Escape from the roach motel

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It wasn't so long ago that fund managers, investors and equity analysts joked that Chile was like a popular make of cockroach trap that worked by luring the critter inside a box whose door wouldn't open outwards.
An individual or mutual fund could invest in Chile, but repatriating dividends or capital gains was a tricky, expensive business and often not worth thae eVort.
However, there have been advantages to this for Chile. By locking up inward portfolio investments, making the Wxed-rate market unattractive as an arbitrage play, and discouraging Chilean companies and banks from over-exposing themselves to short-term foreign credits, Chile has been able to control Xows, stabilize the peso and inXation, and prevent capital Xight disasters such as those that afflicted Mexico, Thailand, Russia, and Brazil.
In the past two years, interest rates have dropped to around 6%, the peso has been floated and the financial markets have been globally integrated, giving the central bank and Wnance ministry the conWdence to relax their stance and make the country more attractive to foreign investors. The latest easing, announced by the bank on May 11, involved the elimination of the one-year permanency rule, by which foreign securities investors had to leave their capital in the country for at least 12 months.

Coming 18 months after the reduction to zero of the minimum reserve requirement (encaje), which demanded that a percentage of an investment be left on deposit with the bank, the move was broadly welcomed as a heartfelt invitation to foreigners to look anew at Chilean stocks and Wxed-rate instruments. The response was immediate. The local stock market awoke from its torpor, with investors pushing the IPSA index of the 40 most-traded shares up 8.65% in three days, on turnover not seen since Spain's Telefónica announced in January that it wanted to consolidate its Latin American interests.
In the event, the US Federal Reserve's decision to raise interest rates stopped the Santiago rally in its tracks, but, according to most analysts, the boost to sentiment should endure.
That said, Wne sentiment and free Xows are all very well, but Chile is still one of the few countries in the world that punishes foreign portfolio investors with capital gains tax on net proWts. At the moment the impost is 15% for gains on market-traded, liquid shares, and up to 35% for other classes of equity. President Ricardo Lagos, in his annual speech to the nation on May 21, singled out for special mention the country's capital markets, and vowed to eliminate a lot of the bureaucracy that has built up around the capital control system.
Generally speaking, a non-Chilean individual with $10,000 to invest in the Santiago Bolsa will Wrst hire a local lawyer, who will register him or her with the central bank and secure an identity number. The investor may then contract an accountant and open an account with a custodian, most probably Citibank or State Street, which dominate the Chilean market. The alternative here is to empower a stockbroking Wrm to handle all the legal procedures. Although principal and proWt no longer have to remain in the country for 12 months, the individual investor still needs approval from the central bank before he or she can remit the spoils. "There are still a lot of extra costs and restrictions for an individual foreign investor," saysYarek Aranowicz, a portfolio manager at Credit Suisse Asset Management's Chile fund.
Credit Suisse's fund, which manages about $200 million in assets, is one of the two remaining Chile-speciWc investment vehicles, after the recent winding-up of Rothchild's Five Arrows Chile. The principal concern for these funds, apart from capital controls, has been the gradual draining of liquidity through multinational takeovers and local mergers, and the paucity of IPOs to compensate.
Hopes are high that government eVorts to encourage more domestic equity oVerings, protect minority shareholders and tempt foreign investors spooked by the Fed's tightening and Nasdaq turbulence - and the fallout in Brazil and Mexico - will revive a comatose Santiago Bolsa. "If it weren't for the current global environment, the reaction to the latest liberalization would have been more dramatic," says James Upton, head of Latin American equity research at Credit Suisse First Boston in New York.
"Even so, it should prove the catalyst for a good period in the markets amid solid economic development."

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