Peru Planning Record Bond Buyback to Stem Sol’s Advance

Peru may buy back a record amount of international bonds next month as it steps up efforts to stem the biggest rally among major Latin American currencies in the past year, Finance Minister Miguel Castilla said.

Officials are still studying which securities to purchase and will buy as much as $2 billion in foreign debt in February, he said. Peru’s government had said in December it planned to purchase $1.5 billion of foreign debt next month. The Treasury will purchase dollars on the local market for the buyback.

Nations from Russia to Chile have expressed concern over the appreciation of their currencies as investors from developed markets plow money into higher-yielding assets. Peru’s sol reached a 16-year high this month, even after the central bank bought a record $13.9 billion in the spot market in 2012.

“The great challenge we have right now is how to deal with the entrance of capital into our country that’s making the currency stronger,” Castilla said in a Jan. 26 interview in Davos, Switzerland. “We aren’t opting for capital controls at the moment. The central bank can continue intervening aggressively.”

The sol gained 5.2 percent in the past 12 months, the best performing amid the seven most traded currencies in Latin America. Last year it had the best annual performance since 2009. The currency was little changed today at 2.558 per U.S. dollar at 9:11 a.m. in Lima, according to prices compiled by Bloomberg.

Weapons of mass destruction

Peru, unlike Costa Rica, doesn’t need to use currency controls to manage dollar inflows into the economy, central bank President Julio Velarde said Jan. 25. He didn’t rule out reducing the country’s benchmark lending rate to close the gap with record low international borrowing costs.

Costa Rica’s President Laura Chinchilla, who has called capital inflows from developed markets seeking higher yields “weapons of mass destruction,” said Jan. 24 her central bank can adopt further controls to weaken the colon. Chinchilla’s administration submitted a bill to Congress last week that would raise taxes to as high as 38 percent from 8 percent on foreign investors who transfer profits out of the country.

Peru’s economy expanded 6.3 percent last year and will grow at a similar pace this year, as exports rebound and internal demand continues to grow at a pace of about 9 percent, Castilla said. The budget surplus was 2 percent of gross domestic product last year and will be about 1 percent this year, according to the minister.

Record Investment

Peru, the world’s third-largest producer of copper, zinc and tin, has lined up $70 billion in mining and energy investment commitments. Record foreign direct investment and Peruvian companies tapping dollar financing abroad is fueling the surge in the sol.

“The appreciation corresponds principally to fundamentals, like foreign direct investment,” Castilla said. “Speculative money is not the main reason, like in other markets.”

The country’s international bonds totaled $9.45 billion as of Dec. 31, according to the Finance Ministry’s website. Peruvian companies raised $1 billion abroad this month, led by a $500 million bond sale by state mortgage lender Mivivienda SA. BBVA Banco Continental and Pesquera Exalmar SAA sold $300 million and $200 million, respectively.

The central bank this month kept benchmark borrowing costs unchanged at 4.25 percent, the lowest in Latin America along with Colombia.

The yield on the nation’s 7.84 percent sol-denominated bond due August 2020 has dropped 196 basis points, or 1.96 percentage points, in the past year to 3.79 percent, according to prices compiled by Bloomberg. The yield on its 7.125 dollar bond due March 2019 has fallen 130 basis points to 1.98 percent over the same period.

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