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Emerging Markets

Chile poised for market reform

Chile is to unveil a series of capital market reforms to boost foreign investment and domestic liquidity.

Chile is to unveil a series of capital market reforms to boost foreign investment and domestic liquidity.

Eric Parrado, international finance director at the Chilean finance ministry, said yesterday that the capital gains tax for foreign and local investors in onshore bonds, currently 17%, would be scrapped, in line with tax exemptions on equity investments.

Foreign non-bank financial institutions participating in the local syndicated loan market will pay only 4% tax for new deals – in line with the current tax for foreign banks. Previously, these foreign investors, such as pension funds and insurance companies, paid 35%.

Measures will also be introduced to broaden capital market access to new issuers such as small and medium-sized companies, Parrado told Emerging Markets in an interview in Medellin. “We want to incentivize foreign creditors and to increase domestic liquidity with new capital market reforms,” he said.

These measures form part of an eagerly awaited capital market reform agenda, the MKIII, that has been languishing since the middle of last year as the global financial crisis hit the region.

The new regulations will be sent to Congress this week, at a time when regional governments seek ways to shore up credit conditions in the face of rising global financial protectionism.

Parrado argued that the need to boost domestic liquidity outweighed the heightened risk of market disruptions that could be triggered if foreign investors leave en masse when global volatility hits. The measures may suck in a large amount of domestic liquidity for local deals issued by foreigners.

The proposals come on top of large losses by Chilean pension funds on investments in foreign equities. But Parrado denied that a political backlash against these losses, or that the international trend towards nationalization would derail these capital liberalization proposals.

Latin governments are scrambling to attract capital in the face of global deleveraging. Last October, the Brazilian government removed its 15% IOF financial transactions tax on foreign investors in public-sector debt investments.

Brazil’s deputy treasury secretary Paulo Valle told Emerging Markets it would be “a right time to debate” lifting taxes on foreign investments in onshore private-sector corporate debenture deals, in order to jumpstart the moribund private domestic fixed-income market.

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