Chile final

CHINAGLOBALANALYSISINC

CHINA GLOBAL ANALYSIS INC.

CHILE: A SAFE HARBOR

We see Chile as the best country in Latin America for setting up banking business. It is characterized by strong democracy, with low risk of political turmoils and good government policies. Chilean economy is very open, being the 1st world exporter of copper. It is exposed to external shocks but somehow resilient, and unemployment rate is so good so far (5.8%). Agreements have been signed between China and Chile to establish an offshore clearing network for Yuan. This attracts Chinese Banks’ interests, as they can operate as intermediares for currency swaps. Chinese banks like CCB and Bank of China are already present in this territory, showing there are good opportunities to take advantage of. The way for implementing this kind of business has been already paved by their experience, and could be easily exploited.

Source: Doing business 2016, World Bank

0 10 20 30 40 50 60 70 80 90

UnitedStates(Rank7)

Mexico(Rank38)

Chile(Rank48)

Peru(Rank50)

Brazil(116)

Argentina(Rank121)

Ease of setting up a business

IN BRIEF

• Risk from shocks in international trade. • Exposed to volatility of commodities prices,

especially copper (50% exports, 20% GDP). • China is main trade partner,accounting for

25% exports, 21% imports. • Strongest quality of sovereign debt in the

region – Moody’s Aa3 rating. • Solid financial system. • Resilient economy and politically stable. • In 2015 China established Yuan clearing

network in Chile, first Latin America country.

• Following currency swap agreement between

Chile and China.

Data from Euler Hermes, Moody’s


The Central Bank announced that in 2015 the Chilean GDP grew by 2.1% vs. expected 3% This lower result is because of complex external economic situation, characterized by deterioration in Latin America and especially by the slowdown of the Chinese economy in the last year. The latter has in fact greatly influenced the reduction in the prices of raw materials on international markets, including the price of copper, of which Chile is the first world producer and China the main buyer. This had a significant impact on the national mining industry, which has significantly reduced investments, with obvious negative consequences on tax revenues. Trade balance has posted in 2015 a surplus of just over 4 billion US dollars, down sharply (about - 47%) from 2014 level (7.767 billion US dollars). In first two months of 2016 the Government managed to lower unemployment rate to the 2014 level (5.8%); it also increased government spending by 8.4 % compared to 2014, the deficit to 3.3% (1.6% in 2014) and brought the public debt as high as 17.5% of GDP. However, with respect to 2016, the Central Bank had estimated a GDP expansion between 2% and 3%, but later it had to revise it downwards by half a percentage point with respect to last forecast.

5.75% 5.53%4.31%

1.85% 2.27%

0%

1%

2%

3%

4%

5%

6%

7%

0%2%4%6%8%10%12%14%16%18%20%

2011 2012 2013 2014 2015

RealGDPgrowth Debt/GDP

• Population:

17,948,000.

• GDP per capita: US $14,528.3.

• Exchange rate: 1 USD=682,226 CLP.

• CPI Inflation: on average 4.01% during the period 2013-2015.

• Current account balance: -1.2% of GDP in 2014.

• M2 Growth: 8.74% in

2014.

• Global Competitiveness ranking: 35 out of 140.

MACROECONOMIC OVERVIEW


Chile, the first South American country to recognize China diplomatically, 45 years ago, has entered into a Free Trade Agreement (NAFTA) in 2005. Moreover, from 2015 it is the protagonist of the launch of the first financial center of the yuan in Latin America, thanks to the adoption of three basic agreements. With the first, the Chilean government has received approval from Chinese regulators to participate in the program of the Chinese Renminbi Qualified Foreign Institutional Investors (RQFII). Therefore Chilean banks, pension funds, insurance companies and mutual funds may invest up to 50 billion yuan (8.1 billion dollars) on China's capital market. With the second, we have the opening of the second clearing center of Renminbi in America. With an initial investment of $ 189 million and under the supervision of the China Construction Bank (CCB), Chile and the Asian giant will reduce transaction costs (credit operations, commercial payments with foreign countries, etc.) facilitating the conversion between the respective currencies. Finally, the signing of the Currency Swap agreement between the Central Bank of Chile and People's Bank of China for 22 billion yuan (3.5 billion dollars). This will allow on one hand to buffer dollar volatility on trade and investment flows and, on the other hand, help the Chilean peso and the yuan to advance in turnover of bilateral trade.

