Chile, Peru and Uruguay: Small but Smart
by Florent Michel, Managing Partner, Latina Finance & Co
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.