Peru: The Road to Capital Controls (Or ‘Carranza, Have a Word with Your Bank Manager, Please’)

Surprisingly, and surely without wanting to get in the way of the avalanche of inflows fortunately entering Peru thanks to the benign policies of Peru’s Central Bank (BCRP), on January 18th the BCRP issued a circular* which modified Article 7 of a previous circular** the “Regulation for Acquisition and Negotiation of Deposit Certificates issued by the BCRP”.

Essentially, this rather rushed modification differentiates between resident and non-resident CD purchasers. Starting three days after the announcement, “the BCRP can charge commissions for the register of transfers. In such case, the BCRP will publish the reference commissions on its portal.” (translated).

And in fact, this week (to be exact, beginning February 5th) we can see at the BCRP website that “a commission of 0.05% of the value of the transfer will be charged” (trans.), except when said transfer is made between financial banks. The “buyer” and “sellers” are both due this charge when “the register of the transfers” is made from 18th January onwards and that “at least one of the counterparties is not resident of Peru.” (trans.)

A small step perhaps, but this is clearly a measure that has been taken to slow down the arrival of speculative capital, instrumental in the sharp revaluation of the Peruvian Sol (see fig.1) that is worrying local business. However, it is not the only capital control mechanism that the BCRP has just introduced. The BCRP has just this week implemented a policy of replacing CDs owned by non-residents with time deposits of equal value which cannot be re-sold to overseas investors. It has also obliged banks to raise minimum holdings in order to reduce liquidity (which, according to the BCRP, is the equivalent of adding 50 basis points to the base reference interest rate….we would love to see how they calculated that one!)

Together, these three steps taken by the BCRP are surprising to us, as it flies in the face of the BCRP’s previously clear policy of blind faith in market forces. Without doubt, these kinds of measures will not help Peru in its grail-like quest for “investment grade” demanded by President Garcia, and which seemed to be just around the corner. It wouldn’t surprise us to learn that those in charge of country debt ratings are now anxiously waiting on the next circular that bumps the commission up to 0.15% or beyond.

But perhaps the strangest part of this episode is the clear lack of coherent communication between the BCRP and the Ministry of Economy. The day after the BCRP announcement was made, local newspaper “La Republica” reported the Peruvian Economy Minister answering comments made by the José Silva President of the local exporters’ association ‘ADEX’. Silva is worried about the continued rise of the Peruvian Sol versus the USD, and made comments about the possible adoption of a tax on capital inflows.

Minister Carranza replied to this idea by saying, “…in a world with capital mobility and development of financial systems, it is not prudent to place any type of control on (short term) capital flows.” He continued by saying, “I do not know if the opinion of the President of ADEX is that of his association, but what I can say is that we totally reject proposals that put chains on capital inflows.” (trans.)

We can only think of two possible conclusions to draw from such a comment in light of the recent developments at the Central Bank.

a) The minister believes that a “commission” is not a “tax”.

b) Peru’s Minister of the Economy does not talk to the president of Peru’s Central Bank very much. This would be backed up by another comment from Minister Carranza yesterday, when he said that although some may suspect, there is no collusion between the ministry of the economy and the BCRP. All things considered, perhaps a little collusion might be a good thing next time!

USD/Peru Sol Forex Rate

image002_04.jpg
* (006-2008-BCRP) ** (003-2006-BCRP dated 13th January 2006)

7 Responses to "Peru: The Road to Capital Controls (Or ‘Carranza, Have a Word with Your Bank Manager, Please’)"

  1. Guest   February 9, 2008 at 11:55 am

    It´s so difficult so gather relevant information and analysis from Peru. A word of gratitude to Dr Schuldt. Five comments and Qs to the note: (i) the 5 bps commission to transfers of Central Bank Certificates can be modify without a Board Regulation (“Circular”), i.e. Can it be approved overnight? (hmmmmm), (ii) the increase of the average reserve requirements has an initial impact equivalent to a 25 bps rise of the policy rate, but how about the effect from the increase of the average rate from 6 to 15%?. (iii) Is the rationale of the increase of the reserve requirements trying to remove further policy rates hikes from the expactation formation of investors waiting for a stronger PEN. (iv) It seems that the local banks are aware that the CB will come with further restrictive measures if they reduce their position of the CB paper. (v) If the CB paper is illiquid without a market price how the US mutual funds are keepig the market valuation?CARG

