Peruvian Sol Reaches S./3 vs $1 USD

Today, the Peruvian Sol fell to S./3 to the US dollar at least for bank customers. In what has been an almost daily event, the Central Bank has been selling dollars to stop the fall of the Sol.

From El Comercio (Via Bing Translator)*

The price of the dollar is appreciating in the foreign exchange market and your (the) quote already reaches the S/.3,00 on the banks of the city since this morning. On the other hand, the Bolsa Valores de Lima (BVL) (Lima Stock Exchange) record positive indices at the opening of business.

At 10:25 (15:25 GMT), the dollar is sold to S/.2,933 in the interbank market, top level facing the S/.2,932 from yesterday’s close.

On the parallel market, the green currency trades at S/.2,935; While its price in the main banks in the city reaches the S/.3, 0185.

It is noteworthy that the interbank market – what is traded in the Central Reserve Bank (BCR) – concentrated nearly 90% of the total amount of USD that exist in the country, while the remaining 10% circulates in local banks and the parallel market, i.e. the money changers of the shred Ocoña and Miraflores, money exchange, etc.

 * Parenthesis & any emphasis added


90% of US Dollars with Central Bank & Debt Increasing

The Central Bank holds nearly 90% of all the dollars in the country. Trade deficits continue to grow as commodity prices fall; will the Sol will also fall? The private debt accrued during the recent high growth years is largely dominated in dollars. Thus debt service will require dollars.

From the IMF:

Private sector securitized debt denominated in US Dollars has increased…Since the end of 2010 US dollar denominated securities placed abroad increased 2 1/2 times, with a surge of Peruvian firms issuing US dollar senior notes in the amount of $6 billion through 2013. Overall, Peruvian issued international debt securities now stand at about $15 billion or 6 & 2/3% of GDP. The asset/currency mismatch makes Peruvian firms vulnerable to exchange rate volatility.

Peru recently returned to the bond market:

Peru Returns to Global Bond Market for First Time Since 2012

(Via Bloomberg 10/31/14)

Peru is tapping the international bond market for the first time in two years as it buys back debt to reduce borrowing costs and extend maturities before the U.S. Federal Reserve begins raising interest rates.

Peru sold today $500 million of its dollar-denominated notes due 2050 to yield 1.85 percentage points over U.S. Treasuries, according to a person familiar with the matter, who isn’t authorized to speak publicly and asked not to be identified. The government said in a statement that it also plans to sell sol-denominated notes due in 2024. That offering will be worth at least the equivalent of $500 million, the Finance Ministry said in a separate statement.

The return by Peru to the international debt market after a January 2012 offering follows Colombia, which sold $1 billion in dollar bonds Oct. 21 to fund next year’s budget.

“It’s an ideal moment to issue debt,” Fernando Iberico, senior analyst at Inteligo SAB in Lima, said in a phone interview. “Rates have fallen this year, so it’s a unique opportunity to enter the market for financing at lower rates.”

The 2024 sol notes will be settled in dollars, and the target yield is about 6 percent, the Finance Ministry said on the second page of a two-page statement to the Lima bourse.

Bond Buybacks

Peru offered to buy back sol bonds known as soberanos maturing in 2015 and 2020 and dollar notes due 2015, 2016 and 2019, according to the statement. The principal outstanding is 10.73 billion soles ($3.67 billion) for the soberanos and $1.86 billion for the dollar notes.

The 2020 notes rose 0.07 centimo to 115.25 centimos per sol at 3:16 p.m. in New York while the yield fell 0.01 percentage point to 4.77 percent, according to data compiled by Bloomberg. The yield has decreased 0.58 percentage point this year. The 2050 dollar bonds dropped 0.85 cent to 114.32 cents per dollar while the yield rose 0.05 percentage point to 4.79 percent.

Today’s tender offer would move Peru closer to its goal of cutting the amount of dollar-denominated debt to 30 percent of the total by 2017 from about 50 percent last year.

Peru sold $500 million of dollar bonds due 2050 and $600 million of sol-denominated debt maturing in 2031 when it last issued overseas. The government has opted for local issuance since then as it seeks to reduce dollar debt and spur domestic securities trading.

The government will also consider using local issuance to repay loans to multilateral lenders such as the World Bank, as part of its strategy of reducing foreign and dollar-denominated debt, Olivares said.

Note the term on the new issue – maturity 2050!

As the global economy slows this currency mismatch may lead to a cascading fall in the value of the Sol, unless commodity prices rise. Meanwhile, the slowdown in China continues to affect the commodities market. Today, gold and silver slipped, however copper had a slight increase of .07%.

The dollars needed to pay the increased debt load denominated in dollars will continue to adversely affect the Sol for the foreseeable future.

A falling currency leads to internal inflation which reduces growth presenting a dilemma for the Central Bankers. Lower interest rates increase capital outflows, but higher interest rates slow economic growth.

A Vicious Cycle

Via Natixis Flash Economics

We find the following cause-and-effect mechanisms in a “dangerous spiral”:

  • Capital outflows, leading to weak investment;
  • Accordingly, exchange-rate depreciation;
  • Hence inflation, loss of purchasing power and weakening of consumption;
  • Hence problems for the central bank, which is faced with both sluggish growth and inflation;
  • The sluggish growth amplifies the capital outflows.

Several major emerging countries are caught in this dangerous spiral… Russia, Brazil, Turkey, Argentina, India and South Africa. (Peru also is seeing this effect.)

How can the countries get out of it?

Only by growth, which appears to be more elusive daily.

Full article here. (via Zero Hedge)

See also: What’s the Future of the Peruvian Economy?

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