Friday, June 17, 2011

Chile ´s own sub prime crisis: The retail industry under scrutiny
It has been widely said that the market oriented Chilean economy, strongly depend upon an economic institutional framework almost crisis proof. It means there is no chance the regulatory authority, do not have the proper tools to protect market confidence, consumer rights, small investor interest and systemic risk. In fact from time to time, there are new development to match such an institutional framework with the steady growth within the retail industry ,and the market as a whole as well(credit cards massive availability, better access to credit market to different segment ).All of that ,coupled with the increasing share of middle class consumers in total sales of almost every kind of goods.-
The retail industry in Chile, has grown steadily in the last ten years. Although with an oligopoly structure, it is very competitive .JC Penney ,Home Depot stores and Carrefour could not consolidate positions on this market. At the same time ,It has also managed to focus on consumers needs basically throughout credit , issuing its own credit cards which have allowed a 25% share of total domestic credit. Within the retail industry, 50% to 80% of daily sales are based on the use of its own credit cards which firms encourage with special discounts and offers on the spot.
Actually, this industry has five players whose key indicators for 2009 are (ROE,ROA ): Cencosud (4,43%,1,94%), Ripley,(1.04%,0,6%)Fallabella, (11.12%,4.81%),La Polar,(14.15%,6.13%),and Hites (4.68%,2.42%). (Source:CORPRESEARCH.2009).According to this data, the Chilean retail industry as a whole look healthy, and in good shape to get investors preference, but with some exceptions. “La Polar” store, is actually in deep trouble because of its practices of hiding real default debt ratios, replacing it by debt reprogramming based on its own terms ,making up financial returns to look better than otherwise .With a market value of U$$ 1335 million and more than 30 local stores, Its property share is divided among local institutional investors (27%),domestic investment funds (12%),Foreign investors (20%), and stock options traders (31%). Moreover It is placed at the fourth place among Chilean retail players .La Polar store was under scrutiny since 2009 by some risk agencies and consultants. At that time it was rated by Fitch-Ratings(April 2009), with negative perspectives. Since then, key managers started to sell their stock options, anticipating by two years in advance expected losses, all of that at sight of local authorities who obviously did not react as quickly as managers did.
Besides, nobody seemed to care about some facts concerning risk and management debt of La Polar : Focused on low income customers, their average debt was almost U$$1200, ,well above average income level of its target(roughly U$$600), and its competitors debt levels(U$$800) .It follows that risk defaults were high enough to impose a threat on reported earnings (EBITDA of 15.4% in September of 2010)and expansion plans.
What went wrong? Reality has proved once more that the institutional framework is a necessary but not sufficient condition, to protect markets from internal or external shocks .It is as much important to have the people ready and prepared to apply the tools they have at their disposal, if not they should resign. At the end of the day ,It is a matter of credibility.

Friday, June 03, 2011


Rough times for global economy: The middle of the road situation
The economic recovery arising from the financial crisis of 2008, seems to follow the traditional path. Let make clear that it is not the same an economic recovery back from a real shock ,(sharp drop in exports), that a recovery back from a financial shock. While in the former, it is a matter decrease domestic spending to stabilize aggregate demand, in the later, it is a matter of the real conditions of the financial sector to support growth, which mean its ability to overcome credit crunch, when firms need additional resources for its cash flow.
A weak financial sector, make the whole process a lot more complex. Actually, financial sector in developed countries is still in the process of getting back to normal , which according to prestigious research center, it might need up to three years to reach the fully recovered status (
Besides, at this moment the main concern is how to cope with debt and the risk of inflation. The former imply the risk of higher taxes or spending cuts, none of which help to boost expectations for further gains in economic growth. The later, induces a tighter monetary policy which does not help the recovery either.
Thus, given a confuse framework arising from the combination of both, the effect of the solutions applied since 2008 , and the still ongoing structural weakness of the economy, private investment delay decisions concerning job creation, weakening household expectations about improving income level . Moreover, both overcapacity and weak demand will keep housing market fragile for a longer than desired period of time.-
Worst of all, the willingness for international cooperation, which was a key factor to overcome the initial stage of the crisis, has been replaced by domestic needs in each of the big global player. Whether it is the currency volatility ,the debt level, the rescue package for those in trouble , or the implications of fiscal deficit increase, it all add up to more global uncertainty.-
It follows that the financial crisis effects on the global economy are far from over. On the other side, Emerging economies on their own can not overcome current uncertainty, or compensate oil prices increases.
Therefore, because of uncertainty , it is time to focus on expectations making clear that key macroeconomic variables (inflation , debt and fiscal deficit) are under control. Besides, it does not seem to be the time for further government involvement, aside from what it has done. Perhaps to get a more robust global recovery, it is the time to make easier to the private sector, to be in charge of the remaining second half of the road.-