The Chilean government recently announced a comprehensive set of initiatives aimed at assuring its full integration with global financial markets and enhancing Chile’s position as an exporter of financial services to Latin America and the world.
These policy initiatives – which include legal and administrative reforms as well as public-private sector co-ordination – are focused on increasing Chile’s financial competitiveness, as well as attracting foreign investors and issuers and broadening the range of available investment alternatives. They also include incentives for emerging, high-growth companies to access capital market financing through innovative products and distribution channels.
Access to instruments
A significant part of establishing financial services as a key export industry is to increase Chile’s attractiveness to foreign investors, not only those who are interested in local issuers, but also as a platform for them to access Latin American instruments.
Furthermore, these initiatives contemplate enhancing Chilean investment management capabilities, with more than 25 years of successful experience.
Why Chile?
In a world of continuous change – especially that of the dynamic financial services industry – Chile can claim to have a highly stable economic, as well as institutional, framework. For several years, various competitiveness and economic freedom surveys have placed Chile not only at the forefront of Latin America, but also in the highest ranks of the most developed countries worldwide. Chile has one of the world’s most pro-business environments, where several well-known multinational and foreign investors have been attracted by its openness and competitive business landscape.
Over the past several decades, Chile’s economic performance has distinguished the country from others around the world. The explanation for this lies in the depth and extent of its reform process and the quality of its institutions.
The combination of sound economic policies with strong institutions has resulted in a robust macroeconomic framework that has sustained the upward credit trend. An example of this is the recent credit rating upgrade to A+ from A by Standard & Poor’s. This upgrade largely reflects the economy's increasing resilience to potential negative shocks. As Standard & Poor’s put it: “[Chile’s] economy is more resilient than ever before.”
Chile has gained strong credentials following the implementation of its countercyclical fiscal and monetary policies. These policies are based on a solid institutional framework and enjoy strong support across the political spectrum. The economic framework includes the government commitment to achieve and maintain a structural fiscal balance, which excludes the effect of cyclical fluctuations of economic activity and the price of copper.
The implementation of Chile’s structural fiscal rule in the context of the recent copper price boom is resulting in strong fiscal surpluses and, therefore, a significant reduction in debt levels and a rapid accumulation of assets.
Sovereign wealth funds
Unlike any other country in the region, Chile has taken advantage of the past few years of abundance to implement two sovereign wealth funds: the Pension Reserve Fund (PRF) and the Economic and Social Stability Fund (ESSF). Combined they reach more than $21bn. If Treasury deposits are included, total assets reach more than $26bn. Indeed, Chile’s government now enjoys a net creditor position.
The economic framework includes an independent and credible central bank, in which monetary policy is conducted within a regime that combines inflation targeting with exchange rate flexibility. In addition, the Chilean banking system contributes to financial stability, thanks to a sound regulatory framework and the country’s reduced economic volatility. The positive economic environment resulted in the banking system’s continued growth during 2008, maintaining strong asset quality indicators and adequate capitalisation levels.
Chile’s continuous reform process has comprised the crucial areas of pension system reforms, trade integration and financial liberalisation.
After Chile became the world’s first country to phase out a bankrupt pay-as-you-go system and to create a fully funded capitalisation system run by private, competing entities, its recent pension system reform of 2008 improves many aspects of the current framework. The most relevant are:
- the creation of a new and stronger solidarity pillar;
- the inclusion of self-employed workers;
- and the increase in competition among pension funds managers.
These reforms have resulted in a substantial increase in aggregate savings and, simultaneously, contributed to the development and deepening of domestic capital markets. Chile’s trade integration takes three forms:
- unilateral tariff reductions (currently a flat rate tariff of 6% and an effective rate around 1%);
- free trade agreements (FTAs); and
- multilateral accords.
No country in the world has signed more trade agreements than Chile, which has placed it in the unique position of having trade agreements spanning more than 90% of current export markets. To date, Chile has signed FTAs with more than 55 parties, including Australia, China, India, Japan, Mexico, the US, the EU and South Korea. Thus it is consolidating the process of integration with the world economy. Chile’s strong performance also shows up in its social indicators. The most outstanding achievement in the case of Chile has been poverty reduction. Over the past 18 years, the country has dramatically reduced its poverty rate to 13% of the population, from 40% in the early 1990s. This dramatic drop is a result of ambitious social policies and also because the Chilean economy has grown an average of 5.5% a year since 1990.
Besides robust economic and social performance, Chile also offers an attractive business environment, a wired and globally connected country with low business costs, high quality of life and a talented and well-qualified work force.
