The Lean Banking Behind Chile's Comeback
Hansen, Fay, Business Credit
Chile remains the center of growth and stability in Latin America, supported by booming export markets and a lean banking system that is quickly becoming a model for the region. GDP growth for 2004 should hit 4.5%, up from 3.3% in 2003 and 2.1% in 2002, but still well below the 7.3% average annual growth during the 19867 -1997 boom years. Both consumer spending and business investment rose by more than 5% in the final quarter of 2003 on a year-ago basis, signaling a sharp upturn from lower growth earlier in the year.
The U.S. and Asian economic recoveries spurred Chilean growth in the last half of 2003 and the first half of 2004. Domestic demand boosted imports. Foreign investment in Chile has slowed from the high levels reported in the 1990s but should rise now that business confidence has been restored.
Inflation is low, but fears of deflation have abated. Excluding agricultural prices, inflation is running 0.3% on a year-ago basis. Core inflation, -which factors out volatile fuel and food prices and is the key figure monitored by the Banco Central of Chile, is -0.1% on a year-ago basis. The central bank's target inflation rate is 2% to 4%, with an annual rate of 2% anticipated for 2004.
Banco Central cut interest rates in December 2003 and again in January 2004 to boost demand and push back the threat of deflation. Since then, it has left its key rate, the nominal interbank rate, unchanged at 1.75%. In early May, the bank announced that it did not anticipate raising rates if U.S. rates rise. Instead, it expects to hold rates steady as long as inflation remains near target.
Unemployment stands at 7.4 percent and is drifting down; renewed hiring in the mining sector should help reduce unemployment further this year. One potentially troublesome development is Argentina's decision to ration its gas exports to Chile, which relics on Argentinean gas to generate one third of its electricity. Companies will face higher fuel costs as they arc forced to turn to more expensive energy supplies. Nonetheless, most economists forecast positive business conditions for the remainder of 2004 and 2005.
One of the keys to Chile's solid economy and financial stability is its banking system. The system is the best in the region and offers many of the asset and liability products available in international markets. Foreign trade financing and money exchange operations are particularly well developed and efficient compared with the rest of Latin America. Chile's Supcrintendency of Banks and Financial Institutions, an agency under the Minister of Finance, regulates the financial sector. The Central Bank, which is autonomous from the government in conducting monetary policy and regulating foreign capital movements, also regulates bank operations.
Chilean banks with a direct presence in the United States include Banco de Chile and Banco Santander, Scotia Bank, Banco de Cr[iota]dite e Inversiones, and CorpBanca. U.S. banks operating in Chile concentrate on corporate lending for multinationals and capital market activities, although Citibank and BankBoston are active in retail banking as well.
Total loan portfolios in Chile's banking sector stood at 34 trillion pesos, or about $65 billion, at the end of March 2004, up $.2% from a year ago, according to the banking superintendent. Consumer and small business lending has also been healthy this year in the low-interest rate environment. The country's biggest bank, Banco Santander, reported a first-quarter 2004 net profit of 51.277 billion pesos, and the second largest, Banco de Chile, had a net profit of 37.895 billion pesos.
Santander, an affiliate of Spain's Banco Santander Central Hispano, holds 23.2% of market share. Banco de Chile's market share rose to 18.3% in early 2004; its end-year goal is 19%. The total banking system in Chile had net profit of 1920 .0 304 billion pesos in the first quarter of 2004, up 22% from the first quarter a year ago. …