  2. Guest   February 9, 2008 at 8:58 pm

    Peru´s nominal GDP is equivalent to USD 2 bln a week, and according to CB Governor Velarde, the recent surge of K flows was USD 1,5 bln in only 3 days, or more than 3/4 of Peru´s GDP. If M2 of Peru´s is only 1/4 of GDP, no doubt that these flows will leave a mess.

  3. Guest   February 9, 2008 at 9:12 pm

    HOW US$ 1,7 CAN BE CASHED IN SUCH SMALL MARKET?

  4. P H   February 9, 2008 at 9:21 pm

    In a Conf.Call, a well connected peruvian fellow from MS, named Stiglitz, assure that the probability of capital controls a-la-columbia is nil in Peru. Is there any chance to be alerted from a move like this?PH

  5. Phil   February 9, 2008 at 9:54 pm

    By Humberto Campodonico Los economistas neoliberales que creen que el mercado soluciona todos los problemas dicen que el tipo de cambio debe flotar libremente y que si su valor se va a S/. 2.50 por dólar (o menos), que así sea. Por tanto, se oponen a toda medida “intervencionista”. Pero si salimos del campo de la “teoría pura” y vamos a los mercados realmente existentes, vemos que existen centenas de miles de millones de dólares que andan dando vueltas por el mundo para hacer ganancias “rápidas”, no importándoles las consecuencias económicas que sufren los países. Eso lo dice el magnate George Soros, quien ha ganado miles de millones de dólares con los capitales “golondrinos” (La peor crisis del mercado en 60 años, 22/1/08). Por eso, es imperativo diferenciar los movimientos de capitales ligados al sector real (balanza comercial, inversión extranjera, remesas de migrantes) de los capitales especulativos. Los primeros producen empleos; los segundos enriquecen a unos pocos y generan un perjuicio para la economía porque derrumban el precio del dólar y, con ello, a los sectores productivos. Hace poco, este diario dio a conocer que el Deutsche Bank, desde Nueva York, recomendaba a los especuladores traer dólares al Perú, cambiarlos a soles y adquirir Certificados de Depósitos del BCR (CD) que pagan una atractiva tasa de interés. Como esto provoca que la moneda nacional se aprecie, a los pocos días o semanas, se produce la operación inversa: con los soles se vuelven a comprar dólares (ahora más baratos). Así, los especuladores ganan a “dos cachetes”: ganan la tasa de interés de los CD y ganan al comprar dólares más baratos. Como es lógico, los países tienen que defenderse de estos ataques especulativos. Según Julio Velarde, presidente del BCR, esto es lo que ha hecho el BCR: “Se reemplazó a los CD por los depósitos a plazo, los que no pueden ser vendidos a los inversionistas extranjeros especulativos, al igual que los CD de Negociación Restringida, puestos en vigencia a partir de esta semana. Además, el aumento del encaje en moneda nacional y extranjera sirvió para reducir la liquidez en el mercado, lo que tiene la ventaja de no atraer capitales golondrinos y equivale a un incremento de la tasa de interés de 0.5% lo que sustituye la necesidad de elevar la tasa de referencia del BCRP. Además, se ha introducido una comisión a la transferencia de propiedad de los Certificados del BCRP” (Nota 013-2008-BCRP, 5/2/08). Estas medidas son “intervencionistas” y se alejan del dogma del libre mercado, que ya señalamos, algo que caracterizaba al BCR. Lo cual no está mal. Además, y esto es lo importante, las medidas han funcionado, hasta cierto punto, porque ha disminuido la volatilidad cambiaria. Pero han puesto en riesgo el sistema de metas de inflación. Como dice Félix Jiménez: “Bajo el actual régimen monetario, el instrumento esencial para propósitos antiinflacionarios es la tasa de interés. Por ello, el 10 de enero el BCR subió la tasa de referencia. Pero las medidas tomadas (contra los capitales especulativos) hicieron innecesario el carácter de referencia que tiene la tasa que administra el BCRP. Todas las tasas de interés de corto plazo en soles se redujeron, cuando debieran haber subido” (La República, 3/2/08). Por eso se hace necesario implementar medidas que frenen la entrada de capitales especulativos y se detenga la apreciación del sol, pero que no atenten contra el sistema de metas de inflación. La regulación a la entrada de capitales de corto plazo, como en Chile y Malasia, dio resultados positivos (lo que comentaremos en otro artículo). Lo que sí es cierto es que las medidas del BCR no le gustaron al Ministro Carranza (“en un mundo con libre movilidad de capitales no es prudente ningún tipo de control de capitales de corto plazo, lo que rechazamos totalmente”). Claro, los intereses de los capitales “golondrinos” (de los cuales forma parte la banca privada internacional, como el Deutsche Bank o el BBVA, donde trabajaba Carranza) propugnan la irrestricta “libertad del mercado” para continuar especulando, aunque el país y su sector productivo (industriales, exportadores y micro empresarios) sufran las consecuencias.Publicado el 08 de Febrero de 2008 (La Reppublica)

