The panel’s bond market experiences may have been relatively benign, but the debt market has not been open to all firms. They have relied on the banking sector.
“Within international corporate and commercial banking, we were managing a book of somewhere in the range of about US$78bn entering the pandemic,” said Robert Williams, senior vice president, international corporate and commercial banking, Latin America and Caribbean, at Scotiabank. “During the first two quarters of the pandemic, the book went from US$78bn to about US$88bn; it jumped up very quickly with corporate and commercial customers seeking liquidity as they had very little visibility as to what was coming up during the pandemic.”
The book has now gone back down to somewhere in the range of about US$79bn–$80bn. “Companies are getting back to normal operating conditions, in some cases generating more revenue, reducing debt, and also accessing capital markets,” said Williams.
In Chile it has been a similar story: Scotiabank’s book went from around US$18.7bn to about US$20.6bn, and now it is back to US$19.6bn.
Within that dynamic, prices behaved as expected; margins went up significantly in Q2 and Q3, but then returned to levels seen prior to the pandemic.
“We are back to relative normality,” said Williams. “In the case of Chile, good policies, better copper prices, and just a better overall economic dynamic suggest this level of normality will prevail.”
For those living in and dealing with Chile, the government’s actions around pension fund draw-downs, releasing savers’ money to facilitate household liquidity, has been a major topic of discussion and some controversy.
“We have now had three draw-downs of the pension fund,” said Mery. “The third was a surprise.”
Draw-downs come with implications for the operation of pension funds and for the market, although the central bank moved to reduce the impact on the market by permitting the use of repos as a measure to facilitate demand for liquidity. But the simple act of fulfilling the draw-down obligations has implications for the portfolio mix, since it is easier to realise cash from more liquid international investments.
The draw-downs and the need for liquidity comes with long-term problems for pensions in terms of asset allocation, returns and management. There is wider significance for the capital markets and the economy in general.
“We can’t underestimate the importance of the pension funds, not only to the long-term savings for the populace but, also, in terms of providing the backbone support for the capital markets,” said Guthrie.
Pension funds provide long-term investment for infrastructure projects, they fund mortgage portfolios at commercial banks with fixed-rate funding, provide liquidity in the derivatives market, and together with insurance companies and mutual funds, they are major players in the capital markets, particularly at the long end of the market. If the depth of domestic demand deteriorates then it will affect companies that are unable to access international capital flows.
“We will be watching the issue of pension reform very carefully,” said Guthrie. “We are supportive of today’s private system, but even if we have to move towards a mixed system, as long as it provides stability for individuals and stability for the capital markets, then we will support that as well.”
Constitutional convention elections
The other major domestic talking point was the constitutional convention election of early May and how the assembly’s confirmation would translate into the drafting of the constitution.
Uncertainty stems from the emergence of a large independent group, forming 48 of the seats or 31% of the constituents, and how that group will work with the other constituents from the left and the centre of the traditional parties in forming the constitution. The stakes are high.
On the agenda are issues like control of natural resources, healthcare, education, pension reform, basic salaries and minority issues. What is not likely to be on the table, according to the panel, is the independence of the central bank and free trade agreements.
The panel said a significant proportion of independents are moderate and hopes were high that they can work together to reach a deal that is beneficial for all Chileans.
And then there is a presidential election in November. It is safe to say that that capital markets are going to be affected.
The ESG agenda
ESG is an increasingly important topic for the government and every sector of industry.
There has been important progress on the ESG front in the public sector, according to Perez. The government and the Ministry of Finance has led the way with sovereign issuance, with green bonds since 2019, social bonds since 2020, and sustainable bonds this year.
“We have added credibility to these products,” said Perez. “Raising a total of US$16.2bn in thematic bonds, roughly 16.6% of our total bond issuance, places us among the highest ESG issuers in the world.”
Other institutions are also driving the financial transition. The Financial Market Commission and the pension fund regulator are working on several initiatives that incorporate climate action as part of their regulatory and supervisory approach.
“We also embarked on an important strategy in terms of developing the potential for green hydrogen, which will further bolster our progress in terms of the decarbonisation of our energy mix,” said Perez.
In the power sector, Engie has been working closely with the government to accelerate the energy transition and reduce emissions. In 2019, it signed a voluntary agreement with the government to stop the development of coal power plants and committed to start a gradual decarbonisation of the energy matrix.
Two years later the power industry has committed to the closure of almost half of the coal power plants in the country by 2025. That is hugely significant for a country that relies on around 35%–40% of its electricity production from coal.
“Our CEO announced, together with the ministries of energy and the environment, that Engie will fully exit coal in Chile by 2025,” said Milligan. “We will be converting our three remaining coal units to biomass and natural gas, and at the same time we will build an additional 1GW of renewable power plants for a total investment of US$1bn.”
“We have been committed to the sustainability of our operations for years,” said Truffello. “We are essentially a sustainable industry, and we are very proud of being the first forestry company in the world to be certified as carbon-neutral.”
The panel said that the environment will be higher up the agenda after the pandemic as people feel more vulnerable, and they care about the long-term sustainability of the planet.
On the whole, the panel were positive about the future.
Williams said Chile had been very successful in managing the Covid crisis, not only from a government perspective but also from the prudent way corporations managed their capital structures.
He also said that vaccinations are going well, so all those things are very positive.
The key determinant for Chile’s financial future, however, is likely to stem from the negotiations on reform.
Most were optimistic that there are enough moderates within the assembly to ensure stability in Chile, and that will ensure it remains the reference point for its Latin American peers.
Mery expects a strong recovery following Covid but said that political issues will lead to volatility. She was more guarded in her enthusiasm for the reform process, hoping that the pension fund reform is not too aggressive, for the sake of savers, the population and for the market.
Truffello recognised the significance of a process that determines the future prospects of the country over the next 30 years.
“We have more than 80% of our assets in Chile, we have good grounds for the future for investment in Chile, and I hope that these guys can talk sense,” he said.
Milligan said that the past 15 months had been challenging but he was positive for the immediate outlook. “We believe that the economic recovery will have a positive impact on electricity consumption while the current copper price can further bolster the recovery and is a positive factor for overall economic activity.”
He stressed the importance of a strong and stable regulatory framework to promote the long-term investment needed to reach climate targets.
“Transition is under way and will require important investments in renewables, in storage and also in electricity and transmission lines,” he said.
Perez was more cautious, reminding everyone that the country is still in the middle of a pandemic, and that there is still uncertainty regarding the effectiveness of vaccines to variants but noted that the government will continue to support households and firms with flexibility and within the realm of fiscal responsibility.
Even within the context of global uncertainty and concerns over reforms, Perez said Chile is well placed to benefit from a return to normality after the pandemic.
“Chile has strong institutions built on several decades of growth and high-level policymaking. Regardless of the unexpected outcome of the elections last weekend, the constitutional process takes place within an institutional framework that was set out to allow for this process to take place,” he said. “And Chile is a small, open, financially integrated economy that will continue to be supported by the rapid turnaround in global growth lying ahead.”
Guthrie agreed. “We continue to be very optimistic for the future. Chile has dealt admirably with the pandemic, is well positioned from a fiscal perspective to weather the remainder of the storm, and our confidence is exemplified by Scotia’s recent additional 7% investment in the bank. We are very optimistic for the future of this country, and we are here for the long haul,” he said.
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