BANKING SYSTEM The solid banking industry in Chile today stands in opposition to the one of thirty years ago. Due to the dramatic financial turmoil of Chile in 1982, several banks were impounded or disbanded.

Between 1980 and 1990, the South-American country reformed its financial system with a stricter regulation and supervision. Present-day the Superintendent of Banks and Financial Institutions (SBIF) and the Central Bank of the Country overlook the banking system: this comprehends twenty-four banks and is largely concentrated (the biggest five control 72% of Chilean banks’ assets). This concentration is the consequence of various mergers which took place in the 90s to enhance efficiency and profitability.

• Strategic location in

Latin America.

• High Chinese investments for infrastructure construction in Chile.

• Chile is world’s major exporter of copper

• China is world’s major importer of copper

• To take advantage of the natural resources of the Country.

• To increase Chinese exportations towards this South-American nation.

CHINESE INTERESTS IN CHILE


Some Chinese banks have already invested in Chile, such as China Construction Bank and Bank of China. The two giants have established operations in the Country to convoy funds in strategic sectors of the territory (for example mining and telecommunication) and to launch a business network with other South-American nations.

CHILE COUNTRY & EQUITY RISK PREMIUM Rating-based assessment Chile stands first for its sovereign debt’s quality among other Latin American countries. Country risk premium is only +0.93% higher than US’s, and the CDS Spread over US of 128 basis points shows a high credit quality.

Moody’s rating Country Risk Premium

Equity Risk Premium

Chile Aa3 0.93% 7.18% Argentina Caa1 11.55% 17.80% Brazil Baa3 3.39% 9.64% Mexico A3 1.85% 8.10% Colombia Baa2 2.93% 9.18% Peru A3 1.85% 8.10% Bolivia Ba3 5.55% 11.80% Source: Damodaran, Moody’s. USA assumed as default risk-free country.

The rating reflects the strong business environment: World Bank’s Doing Business 2016 ranks Chile 48th both in 2015 and 2016. The democracy is quite stable and the economy performs well, even being exposed to external shocks like the slowdown of Chinese economy (25% Export) or a plunge in copper price (50% exports, 20% GDP). Macroeconomic good policies, inflation control (4.4%), low public debt (16%) and a good rule of law strenghten Chilean economy, keeping its country risk at low levels. Relative Standard Deviation-based assessment Chilean financial markets are however affected by the decline in economy growth rate, worsened by the plummet in copper price (almost 30% in 2 years) and the Chinese slowdown. This could make somehow difficult to get credit, increasing market’s volatility.

Annual Standard Deviation (5 Years)

Relative Standard Deviation

Equity Risk Premium

Chile 20.92% 2.20 13.75% Argentina 43.63% 4.59 28.67% Brazil 28.48% 2.99 18.72% Mexico 18.25% 1.92 11.99% EM Latin America 22.69% 2.39 14.91% Emerging Markets 17.85% 1.88 11.73% Source: MSCI Investable Market Indexes (IMI), our analysis. RSD is relative to USA volatility.


In fact, we find Chile’s ERP closely follows the average in Latin America Emerging Markets (13.75% vs 14.91%). We expect a stable situation, without future shocks in the market. This will keep Chilean ERP in line with the actual value, confirming the overall good quality of its sovereign debt and the low risk of investing in this country. RISK OVERVIEW Persistent financial market stress in structurally relevant emerging markets (China and Brazil) does not support Chilean export-based economy. The high fluctuation of markets and the depreciation in Chilean Peso (CLP) keep high pressure on the overall system, especially on the weaker import sector. The predominance of mining and copper sector leaves the country exposed to external collapses. In fact the larger part of exports (>50%) are related to copper trading. If Chile does not accelerate its development, shifting from a natural resources-based economy to a services-based economy, it will remain tied to the trend of commoditities in volatile markets. But the education system remains poorly developed. Possible widening of current account deficit could occur, due to adverse performance in external sector. Moreover Chile is exposed to climatic and earthquake risks which could lead the government to unexpected expenses in the future.

CHINA GLOBAL ANALYSIS INC. THE COUNTRY RISK ASSESSMENT TEAM Enrico Astegiano Andrea D’Oro 9 March 2016

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Chile final