  6. Guest   February 11, 2008 at 1:28 pm

    ANALYSIS-Peru bid to tame currency decried as
    anti-market
    By Terry Wade
    LIMA, Feb 11 (Reuters) – Peru’s central bank,
    worried that its currency is rallying too much, has
    adopted tough measures to block hot money from
    entering the Andean country — including a fee on
    “speculative foreign capital.”
    It says its aim is ease the volatility of
    Peru’s sol  currency, which has gained to a
    nine-year high against the dollar. In Peru, currency
    fluctuations can cause dangerous mismatches for
    banks  and consumers as most loans are made in dollars, but
    salaries are paid in soles.
    The most controversial new measure to stabilize
    the currency tries to squeeze foreign investors out
    of  the market for certificates of deposit, where
    “speculators” were parking short-term cash, by
    charging a 0.05 percent fee.
    In the war of words over the new measures,
    critics say the central bank appears to be adopting
    capital controls, and that Peru risks being
    penalized by investors or credit rating agencies for
    restricting free access to markets.
    The central bank, along with the finance
    ministry, insists the “commission” it charges is
    neither a tax nor a capital control and that local
    speculators, of which there are few, would also have
    to pay the fee.
    But others say the central bank is going
    overboard.
    “This (tax) flies in the face of the central
    bank’s previously clear policy of blind faith in
    market forces,” said Jurgen Schuldt, economist at
    Lima’s Universidad del Pacifico. “This certainly
    isn’t the way to reach investment grade.”
    The central bank has been making other moves to

