Corporate Treasury & FX in Colombia, Chile & Peru

Commentary

Amongst treasurers, Latin America does not have a great reputation. Even if we have come a long way from the past of military dictatorships and very difficult regulations, it remains more complicated than many other regions. Peru, Colombia and Chile all have seen significant turmoil in the recent past.

So – where do we stand today? It says a lot that, on this call, the peers’ main concern was about whether to use local or foreign banks, and whether the FX rates for foreign remittances were better onshore or offshore. 

Of course, there are causes for concern, especially about the direction of the economy in each country. Peers gave different views on this, especially in Colombia. But, generally, the problems companies face are manageable:

• The biggest complaint was about the financial transaction tax in Colombia: as its name suggests, the “cuatro por mil” is a 0.4% tax on every money transfer above a monthly threshold. This can represent a significant cost when cash is being moved between banks, even within the same entity. There is a workaround which involves the use of a fiduciary: this does not work for transfers with third parties, and it blocks the cash for 24 hours. Another alternative for cross border international payments between subsidiaries is to settle them offshore.
• All peers are working to improve working capital. Factoring and supplier finance solutions are available, but factoring is felt to be expensive. 
• Other avenues for improving working capital include trying to use more modern payment methods. There was a feeling that these countries are maybe less innovative in payments than other countries in Latin America, such as Brazil with PIX and Yappy in Panama. However, BBVA in Colombia does have a QR code based solution, which makes it easier for customers to pay and provides an on-line detailed remittance advice. This has improved receivables reconciliation rates and timing.
• One peer in Peru uses two banks who have an innovative solution for drawing down bank loans under existing facilities: draw downs can be triggered on line, with no need for wet ink signatures or additional paperwork and the cash being quickly available. Interest calculations are automatic and reliable.
• Overall, however, the banking situation is not ideal: as is often the case in Latin America, there is a strong pressure to use local banks for services such as payroll, as the local banks often provide preferential services to employees. Most peers use international relationship banks, especially Citi, BBVA, Santander, JPMorgan and Bank of America. However, as for Citi in Chile and BofA in Colombia, the international banks often no longer have a full onshore presence. They may operate through a local partner bank, where accounts can be accessed through the Citi or BofA portals, and operated remotely.
• Peers with a diversified customer base tend to use a lot of local banks for collections; it is easier to use only international banks if you only have large B2B customers.
• One peer offers supplier financing solutions in EUR and USD, as well as local currency: there is no regulatory obstacle, and it makes sense for customers who have supply contracts in these currencies.
• Although the currencies of the three countries are fully convertible, cross border pooling is not allowed. Cash repatriation can be something of a challenge: dividends work, and intercompany services can be paid for – but withholding tax is an issue. 
• The tax systems can be onerous
• All peers on the call hedge their currency exposures, and continue to do so, despite a recent cost increase due to heightened volatility. There is a mix of onshore and offshore hedging: one peer finds the local banks give better pricing, but still gets quotes from a variety of banks to ensure competition.
• Treasury can be operated remotely, though some peers maintain small local teams.

Bottom line: these countries remain attractive and viable places to do business, even if they present administrative challenges. Chile appears to have emerged from its political unrest with an economy which still makes it the standout country in the region; Colombia and Peru are very much open for business, even if there is cause for concern, given the current economic and geopolitical uncertainties. 

Most international banks have scaled back their presence in these countries, and do not necessarily view them as being key markets, even when they have an onshore presence. However, their partnerships with local banks work, and there is no shortage of competent local banks. So – for things to work, it can be necessary to adapt the treasury management model.

But, for the peers on this call, that is an acceptable price to pay.

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