Chile’s lenders look east to ease exporters’ pain from the strengthening peso, writes Eleanor Wragg.

Chile’s economy can comfortably be described as booming. Tipped to grow 6.5% this year and 6% in 2012, the economy, with its high level of foreign trade, reputation for strong financial institutions and sound policy, has the strongest sovereign bond rating in South America.

The peso’s growth has battered exporters, who are losing competitiveness abroad.

Exports account for more than a quarter of GDP, with commodities making up some three-quarters of total exports. As the world’s leading producer of copper, the metal alone provides one-third of government revenue.

Last year’s record copper prices, combined with the post-earthquake reconstruction process, in a time when the US dollar is depreciating against a basket of foreign currencies, led to the Chilean peso ending last year as the highest-growing Latin American currency – appreciating 8.4% against the dollar.

Unfortunately, the peso’s growth has battered exporters, who are losing competitiveness abroad.

One example of the difficulties faced by exporters is Chilean company Concha y Toro, the largest winemaker in Latin America. It experienced impressive sales growth in the first quarter, ending March 31, 2011, but the strong Chilean peso hurt profits. While the company’s first quarter sales advanced by
17.5% to US$170.5mn, net profit slipped 0.7% to US$13.9mn.

Concha y Toro is not alone. Exporters across the board are suffering, particularly in the agricultural sector.“This is an international problem and many countries that are doing well are complaining,” said minister of finance Felipe Larrain at a press conference in May. “It has particularly affected Chile’s agriculture sector and we are taking various measures.”

Among these measures include increased state-backed financial support to the agri-industry. In May, the state-owned bank BancoEstado provided a US$400mn credit line to small and medium-sized farmers, who have been reeling in the face of an appreciating peso.

“The bank’s role and mission is to support Chilean growth and development. In this context, we have a special concern for micro and small enterprises and therefore seek to generate products that respond to the needs of different segments. Generating credit lines allows them to have access to sufficient capital to meet their financing needs,” says Jorge González Solís, head of small businesses at BancoEstado.

BancoEstado is also looking at ways to minimise exporters’ foreign currency exposure.

“As hedging instruments are not widely used in Chile by small and medium enterprises, we have also launched a US$10mn foreign exchange hedging programme to make foreign exchange hedging more popular. In parallel, we are also implementing a programme of outreach and training to those clients that are linked to imports and exports,” says González.

At the beginning of June during a visit to Chile, the Chinese vice-president Xi Jinping signed a financial cooperation agreement between BancoEstado and the China Development Bank. The Chinese delegation also signed agreements with Banco de Chile.

Support programmes

This problem with the currency is not only happening in Chile, we are also seeing it in other export driven countries in Latin America.”

The IFC has lent its support to the small and medium producers in Chile.

Under new short-term finance products, which will roll out during the third quarter of this year, the IFC will be taking partial risk of the small and medium exporters in order to increase the supply of financing to the real sector in the middle market segment.

“In Chile, these types of initiatives are needed because there is an important imbalance between supply and demand for short-term finance to the small and medium producers,” says Antonio Alves, regional head of the IFC.

“The local banks have limited risk appetite and capital restrictions; therefore, what we want to provide to the market is an additional capacity to the local banks, so they can finance more and provide more financial access to these small and medium producers.”

Also fighting back, like Brazil, Peru and Colombia before it, the Chilean central bank has drafted measures to rein in its currency and support its export-dependent economy, introducing a US$12bn currency intervention programme in January this year– the largest such programme in the country’s history.
However, concerns remain as to how effective this intervention will be, as the peso often takes its cues from copper prices. Today, despite the ongoing intervention programme, the peso is still trading around a three-year high against the dollar, cutting into exporter’s competitiveness.

“This problem with the currency is not only happening in Chile, we are also seeing it in other export driven countries in Latin America, for example in Brazil,” says Alves.

“One alternative to try to tackle this problem would be to really diversify the import base, finding different markets for Chilean products, where Chile is not yet competing. Once we introduce the Chilean exporters to these new markets, they might be more competitive than the existing sellers.”

New markets

Chile’s multi-pronged foreign trade strategy, with its huge number of free trade agreements (FTA), 59 at the last count, has greatly broadened access to new markets where Chilean exporters can compete. Chile already has FTAs with China, Japan, Malaysia, Korea and India, with a further agreement to be signed with Vietnam in November. Lenders in the country are now seeking ways to further open doors to the lucrative Asian markets.

The IFC is already finding new buyers for Chilean products, opening new countries and markets, and consequently helping the small and medium exporters to become more competitive than the other existing sellers.

One such example of a first time relationship was with Lebanon. By finding a local bank in Lebanon and then connecting it to the Chilean bank, the IFC was able to promote a mercantile relationship between the Chilean exporter and a buyer in a new market.

Also looking east is Santander Chile, which concluded a three-year US$200mn cross-border syndication with Japan’s Mizuho Corporate
Bank and Bank of Taiwan in April, marking the first ever all-Asian bank syndication for a Chilean bank.

“This deal was very successful in that we were able to push forward this loan with only Asian banks. There had been other syndicated loans in which Asian banks participated, but this was the first in which only Asian banks were included. This was important because, despite the intense trade between Chile and Asia, very little was known about Chile’s financial system in the Asian market,” says Pedro Murua, manager of structured finance at Santander Chile.
Santander Chile has so far raised US$3.7bn from the international markets (US$3,425mn in bonds and US$375mn in syndicated loans) during the last 19 months.

Banco de Crédito e Inversiones (BCI), the fourth largest bank in number of clients, behind Banco Santander Chile, Banco de Chile and Banco Estado, signed a US$325mn syndicated loan led by Wells Fargo and Standard Chartered in April, which it allocated to the growth of its trade operations. According to the bank, the loan was the “result of an effective road show carried out by our executives in Asia, which generated a high degree of interest from potential investors”.

“The main objective of this operation is to assist the growth that our trade operations have been experiencing,” says Lionel Olavarria, CEO of BCI.

“The region which has displayed a strong growth in world trade operations for us is Asia, mainly China, Japan and Korea, where bilateral trade agreements with these countries have made them become main economic partners of Chile,” adds Julio Jaraquemada, CEO of Banco Internacional, which has partnered with the IFC to enable it to reach small and medium exporters in Chile.

“The main motivation that led us to partner with the IFC was to improve coverage and access to countries which, due to the bank’s size, we were not able to reach.

“Through this, we have been able to obtain support for new trade lines and funding in order to finance our foreign trade operations. It has granted us access to more diversified fund sources and to develop different IFC structures, allowing us to leverage our fund base,” continues Jaraquemada.
“A continuous growth of our bank along with the Chilean economy will require more correspondent bank relationships, additional trade lines and funding, in the short and medium term.”

Despite concerns for exporters, there is little worry about Chile’s economy overheating. In a recent credit report, Moody’s noted that:“Over the medium term, we expect that increased productivity should compensate for external competitiveness problems derived from a stronger currency.”

In the meantime, Chilean exporters and banks will continue to look east to ease the burden of the strong peso. “Asia is already the largest export market for Chilean companies. We believe this will be an on-going process and we hope to see more Asian deals in the future,” says Santander Chile’s Murua.