Peru unveils capital market reform

Peru is set to embark on a sweeping package of legislation later this year that will make it easier for local firms to issue bonds, cut red tape and reform the fiscal framework, Emerging Markets can confirm.

The reform of capital market laws, which has been eagerly anticipated and the centre of market speculation in Peru, will build on a strong volume of issuance in 2012 that saw overall flows equal to 7% of GDP, nearly all of which came from private external debt.

Meanwhile corporate issuance in 2012 was up 40% compared to the previous year and is already topping 40% in the first two months of this year.

Among the changes that could be included in the legislation, which is expected to go to Congress in May, is a review of the 5% capital gains tax and greater alignment with rules with Chile and Colombia that also form the integrated Andean stock market (MILA).

“The most important thing about the reform will be the tax treatment given to capital markets to make it more neutral. Right now the treatment favours the banking system,” the Peruvian economy and finance minister Luis Miguel Castilla told Emerging Markets.

The government is also considering a series of other bills that would reform the fiscal framework and reduce bureaucracy. It could also improve the system used to transfer taxes from extractive industries, principally mining and oil and gas, to the regions where they are produced. Tax transfers, known in the country as canon, were slightly more than $3 billion in 2012.

One change in the fiscal framework structure could be with the sovereign wealth fund (SWF), which is now close to 4% of GDP. Peru’s GDP at the end of 2012 was $325 billion, with forecasts for this year putting it at $348 billion. Castilla said one option was to tailor the SWF’s remit to make it more specifically useable to respond to natural disasters. 

“Our macroeconomic fundamentals are strong and we are among the best-prepared countries to face external shocks, which gives us a great window of opportunity to pursue reform,” he said.

Peru’s economy has grown almost every year for nearly two decades, with the fastest acceleration coming since mid-way through the last decade. It had the highest GDP growth last year in South America and should repeat that number this year. Castilla said he expected growth of 6.3%-6.5%.

GDP expanded by 6.15% in January, slightly below expectation. The country also racked up record-setting FDI last year, $12.2 billion, and tax collection above 16% of GDP, a historic high. Tax collection in February was up 7.3% compared to the same month last year.

While excess liquidity remains an important concern, both Castilla and Central Reserve Bank Governor Julio Velarde believe the situation is under control. “The appreciation of the sol has responded to fundamentals in the market,” said Velarde.

The sol appreciated 5.4% in 2012, but so far this year it has slid 1.7%. The bank purchased $14 billion last year to keep the currency from gaining too quickly and has purchased $3.5 billion so far this year.

Unlike Colombia, Peru does not acquire a stated amount, intervening when it deems necessary. The last major purchase was $90 million mid-March.

The bank will also receive some help on currency appreciation from the finance ministry, which announced that it would absorb $4 billion that would primarily go to liability management.

The government placed $1.67 billion in sol bonds earlier this year that will be used to prepay IDB and World Bank debt. Castilla said the goal is to have 70% of debt in local currency by 2016, up from the current 55%.