Peru is typically grouped with Mexico, Panama, Colombia and Chile as one of Latin America?s high-growth economies, a darling of international investors. But how easy is it to invest in? Not easy at all, says Luis Miguel Castilla, Peru?s finance minister.
?Our diagnosis is that our own capital market is poorly developed; not deep; scarcely liquid,? he tells beyondbrics.
That is why by June this year, the minister says, Peru will overhaul its capital market with a new law designed to make it easier for local companies to use the market as a source of finance, and to create a level playing field in terms of taxation.
?For our level of development we think we should have a deeper, more liquid market, hence the reform,? Castilla says. ?We are trying to reduce barriers to entry, to reduce costs, to create hybrid instruments that would let small and medium enterprises in, and most of all, to level the tax base between financing through banks and through the capital markets.?
Currently, Peruvian companies get 70 per cent of their finance from the banking system and just 30 per cent from capital markets. To be sure, corporate issuance is on the up ? it grew 50 per cent to $4.3bn (which is equal to 7 per cent of the country?s GDP).
But about 90 per cent of that took the form of foreign currency bond issued overseas, which are only available to the biggest corporate names. The most recent issue was a $450m 10-year note from Alicorp, a divison of the Romero Group that also owns Peru?s biggest bank, Banco de Credito.
Peru?s market, clearly, is failing to meet demands from both issuers and investors. Currently, most of the local investment is from pension funds. Castilla says this is partly due to ?excessive regulation? and partly because of a shortage of investable assets, so the reform will encourage the offer of hybrid instruments.
But the most important part of the reform for Castilla will be to create a tax environment that does not discriminate in favour of bank lending and against capital markets. This will include a review of Peru?s 5 per cent capital gains tax.
An added disadvantage of a shallow capital market is its impact on the exchange rate. The investment rate in Peru is currently equal to 27 per cent of GDP and the savings rate, 23 per cent. The gap is covered by foreign savings.
?Those savings coming from abroad have been exerting pressure on the exchange rate,? Castilla says. Three years ago, the currency was trading at about 3.25 sols to the dollar. In January, it had strengthened to 2.54, an increase in value of 28 per cent, although is has since weakened to about 2.59.
With capital market reform, Castilla hopes, ?we will be able to ease appreciation pressures by reducing this high dependence on external financing.?
Reform should also help consolidation of Mila, or the Mercado Integrado Latinoamericano, a tie-up between the Chilean, Colombian, and Peruvian bourses aimed at attracting international investment to local markets. Mexico?s Bolsa Mexican de Valores, which recently bought a stake in the Lima exchange, is also expected to join.
?This will harmonise the regulatory frameworks between countries and contribute to the deepening of the capital markets,? Castilla says.
So, a target worth aiming at. Now to see if Castilla and his team can deliver.
Related Reading:
Bourses: Uniting to build critical mass, FT
Peru to prepay debt as currency soars, beyondbrics
Peru: Intercorp?s new pension fund, beyondbrics
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