After the hyper-inflationary shocks of the 1980s Peruvians had low levels of confidence in the national currency, as well as in government policy-making in general. Subsequent governments have sought to rebuild trust and restore macroeconomic stability. Part of achieving this was to allow free convertibility between the Peruvian nuevo sol and the US dollar. Individuals and companies were allowed to hold accounts and transact business in either currency, or in both. Initially, the markets had a strong preference for holding assets in US dollars, but over time the financial system’s dollarisation percentage has fallen.
Over the course of 2015, the nuevo sol depreciated against the US dollar at an increased rate, reflecting the general weakening of Latin American currencies prompted by slower economic growth and investor nervousness over emerging markets. This was accentuated by expectations of an interest rate tightening in the US. In this context worries were expressed over the risk that Peruvian companies or individuals with dollar-denominated debts but with local currency revenue streams might find their ability to repay impaired by an adverse exchange rate.
Local analysts say that Peru’s financial markets had already begun to anticipate this danger, with a natural “de-dollarisation” of loans beginning to set in. However, they also say that the country’s central bank (Banco Central de Reserva del Peru, BCRP) and the regulator, Superintendencia de Banca, Seguros y AFPs (SBS), have sought to lend their support to encourage this process.
BCRP president Julio Velarde sent a signal to the markets in October 2015, saying that the proportion of dollar-denominated debt in Peru was still high compared to its neighbours, which made it more exposed to the risk of a sharp depreciation of the local currency. The banks with the highest proportion of dollar-denominated loans were the local subsidiary of China’s ICBC (88.1% of its total loan book), followed by Banco Santander (53.5%), BCP (39.5%) and Scotiabank (39%). By type of loan, dollarisation was highest in lending for car purchases (50.5%), followed by lending to medium-sized companies (49%), to large companies (48.2%) and for mortgages (27.5%). Dollarisation of loans was lowest for small and medium-sized companies (8.8%) and for credit cards (6.3%).
“In the 1990s as much as 85% of the loan book was denominated in US dollars, but by August 2015 that had fallen to 35%,” Alberto Morisaki Cáceres, head of the economic studies department at the Peruvian Banking Association, told OBG. “The dollarisation of loans had been falling by around four percentage points a year, but in the last year that seems to have accelerated to around 10 points – we started 2015 with 44% dollarisation and now we are on 35%”. Later figures released by the SBS covering the period up to the end of September 2015 showed that the dollarisation of loans had fallen further to 31.6%. Morisaki said that the SBS has offered incentives for de-dollarisation by requiring lower capital provisioning for local currency loans.
The BCRP has similarly and progressively reduced reserve requirements on sol-denominated deposits from 30% in 2013 to 6.5% in June 2015. In recent times the BCRP has also become more directive, ruling that banks must achieve specified reductions in the share of dollar denominated loans, particularly for mortgages and car purchases, or be exposed to higher reserve requirements. In Morisaki’s view the process will eventually stabilise: there is a “normal” level of loan book dollarisation which is around 15-20%, reflecting the needs of exporters (who have reduced foreign exchange risk because their earnings are in dollars) and various types of hedging operations.
In late 2015, however, it was clear that the BCRP was still concerned over the speed of adjustment and felt the need to push for further de-dollarisation. In November 2015 it announced additional measures to achieve this, giving banks until December 2016 to meet new targets for dollar loan reduction or face additional reserve requirements. The instructions included specific and more stringent targets for car loans and mortgages.
By the end of 2016 banks are required to have reduced their total dollar loans to 80% of their September 2013 level, while car and mortgage loans would have to come down to 70% of their February 2013 levels. The BCRP said that the aim of these additional measures was to “reduce the financial vulnerability of households and companies that receive income in soles but have debt denominated in foreign currencies”. It specified that the required reductions in dollarisation did not apply to foreign trade financing or to longerterm lending (three years or more).
Dollarisation Of Deposits
While in the medium term the dollarisation of both loans and deposits in the financial system has been falling, this has occurred at uneven rates. There has been a tendency for savers to move their deposits into dollars for the short term, given that they have been appreciating in local currency terms. As of August 2015, 52.7% of total deposits were held in US dollars. There is theoretically a danger of a mismatch between deposit and loan dollarisation rates, but here too the market itself provides adjustment mechanisms, to some degree coaxed along by regulatory fine-tuning.
Costs & Benefits
The relative costs and benefits of Peru’s dual currency system – and the varying levels of deposit and loan dollarisation associated with it – have been discussed by economists for some time. According to a BNP Paribas research paper published in early 2015, dollarisation has been positive for Peruvian households because it offers them a strong foreign currency in which to hold their savings, thereby protecting them from the risk of loss of wealth caused by exchange rate volatility. On the other hand, however, dollarisation increases “the country’s dependency on an external currency it can’t control, exposing the domestic economy to external shocks, diminishing the effectiveness of monetary policy and creating currency mismatches in banks’ balance sheets.”
While there are potentially complex trade-offs in the way the authorities manage the dual currency system and seek to minimise the risks associated with dollarisation and exchange rate volatility, most analysts believe that the central bank and the regulator – the BCRP and the SBS – are managing these issues in a prudent fashion. Robert Kozak of consultancy Andean Insight told OBG that despite the concerns, “The dual currency system works very well. The dollar is seen as a safe store of value”.
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