Peru Seeks to Relax Limits for Pension Funds by Year-End

Central Bank President Julio Velarde
Julio Velarde, president of the central bank of Peru, attends the Group of 24 meeting during the IMF-World Bank spring meeting in Washington, D.C. Photographer: Andrew Harrer/Bloomberg

Peru’s central bank will probably raise the limit on pension fund investments abroad by year-end as part of measures to fight an appreciation of the sol, central bank President Julio Velarde said.

The monetary authority is awaiting a written statement on the restrictions from the pension regulator before moving forward, Velarde said in an interview in Miami yesterday. That opinion should be coming “in the next few weeks,” he added. The move, which could ease pressure on the sol, comes after the currency reached a 15-year high of 2.5780 per dollar on Oct. 22.

“We don’t want the currency to appreciate too much outside the fundamentals” of the economy, Velarde said before the start of a forum sponsored by Latin Trade magazine. “We’re always concerned that if there is too much appreciation the demand for protectionism will grow.”

Peru has raised reserve requirements on dollar accounts, tightened restrictions on sales of greenbacks and boosted reserves by buying $12 billion in the currency market this year to tame the sol. Raising foreign investment restrictions for Peru’s four pension funds, which are near the 30 percent limit on their $35 billion in assets, would aid that effort, Velarde said.

‘Some Success’

“We’ve had some success over the past four years” in fighting the appreciation, Velarde said. “Peru is one of the few countries in Latin America where people are used to taking out loans in dollars, so that makes monetary policy a bit more difficult.”

The move to limit local banks’ U.S. currency sales in the spot market to 10 percent of their equity from 15 percent may reduce bets against the dollar, said Alonso Segura, head of investment and strategy at Banco de Credito del Peru in Lima. The sol has gained 16 percent in the past five years, the best performance among major Latin American currencies.

“It may limit some speculative flows but the majority of flows are long-term,” Segura said in a phone interview yesterday.


The measure also seeks to limit banks’ dollar sales in the forwards market to 20 percent of their equity or 300 million soles ($116 million), whichever is greater, according to an Oct. 19 statement on the website of the Superintendency of Banking, Insurance and Pension Fund Administrators.

The sol weakened 0.4 percent to 2.6025 per U.S. dollar at today’s close, the steepest fall in three months, according to Deutsche Bank AG’s local unit. The yield on the nation’s benchmark 7.84 percent sol-denominated bond due August 2020 rose one basis point, or 0.01 percentage point, to 4.27 percent, according to prices compiled by Bloomberg.

The central bank said on its website it purchased $20 million in the spot market today. The bank previously bought dollars only when the sol appreciated and is now also buying when it depreciates, as it seeks to create volatility and make movements in the currency less predictable.

“We want to have some volatility” while making sure the movements aren’t “excessive”, Velarde said.

Vacant Seats

The central bank increased pension funds’ foreign investment ceiling four times in 2010 to 30 percent. Congress last year gave the central bank authorization to take the limit to 50 percent.

The central bank doesn’t need to wait for Congress to fill vacant seats on its seven-member board before raising the ceiling, Velarde said.

Under Velarde’s tenure, annual inflation has averaged 3.34 percent with economic growth of 6.9 percent, while bank loans have increased 180 percent to 139 billion soles, fueled by booming private investment and consumer demand. He has quadrupled the country’s foreign reserves to a record $62 billion.

`So Much Optimism'

The 60-year-old Velarde, who studied economics at Universidad del Pacifico and Brown University, took office in 2006 and was re-appointed to a second five-year term last year by President Ollanta Humala.

Fueled by growing domestic demand, construction and exports of copper and gold, Peru’s economy probably grew 6.5 percent in the third quarter, Velarde said. Growth should average about 6 percent per year over the next four to five years, he added.

“There are so many investment projects going forward and there’s so much optimism in the business community,” Velarde said.

The central bank is seeking to slow credit growth that’s running at 17 percent, though policy makers don’t see a need to raise reserve requirements after three increases between May and October, Velarde said.

Inflation will be below 3 percent next year, he said. Inflation has remained above 3 percent, the upper limit of the central bank’s target range, for five quarters.

Policy maker are studying measures to slow the pace of lending in dollars, including increased bank provisions, Finance Minister Miguel Castilla said yesterday.

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