Bankers have told a well-regarded trade finance journal that pricing for Latin American letter of credit (L/C) confirmation has fallen sharply over recent months, and margins appear very slim given the levels of risk in the region.

Regional growth has been strong, but South America remains exposed to political interference such as Venezuela's September cancellation of mining concessions. Political turmoil and popular unrest may bubble up to the surface in elections in Brazil and elsewhere in the region next year.

Unreal situation

Latin America's healthiest economy is Chile, although economic growth has slowed there over recent months as the production of copper, the country's biggest export, declined and higher interest rates made life tough for manufacturers.

One banker told International Trade Finance (ITF) that in Chile, he would "happily confirm" L/Cs from major banks for 50 basis points (bp) per annum but described as "unreal" the situation elsewhere in South America.

Argentine worries

Another L/C specialist said he had recently returned from the region and was apparently staggered by Brazilian banks' willingness to confirm L/Cs from top rated Argentinean banks at rates equivalent to between 50-80bp per annum.

Pointing out that Argentina is not long out of recovery from its collapse into bankruptcy in 2002, he suggested that his bank might be declining Argentinean L/C business as too risky, leaving business priced even as high as 1 per cent per annum to more aggressive banks.

Peru, Colombia, Brazil

Bankers canvassed by ITF said pricing for Peruvian L/C confirmation is around 80-100bp per annum, while confirmation margins in Colombia are in the 50-100bp per annum range.

In Brazil, confirmation fees are as low as 50bp per annum for top-tier banks, which a New York-based analyst told the trade finance journal was down to stiff competition for a very few L/Cs in the market.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.