Peru stands firm on currency policy

22/03/2010 | Lucien Chauvin

Pressures caused by upcoming elections and lobbying by the exporters’ association are not going to alter Peru’s money-management policies, the head of the central bank has said

Pressures caused by upcoming elections and lobbying by the exporters’ association are not going to alter Peru’s money-management policies, the head of the central bank has said.

Julio Velarde, President of the Central Reserve Bank (BCR), told Emerging Markets that there are no plans either for exchange rate controls or for a rapid increase in interest rates.

“There could be an impact if there was rapid appreciation of the sol, but this has not been the case. While the sol is stronger, it has not appreciated at the same level of other countries. We are avoiding volatility,” he said.

Jose Luis Silva, outgoing president of the Peruvian Exporters’ Association (ADEX), disagrees, and has called for the bank to adopt “drastic” measures to stop the dollar from falling against the sol.

ADEX wants the BCR to buy dollars more aggressively, and has demanded changes in several government policies, including an increase to 1%, from 0.05%, in the tax on deposit certificates; the possibility for exporters to pay their taxes in dollars instead of soles; and a 50% tax break for companies reinvesting profits.

He said this would not affect government accounts, because “the treasury could use dollar-based taxes to service its debt or create special stabilization funds”.

The proposals have been rejected by the Economy and Finance Ministry as anti-technical, and Velarde said that “exporters need to admit that their products are also increasing in value.”

The sol has appreciated 2% against the US dollar so far this year and approximately 10% over the past 12 months. The BCR does intervene in the market buying dollars, but Velarde said this was to protect people and businesses with dollar-based accounts or loans. The bank has acquired nearly $2.3 billion so far this year.

“The simple reason is because we are still a partially dollarized market. Loans in dollars represent 45% of loans. More than avoid appreciation of the currency, we want to avoid change that would affect companies and families with savings in dollars,” he said. While still high, Peru has rapidly dedollarized its economy in the past decade.

Velarde said he does expect the dollar to soften somewhat. “I do not see it falling too much in the 12 months [of 2010],” he said. He also foresees in the medium term a basket of currencies in which countries can hold reserves. “It has only been since World War II that you have had a dominant currency. While the dollar will remain the major player, there are now other currencies so that we can have a balance.”

Velarde is more flexible on interest rates, which at 1.25% are the second lowest in the emerging markets after Chile, where it is 0.5%. He said it was impossible to predict rates, but he did offer the optimal situation for interest rates in Peru if economic conditions follow forecasts.

“It is hard to pinpoint an exact rate, but if inflation is 2% and GDP is growing at its potential, which is 6% this year, the interest rate would be close to 4%. There is a range and it can never be set in stone,” said Velarde.

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