Analysts see potential in SME use of FX options, but costs may hinder growth

Wednesday, January 19, 2011

The Chilean finance ministry and private banking association ABIF's recently launched campaign to promote the use of FX options among local exporting SMEs may unleash an untapped market, but the product's high cost could end up being a hurdle for development.

"This is a high-potential market. Few companies currently use it, but this is basically due to a lack of awareness," said Raul Barros, senior analyst at stock brokerage BBVA Chile's research department.

In a press release, finance minister Felipe Larrain said that more than 5% of the country's SMEs and almost half of companies that bill US$50mn a year use some type of currency coverage.

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This type of product also carries high costs, not only because of the transaction per se, but also because of the need to create new platforms to manage them, Barros said.

The peso has seen strong appreciation over the last few months, which prompted the central bank to step in and buy billions of dollars to help stabilize the local currency. Chile has a floating exchange rate regime.

"It sure is better to have it than not in moments of currency volatility, but the cost-benefit will purely depend on your company's sales volume," Barros said.

And while these options are useful to reduce SMEs' flow volatility, it is not what these companies need the most, which is financing, analyst at brokerage Banchile Claudia Benavente told BNamericas.


On Tuesday (Jan 18), the government and the country's five largest private banks - Santander-Chile (NYSE: SAN), Banco de Chile (NYSE BCH), BCI, CorpBanca (NYSE: BCA) and BBVA - launched a campaign to promote the benefits of FX options, which can allow companies to plan their operations annually without having their returns being significantly affected by currency fluctuations.

The measure is a step in the right direction as the main hazard for Chilean exporters is the currency's volatility, local association of manufacturers and service exporters Asexma's chairman, Roberto Fantuzzi, told BNamericas.

"But the minister should have invited all other business' unions. If you only invite banks, you leave the beneficiaries out," he said.

A bill currently being discussed in congress calls for tax breaks when using these instruments, the press release reads.