Peru is looking to exchange US$6bn worth of its dollar-denominated debt for sol-denominated debt, according to the country’s Minister of Finance Alfredo Thorne, on increasing expectations that the US will raise interest rates.
The US Federal Reserve is set to meet on 21 September, when it could opt to raise interest rates by as much as 25bp.
“The debt swap is part of the country’s on-going strategic program to de-dollarise the economy as well as managing their debt maturity profile,” said Lewis Jones, portfolio manager of EM debt at NN Investment Partners.
He added that it is likely the country will use the swap to extend maturities along the local curve which, would be welcomed by foreign investors. Peru’s local debt curve suffers from a lack of liquidity relative to its regional emerging market peers, particularly on longer tenors.
“Peru is an attractive market in terms of the growth outlook, macroeconomic strength and strong credit profile,” Jones stated, adding that a debt exchange and issuance of sol-denominated debt should alleviate current liquidity problems with the local debt curve.
In anticipation of this, the government is set to open its treasury bill market to foreign investors. Bloomberg noted that the outstanding amount of treasury bills in Peru will be raised from PEN1.5bn to PEN4bn (US$1.2bn).
“The addition of shorter maturity bonds to the range of securities available to foreign investors will certainly be welcome. These bonds will provide investors with another gauge of market expectations of central bank policy rates as well as potentially providing arbitrage opportunities on a dollar hedged basis in conjunction with the forward FX curve,” said another portfolio manager speaking to Bonds & Loans.
They added however that liquidity would remain problematic in the near-term as the planned issuance size is quite small.
Despite this, the performance of the Peruvian sol is likely to keep investors interested in local-currency denominated debt. The Peruvian sol has gained 1.35% against the US dollar since the beginning of the year, and the sol is currently trading at 3.3993 to the dollar according to Bloomberg.
Investor expectations for the sol directly impact the relative attractiveness of the Peruvian local curve on a total return basis, according to Jones.
The sol’s improving performance can be attributed to improvements in the country’s trade balance. Government predictions place the trade deficit to fall to 0.4% of GDP for 2016. The country actually saw a trade surplus of US$484mn in July 2016 compared to a US$301mn deficit in the same month last year according to Trading Economics.
In addition, the Central Bank is likely to keep rates steady, with inflation hovering near the top of the 2% target range according to Jones, who also noted that the sol benefits from an attractive carry on a volatility adjusted basis.