According to the latest e-readiness rankings published by the Economist Intelligence Unit (EIU), in the Business Environment Ranking, Chile is the world’s 19th most attractive country in which to do business and invest in the forecast period of 2008 to 2012 (and the first among Latin American countries).
In the ranking, which was led by Canada, Singapore and Denmark, Chile came between Norway and France and ahead of countries such as Spain, Israel, South Korea, China and India. Chile was the leading country in Latin America.
Chile’s attractive business environment is also reflected in yearly rankings of the Best Cities to do Business in Latin America, published by business magazine AméricaEconomía. From 2005 to 2008, Santiago consistently ranked in the top three cities of Latin America, sharing the top positions with São Paulo and Miami.
Bridging the world
Chile also offers efficient communications services and a world-class seaport, airport and logistical infrastructure, which are crucial to bridging the geographic distance between it and other business centres throughout the world.
The country’s workforce is highly skilled and ready to meet the needs of the highly demanding financial services industry. Many of its executives have undertaken postgraduate studies abroad, often at leading US business schools.
However, high-quality training is also available in Chile. AméricaEconomía recently found that four of Latin America’s top 10 business schools are in Chile. This is further enhanced by the appropriate information technology and telecommunications connectivity infrastructure that make Chile a truly ‘wired’ country.
Finally, costs of doing business are very competitive, especially for foreign investors, not only considering transactions and support services but also in terms of high standards for investor protection and corporate governance.
A CONTINUOUS PROCESS OF CAPITAL MARKETS REFORM:FROM MKI TO MK III
In a process that was begun seven years ago, the recently announced initiatives are a new step in the modernisation of Chile’s capital markets. The first set of reforms, Capital Markets I (MK I), was approved in 2001. It considered several measures aimed at promoting savings in investment securities, including the exemption of capital gains tax on highly traded stocks of publicly traded companies as well as lowering taxes for foreign investors on interest payments, advancing towards the integration into increasingly globalised financial markets.
A second set of measures, Capital Markets II (MK II), was approved by Congress in 2007. These included initiatives to promote broader financing alternatives of high growth, emerging companies, including tax incentives for the development of a local risk capital fund management industry. Other improvements were aimed at increasing security levels of financial transactions, including stronger custodial, clearing and payment, and reinforcing regulatory and supervision capabilities. Further enhancements considered investment funds, derivatives and insurance company investment guidelines.
MK III: CHILE AS A FINANCIAL SERVICES EXPORTER
The latest initiatives, known as Capital Markets III, consider four primary areas for further advancing in modernising Chile’s financial industry, including a decisive step in becoming an exporter of highly competitive services.
- A first set aims to assure deeper and more liquid financial markets. In achieving these objectives, the proposed measures include further developing the mutual and closed-end fund industries, establishing a new common and clear framework tax treatment for fixed-income securities, as well as extending the business opportunities for financial intermediaries.
- A second group considers improvements in broadening financial access alternatives for younger companies; small and medium-sized businesses (SMEs); and higher risk projects, including incentives to develop a high-yield bond market and to assist securitising loans for small and medium-sized companies that currently only have access to traditional bank financing. This will allow a higher degree of competition for funding, resulting in an increase of competitiveness, as well as a further degree of financial innovation.
- A third area of interest is to assure that Chile is fully integrated with global financial markets, as well as fully competitive with the best financial services centres worldwide, following distinctive focused strategies, namely investment management as well as regionally focused financial intermediation. Increasing the attractiveness of Chile as a financial platform for international investors is a key component in these initiatives. Thus, expanding existing tax incentives will be expanded to benefit a wider array of institutional investors. Regulatory changes will look to facilitate a greater integration between financial intermediaries. Yet other measures look to make Chilean domiciled financial service providers fully competitive when exporting their capabilities.
- A fourth and final scope of interest is centred on establishing a process of continuous improvement in relation to capital market reforms – a necessary condition in an industry with such a dynamic rate of change due to financial innovation and global market integration. As part of this effort, the Ministry of Finance will invite a select group of top financial experts to form the Capital Markets Consultative Council as a permanent discussion forum that will assist in the further reforms required to continue advancing Chile’s financial market modernisation. Steps to increase the public-private sector co-operation in promoting Chile as a financial services platform will also be taken, including road shows to contact investors and intermediaries worldwide.
Additionally, an extensive agenda of further institutional and legal reforms has been established, including transforming the securities and insurance regulator’s leadership into a commission with greater autonomy and legitimacy. Reforms affecting the banking and insurance industries have also been identified. In what may be the most ambitious capital markets reform proposal to date, Chile is not just developing them further, but is going beyond this to make financial services a key component in its path to become a developed economy by 2020.
Rule of law: how Chile compares with the world
Source: World Bank
