CHILE: OPIC-SUPPORTED INVESTMENT FUND MAY BE BETTER

UNCLAS SANTIAGO 000760

STATE PLEASE PASS TO OPIC BILL PEARCE
STATE PLEASE PASS TO USTR KATE KALUTKIEWICZ
TREASURY FOR BLINDQUIST
COMMERCE FOR KMANN

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV CI
SUBJECT: CHILE: OPIC-SUPPORTED INVESTMENT FUND MAY BE BETTER
TARGETED AT OTHER COUNTRIES

REFS: (A) STATE 26881 (B) SANTIAGO 316


1. (SBU) SUMMARY: Post has no objection to OPIC's proposed
investment funds program outlined in ref A. The objectives of the
Paladin Realty Latin AMERICA Investors III, L.P. fund are compatible
with Chile's economic development programs. However, OPIC may find
that the program is better targeted at other countries in the
region. Post believes that demand for capital from the fund will be
much lower in Chile than in other countries being considered, due
mostly to a variety of alternative capital sources and a surplus of
existing housing and commercial real estate projects. END SUMMARY.

The Need for Such Capital in the Chilean Market
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2. (SBU) The fund's stated focus will be on long-term capital
appreciation through real estate projects in partnership with local
developers. The Chilean market is currently experiencing a surplus
of housing and other real estate projects in many urban areas. A
significant proportion of projects were put on hold in
mid-construction during the height of the financial crisis, though
some have very recently resumed building.


3. (SBU) Many real estate companies have now partnered with banks
and even retail chains (an alternative source of credit in Chile) to
offer special incentives that will spur sales of existing housing.
Given the current environment, the fund might find a markedly
decreased appetite among developers for the purchase and/or
construction of new housing or new commercial real estate projects.

Availability of Funds from Other Sources
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4. (SBU) Chile's modern, open-market economy has an extremely
sophisticated (if somewhat conservative and small) financial market.
There are many sources of capital (including significant
participation from foreign banks) and more are starting to emerge
(e.g., retail chains as cited above). The flow of credit to major
providers within the Chilean market appears to have been largely
unaffected by the financial crisis. The banking sector and the GOC
continue to assert that the Chilean financial sector is
well-capitalized.


5. (SBU) Small- to medium-sized enterprises (SMEs) and individual
consumers have had greater difficulty accessing credit and new
capital as a result of the crisis. The GOC has taken several
measures to promote lending and improve access to credit. For
example, in March the Government announced a new "Pro-Credit
Initiative" designed to stimulate bank and non-bank credit by
generating an extra US$3.6 billion in private loans (ref B). In the
area of affordable housing, the GOC provides a healthy subsidy
(sometimes more than 50% for the lowest income brackets) for those
disadvantaged sectors of Chilean society in need of securing a home.
OPIC's program would likely find itself in serious competition with
the GOC and numerous private sector capital providers in both
housing and commercial real estate projects. However, the fund
might be able to find a niche in targeting middle-income housing
projects and commercial real estate projects associated with SMEs.

Local Reputation of Fund Manager
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6. (SBU) Post has no information regarding the Chilean reputation of
the prospective fund managers, Paladin Realty Partners, LLC.
SIMONS