Chile’s accounting sector ‘poised for new growth’

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hile, despite being one of the most prosperous Latin American countries, was hit hard by the worst social unrest it has seen for decades in 2019. No sooner was the country recovering from this than Covid arrived on its shores.

But it is not all bad news – far from it. While merger and acquisition activity has come to a standstill and hiring of new staff has slowed to a crawl, Chile is well placed to bounce back from 2020, according to its accountants.

Chile responded quickly to the pandemic by making adjustments to the tax and regulatory reform it had started in 2020. As a result of the social unrest that occurred in October 2019, it was proposed that a new constitution should be drafted. As a consequence of the problems caused by the Covid-19 pandemic, there have also been some changes.

“Adjustments in the constitution that affect the pension system in Chile (AFP) allow affiliates to withdraw 10% of pension funds, with a limit of USD 5,500 for each withdrawal,” says Viviana Rojas, partner at MGI Hernán Espejo y Asociados.

During 2020 the latest tax reform was implemented, with preferential changes for SMEs such as simplified taxation and a reduced income tax rate until 2022 of 10% (companies with a general regime pay 27% taxes).

“For the year 2020 and 2021, deadlines for filing and paying annual taxes and affidavits were extended,” says Rojas. “In addition, benefits have been granted such as bonds for SMEs and individuals, and postponement in the payment of real estate contributions and bank loans, with preferential rates guaranteed by the state.”

The Comisión para el Mercado Financiero (Commission for the Financial Market) has also established the obligation to apply the BASILEA III standard for Financial Institutions, extending the term up to 2023.

Despite the turbulence of the last two years, Miguel Pavez, managing partner of PrimeGlobal member firm Keystone Auditores, says the accounting market has escaped a depression and is poised for new growth.

“The accounting market has remained relatively stable, hiring has stagnated but retention has improved,” he says. “Client portfolios have not increased significantly, but demand is expected to increase next year. Fees have remained at the levels of the beginning of the year, but they will recover when economic activity bounces back.”

But it seems the accounting industry has had to restructure to avoid that depression. “There have been major changes forced on the industry due to Covid lockdown and political issues, while strong fee pressure and staffing issues have been a major challenge for all the audit companies,” says Fernando Landa Escalona of ARTL Chile Auditores Limitada, member of Nexia International. “We saw some market recovery in August 2021, with more demand on audit and accounting business.”

Smaller firms seem to be struggling the most. “Covid-19 has really impacted the small accounting firms,” says Moises Crisóstomo, managing partner BDO Chile. “Grant Thornton Chile became HLB Surlatina Chile last year and some other small companies are disappearing.”

While M&A activity has been flat, Pavez says the back office services area has grown more than other accounting services. He predicts that the demand for accounting and financial services will increase in the coming months in correlation with the higher GDP growth and the reduction in the effects of Covid-19.

David Molina Candia, audit partner at Kreston MCAA, has seen an increased demand for audits for non-regulated companies, both yearly and mid-year. “Most of these requests come from the banking industry, which requires them to facilitate financing for clients affected by the pandemic,” he says. “There has also been an increase in bankruptcy or reorganisation certifications and due diligence services for company acquisitions.”

Candia predicts M&A activity will surge again in 2022. “Signs of improvement are already being seen,” he says. “We have seen some of the highest figures in foreign investment since 2003, reaching close to USD 7.7 billion in the first half of 2021, where China stands out with almost 70% of total investment.”

Rojas has seen most of the growth in the last year in the areas of BPO, financial advisory and corporate governance. The boost in electronic commerce and home working forced by Covid has seen a focus on cybersecurity and data analysis. “While M&A activity is expected to pick up, mergers will be directed towards companies with technologies and innovations and digital capabilities that allow the delivery of new services to customers,” she says.

Escalona predicts that a lot of business will migrate from the Big Four to mid-tier firms. “A significant portion of the market is moving from Big Four services to mid-tier companies, mainly driven by a need to cut fee costs,” he says. “There is more opportunity than ever for mid-tier firms to win former Big Four clients and we are expecting to gain more market share by following this strategy. “

The social unrest in Chile had consequences for the local economy as a result of restrictions on the population and the adoption of emergency measures. These consequences increased as a result of the arrival of Covid in March 2020, enhancing the negative impacts on the economy.

“Tourism, hospitality and transportation have suffered the greatest effects of the pandemic and consequent restrictions on mobility,” says Rojas. “As of the second semester of 2021, an increase in economic development is already observed in Chile and it is expected that by 2022, the growth experienced before 2019 will resume.”

Of course, even in bad times there are companies that do well. “SMEs dealing with imported goods such as electronics and cars are having a great year,” says Escalando. “New companies such as Cornershop and NotCo have had great success internationally and attracted foreign investment. The Chilean consumer has moved from face-to-face to a web-based platform and investment in internet connectivity has developed a whole new market where SMEs can now compete against major players.”

Candia says that Chile’s management of the pandemic was very good and the vaccination scheme it put in place is one of the best in the world. “As a consequence of this, the country is already showing an improvement in its economic indices, increasing investment and GDP, and reducing unemployment,” he says.

However, he does warn that the effects of the disease will linger far beyond this year, noting that although the disease may disappear or decrease significantly, the economic impacts will remain for a long time.

Chile currently has access to the IMF’s flexible credit line (FCL), which was approved in May 2020 for two years. Chilean authorities have stated their intention to continue to treat the FCL as precautionary and to exit as soon as the 24 month period is completed, conditional on developments and risks.

The IMF said the FCL will continue to play an important role in supporting the Chilean macroeconomic strategy by providing a valuable buffer and boosting market confidence. So how close is Chile to exiting the FCL and how strong is that market confidence?

Rojas says the country is on track to leave at the end of the two year time period, having accessed almost USD 24 billion, which improved liquidity and was also used in pandemic social support. Candia is also positive the country will not need to extend its term within the scheme but points out that the final decision will be subject to the evolution of the pandemic and its effects on the local economy.

The Central Bank of Chile (CBC) has implemented broadly advanced transparency practices to ensure investor confidence. According to the IMF, transparency quality is high in terms of timeliness, periodicity, and disclosure. Rojas says investors have every confidence in the CBC’s independence and transparency and it is has been successful in its monetary and financial policies.

“It is really positive to see a reactivation of investments in research and development of technologies and also in renewable energies,” she says. “Over the next 12 months the biggest areas of growth will be mainly in the services associated with BPO and information technology and data analysis.”

Despite the negative press the social unrest brought to the country, Candia stresses that in general, Chile is an orderly country with clear laws and rules and where the institutions function. He says investors are in no doubt that the Central Bank of Chile is an autonomous entity.

“Although a constituent assembly has been called to propose a new constitution, all this is being carried out in an orderly manner and through an institutional channel,” he says. “It is the long tradition of the country in complying with its laws and commitments that make investors want to continue investing in Chile.”

The biggest problem that Chile faces when wooing foreign investment is in the quality of information, according to Candia. “The different actors that participate in the capital market in Chile require more trustworthy and reliable information,” he says. “The level of scepticism about accounting information has increased, making the participation and review of said information by external auditors more essential.”

Crisóstomo observes that the CMF (Chile’s financial market commission) has just published for consultation a regulation that incorporates sustainability and corporate governance issues in annual reports. In fact, the March 2020 proposal seeks to modernise and improve the environmental, social and governance (ESG) information that must be submitted by issuers of public offering securities registered in the securities registry.

These changes are intended to provide more information to the market, so that investors and the public can evaluate and select the investments that best represent their interests.