To Chilean broker Larrain Vial SA Corredores de Bolsa, JPMorgan Chase & Co. is dragging its feet when it comes to increasing the nation’s presence in its benchmark local bond index.
Over the past two years, Latin America’s highest-rated country has eliminated taxes on capital gains for foreign investors in the domestic debt market and allowed over-the-counter trading for the securities as part of its effort to boost its representation in the New York-based bank’s GBI EM Global Diversified index.
Yet Chile’s peso-denominated notes account for just 0.1 percent of the gauge, compared with 5.8 percent for Colombia and 10 percent for Brazil.
Larrain Vial CEO Andres Trivelli contends Chile’s negligible presence is holding back the development of its market as a lack of liquidity keeps foreign investors away. Just about $300 million of the 31.5 trillion pesos ($47 billion) of notes issued by Chile’s central bank and government trade daily. That compares with almost $1.5 billion in Colombia’s local fixed-income market, according to estimates from the brokerage.
“JPMorgan has systematically given different excuses for Chile’s weight,” Trivelli said in an interview from his office in Santiago. “First, it was the taxes. Now those taxes are gone. Then that it was hard to operate because you had to trade through the exchange, but that isn’t so now. It’s very weird.”
JPMorgan declined to comment on Chile’s weighting and its methodology. As of Dec. 2014, $191 billion was benchmarked against the GBI EM Global Diversified index.
Bernardita Piedrabuena, the capital markets coordinator at Chile’s Finance Ministry, said the country’s local treasury bonds don’t satisfy JPMorgan criteria requiring that the securities be liquid enough that foreigners can easily access them. If the treasury debt were included in the index, Chile’s weighting would jump to 1.6 percent, she said.
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“This would allow for more demand for local papers, which currently is almost all in the hands of local investors, increasing competition and thus reducing yields in the market,” Piedrabuena said in an e-mailed statement.
Foreigners owned 4.8 percent of Chile’s local sovereign bonds versus Colombia’s 44 percent and Peru’s 37 percent, according to the most recent data from Chile’s central bank. Colombia has $66.6 billion domestic sovereign debt outstanding while Peru has $14 billion.
Foreigners also remain reluctant to invest in Chile’s local market because, among other things, trading in its securities can’t be settled through international clearing houses such as Euroclear, said Alvaro Vivanco, head of Latin America strategy at Banco Bilbao Vizcaya Argentaria SA.
“There’s a lot of appetite to invest in a stable country such as Chile, but it’s much easier to invest in the swap curve than in local bonds,” Vivanco said, referring to the country’s market for interest-rate swaps.
–With assistance from Christine Jenkins John Quigley Andrea Jaramillo and Javiera Quiroga To contact the reporter on this story: Eduardo Thomson in Santiago at firstname.lastname@example.org. To contact the editors responsible for this story: Brendan Walsh at email@example.com, Michael Tsang at firstname.lastname@example.org, Lester Pimentel, Rita Nazareth
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