    discourage foreign investors from investing cash for
    short periods in an economy that grew more than 8
    percent last year.
    Last week, it scrapped its own traditional
    certificates of deposit, a favorite investment
    option
    of foreign “speculators,” with ones that cannot
    easily
    be re-sold to overseas investors.
    In January, after months of heavily intervening
    in the currency market by buying dollars, it also
    raised reserve requirements on foreign-currency bank
    accounts to try to soak up a flood of dollars
    entering
    the country.
    Much of that cash may have been trying to get
    in
    before credit rating agencies upgrade Peru, which
    President Alan Garcia says should happen this year.
    > An
    > upgrade could cause the sol, which has gained nine
    > percent over the last 12 months, to rally further
    > against the dollar.
    In his defense, Central Bank President Julio
    Velarde faces a dilemma. He says he wants to avoid
    currency volatility because nearly 60 percent of
    loans
    in Peru are denominated in dollars, which means
    people
    could be trapped if they take on loans when the sol
    is
    strong and it later weakens.
    At the same time, Peru has few money market
    instruments. Its debt markets lack depth and the
    > government sells little paper. They are, Velarde
    > says,
    > “underdeveloped … people don’t realize there
    > aren’t
    > enough instruments” to absorb the cash.
    >      That means when floods of foreign cash arrive,
    > as
    > they have this year to the tune of up to $500
    > million
    > a day, the central bank has found itself being
    > forced
    > to block short-term money so as to prevent the sol
    > from quickly gaining.
    >      For a central bank that has spent years
    > courting
    > foreign capital, the new policy-marks an abrupt
    > change
    > in direction.
    >      Velarde has likened the new policy to “making
    > things less attractive. It’s like waxing the floor.
    > We
    > can’t stop the inflows but (investors) will have to
    > come more cautiously.”
    >      On Friday, he said it was okay to push
    > “speculators” out of the market for certificates of
    > deposit because “they were never designed as
    > investment vehicles … and instead as mechanisms
    > for
    > banks to manage liquidity.”
    >
    >      WHEN DOES A COMMISSION BECOME A TAX?
    >      Normally, capital controls are defined as taxes
    > or restrictions on international transactions in
    > assets.
    >      Velarde has repeatedly objected to using such
    > capital controls, saying “they don’t work.”
    >      At the same time, he has defended the new
    > commission and rules aimed a pushing “speculators”
    > out
    > of the market for certificates of deposit.
    >      “It’s absolutely not capital controls,” Velarde
    > told reporters. Traders have said the new policies
    > have not curbed inflows as much as intended.
    >      The finance minister has also criticized
    > capital
    > controls, which exporters who fear a stronger sol
    > have
    > endorsed.
    >      “We totally reject any plan that aims to put
    > chains on foreign inflows,” Luis Carranza told
    > Congress last week.
    >      Even so, Peru’s finance ministry admits that it
    > wants to discourage the arrival of short-term hot
    > money from abroad.
    >      “The real aim is to attract long-term
    > investment
    > and discourage short-term speculative behavior,”
    > said
    > a finance ministry official who asked not to be
    > identified.
    >   (Additional reporting by Ricardo Serra, editing by
    > Walker Simon)
    >   ((terry.wade@reuters.com; +51 1 221 2130; Reuters
    > Messaging: terry.wade.reuters.com@reuters.net))
    >
    >
    >

  7. Anonymous   February 12, 2008 at 9:49 am

    &BCR aplica comisión a capitales especulativos& Con el objetivo de evitar el ingreso especulativo de capitales extranjeros al país, el Banco Central de Reserva (BCR) optó por colocar una comisión a los flujos de dinero “golondrino” que ingresen al Perú. De acuerdo con la agencia de noticias Reuter esta medida afecta a los inversores extranjeros que compran certificados con una comisión del 0.05% desde fines de enero. Según analistas consultados por la agencia, el BCR adopta medidas de control de capital, las mismas que pueden ser penalizadas por inversionistas o agencias crediticias bajo la premisa de que en Perú se restringe el libre acceso a los mercados. El BCR indicó que dicha comisión no responde a un control de capital y se cobra tanto a residentes como a no residentes. & Con el objetivo de evitar el ingreso especulativo de capitales extranjeros al país, el Banco Central de Reserva (BCR) optó por colocar una comisión a los flujos de dinero “golondrino” que ingresen al Perú. De acuerdo con la agencia de noticias Reuter esta medida afecta a los inversores extranjeros que compran certificados con una comisión del 0.05% desde fines de enero. Según analistas consultados por la agencia, el BCR adopta medidas de control de capital, las mismas que pueden ser penalizadas por inversionistas o agencias crediticias bajo la premisa de que en Perú se restringe el libre acceso a los mercados. El BCR indicó que dicha comisión no responde a un control de capital y se cobra tanto a residentes como a no residentes.