growth with great pragmatism. Chile, Peru and Uruguay will have registered 6% growth in 2011.
Despite the fact that the three countries have different cultures, historical backgrounds and economies, they share the fact that they are some of the smallest in the region. Like other small countries in the world they have quickly understood that international opening, simplification of cross-border transactions, easing of regulations and favourable investment framework for foreign investors would be keys to economical success. Politically Chile and Uruguay have historically been relatively stable, while Peruvian history has been somewhat more hectic. However, since the recent election of the Gana Peru party led by the current president Humala at the end of 2011 one can say that the country is on the right track. On another important subject in the region which is corruption, Chile and Uruguay are the only two countries in the region to have a CPI* higher than 6 (Chile [7.2], Uruguay [6.9]). Peru still has some efforts to make in that respect with a mark of 3.5.
In our area of treasury and financing, here again local regulations are favourable to manage proactively cash, risks, liquidity, and debt. Foreign exchange markets are well developed and mature and basic derivative products are also available (Uruguay, given its size and present rating – still below investment grade – might not offer the same market depth). In fact the investment rating status of both Chile and Peru has enabled those countries to develop their local capital markets strongly. According to many analysts Uruguay is on its way to regain in 2012 its investment grade rating lost in 2002.
From a treasury management perspective these three countries have things in common starting with a more flexible regulatory environment than Brazil, Argentina, Colombia and Venezuela for example. It is far easier to manage account structures in these countries as there is firstly no obligation to convert hard currencies inflows into local currencies (as there is in Brazil and Argentina), and secondly residents and non residents are truly treated on an equal footing. Foreign exchange regulation is quasi non-existent or very light. Overall tax rates are relatively attractive and liquidity can be easily managed in both local and foreign currencies (USD). Local financing in local currencies or USD are available and medium- and long-term capital markets are either very developed or growing (Peru and Uruguay). This being said, it is not heaven on earth. In fact as in every country in the region domestic ZBA or pooling is doable but it requires some work. Notional pooling is not permitted, or could be permitted in Uruguay for example but the volume of flows does not justify implementing it. Cross- border pooling is impossible so automatic offshore cash up streaming is still an issue, notably for multinationals.[[[PAGE]]]
Each of those countries offers the possibility of having local or foreign currency accounts (USD or euro) without difficulties and little if no restrictions in their usage. However, offshore accounts in local currencies are not permitted. In all those countries it is possible to concentrate cash on a daily basis on a header account via a ZBA structure. Payments are automated in most cases and the large banks provide this service. Direct debit is also used frequently either by direct debit on the account or using a credit card. Cheques are still the major method of payment in terms of volume while in terms of number of transactions transfers and credit cards are growing rapidly. At the same time in all three countries the USD can be used like a local currency for cheques or payments. Generally cross-border payments have very few restrictions either for dividends, royalties or payments of offshore services. The same is true for cross-border payments such as dividends, interest on loans or capital injections. There are no taxes on financial transactions in Chile or Uruguay. Peru still has a tax called ITF of 0.05 % on financial transactions but that tax is due to be reduced at some stage and may disappear altogether in the future. A number of banking products in each country will help corporates to improve their working capital position. Accelerating the collections process in countries with long distances such as Peru or Chile is something to consider.
In all three countries foreign-controlled banks are dominant in the market, although maybe to a lesser extent in Uruguay. In Chile the two largest banks are Santander and Banco de Chile (Citi), in Peru the second and third largest banks are BBVA and Scotiabank. Finally in Uruguay Santander and Itau are also in second and third positions. The leading banks of Peru and Uruguay are local banks, Credito del Peru and Banco de la Republica Oriental del Uruguay ( BROU). There were no major changes in the banking environment in 2011 apart from Credit Agricole’s sale of its assets in Uruguay to BBVA. However in each of those countries the trend is towards consolidation, as some foreign banks might not maintain a presence in countries that they could consider too small.
[[[PAGE]]]
Treasury technology is still predominately provided by banks and very few corporates use independent treasury systems providers. Most of the large foreign banks and local banks too provide their international payment platforms and also trade financing and settlement modules. SWIFTNet is operational in Peru today. Some of the large ERP providers such as SAP or Oracle have deployed their treasury modules which are used by multinationals. Independent treasury system providers have not yet penetrated those countries.
