Lima Stock Exchange CEO Says Tax Exemption to Help Win Over MSCI

  • Tax change to help keep emerging-market status, CEO says
  • Peru delegation to meet MSCI officials in New York next week

Peru’s decision to stop taxing stock gains will boost volumes in the world’s worst-performing market and help keep the country from being reclassified as a frontier market, a senior official from Lima’s Stock Exchange said.

As officials suspend capital gains taxes on equities for at least three years, they’re also reducing costs for market makers in a bid to encourage trading, Chief Executive Officer Francis Stenning said in an interview from Lima. Trading volumes, which have fallen 80 percent since 2007, will return to “normal” levels in two to three years, he said.

Peru’s Congress approved the tax change Sept. 4 after MSCI Inc. said last month that the slide in trading volumes meant Peru no longer meets the criteria of its emerging-market category, which is considered to be less risky for investors than the frontier classification. MSCI indexes are the benchmark for more than $9.5 trillion in assets worldwide, and changes in their composition can spur capital inflows or outflows as investors adjust their portfolios.

‘Freeing Ourselves’

“In an environment like this, freeing ourselves of the tax issue is a point in our favor,” Stenning said. “When this barrier, this distortion, is eliminated it’s going to facilitate lots of things we’ve been working on.”

The S&P/BVL Peru General Index has dropped 31 percent this year in local currency terms, the most among 103 indexes tracked by Bloomberg.

While falling commodities prices, China’s slowing economy, and the prospect of higher U.S. interest rates have hurt stock markets in developing nations, Peru’s taxation was an additional drag, according to Stenning. The tax change, which takes effect Jan. 1, will also make it easier to bet on declines in shares, and the bourse is working on algorithmic trading rules with the securities regulator to further boost volumes.

Peru’s Finance Minister Alonso Segura will lead a delegation to meet MSCI’s senior management in New York on Sept. 14 and ask the company to wait two to three years to see the result of the measures to lift liquidity, Stenning said. The stock exchange plans additional presentations in the U.S. and the U.K. to explain the situation, he said.

“Wee want the biggest fund managers to understand the situation in the market and have confidence that we’re going to recover liquidity,” Stenning said.

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