Key risk topics for multinationals and large local corporates are foreign exchange risk and interest rate risk (especially in Chile and Peru where there is a long-term debt market). These three countries offer both plain vanilla and more exotic derivative instruments. In Chile and Peru, markets are deep and liquid enough to offer instruments for maturities exceeding two years. Unlike the position in Argentina or Brazil where any hard currency inflow in the country must be converted to the local currency, it is possible to maintain USD and euro accounts in Chile, Peru and Uruguay. However accounts in euros can be subject to more restrictions (in terms of movements, interest on deposits and placement products). Local currencies are fully convertible without restrictions but not deliverable offshore. Deliverable and Non Deliverable Forwards are available in all three countries for standard maturities of 12 months but up to three or five years in the case of Chile and Peru. A cross-currency swap market is also active in Peru and Chile.
Unlike in many other countries in the region there is little restriction as to capital repatriation, so keeping some deposits locally is less of an issue (no ‘trapped cash’ syndrome). Each of the three countries offer a wide range of placement options for treasurers, be it short- or medium-term. Besides classical bank term deposits, treasury bills and mutual funds are also available as well as the repo market which is active in all three countries. Investments in local currency can provide a sound yield where onshore USD or euro placements will generally bring little if no return. Interest rates are on the up-trend in the three countries, so a good placement strategy is key. In January 2012 local reference rates were 5% in Chile, 4.25% in Peru and 6.5% in Uruguay. Given the AA country rating of Chile and its banks combined with relatively low inflation, a 5 % interest return is not a bad risk/performance proposition. As for Uruguay, don’t expect great returns on your cash deposits. There is over liquidity in the market. This country is in a very odd situation. Considered as a safe haven by Argentinians and other South Americans it attracts very large deposits creating an over-dimensioned liquidity position in respect of the country’s asset base.[[[PAGE]]]
With regard to financing options there are multiple possibilities to finance one’s business either short- or long-term in local or foreign currency. Some multinationals are privileging short-term local currency roll-over loans to finance their working capital in order to avoid foreign exchange risk exposure and long-term interest rate risk. Others are funding themselves through intercompany loans. Until recently interest rates in Chile and Peru were rather low. They remain at relatively acceptable levels. In Uruguay local interest rates are high and loans in USD are also an option to pay less interest, but the market for fixed rate debt is limited at two to three years. Chile and Peru offer a wide range of long-term financing instruments to finance capital expenditures. It is possible to find long-term fixed rate financing with tenors of 15 to 20 years in the bond markets. Besides those classical bank or intercompany financings those countries offer a number of trade financing products, whether factoring or discounts of receivables, which can be cheaper. Pre-export/import financing is generally much cheaper too.
Uruguay’s bank market is very liquid and there is ample opportunity for lending.
All three countries have a relatively favourable tax environment. However apart from Chile, Peru and Uruguay have signed very few double tax treaties - Uruguay with Germany and Hungary only for example. Chile is one of the interesting countries in the region tax wise. It has been ranked in 2011 as the Latin American country with the most advantageous tax environment by Latin Business Chronicle (Latin Tax Index) with a corporate tax rate which can be as low as 17%. Uruguay, contrary to pre- conceived ideas is not a tax haven anymore since the institution of both personal and corporate taxes in 2007. Personal and wealth tax ranges between 10 and 25% and corporate tax is 25%. One of the most important recent news for the country was its removal from the OECD ‘grey list’ of countries in December 2011. Peru is an interesting case too and offers a number of tax advantages, including for example a very reduced withholding tax rate on dividend repatriation (4.1%) whereas Chile and Uruguay charge 15% and 30% respectively. As regards tax on capital gains, in Chile the rate is 17% and both Peru and Uruguay charge 30%.
In conclusion, despite being smaller local markets for business, these three countries are making life simpler for treasurers. Brazil and Argentina, the two largest countries of the continent, are still way behind in terms of regulatory framework. Those three countries attracted huge foreign direct investments in 2011 and this should give a signal to some of their neighbours to relax some old regulatory practices.
* Corruption perception index: Transparency International
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
