Capital Markets and Portfolio Investment
The GOP enables foreign portfolio investment. Neither the GOP nor its Central Bank place restrictions on international transactions.
The Securities Market Superintendence (SMV) is the GOP entity charged with regulating the securities and commodities markets. Following the IMF’s recommendations, the GOP passed a law reforming the SMV’s predecessor, CONASEV (the National Commission for the Supervision of Companies, Securities, and Exchanges). SMV’s mandate includes controlling securities market participants, maintaining a transparent and orderly market, setting accounting standards, and publishing financial information about covered companies. SMV requires stock issuers to report events that may affect the stock, the company, or any public offerings. This requirement promotes market transparency, and aims to prevent fraud. Trading on insider information is a crime, with some reported prosecutions in past years. One case at the end of 2010 involved three (government-owned health care provider) ESSALUD employees, a stock brokerage firm and an employee of the stock brokerage firm. CONASEV fined these individuals and the stock brokerage firm, and their cases are moving through the Peruvian court system. SMV must vet all firms listed on the Lima Stock Exchange (Bolsa de Valores de Lima) or the Public Registry of Securities. SMV also maintains the Public Registry of Securities and Stock Brokers. SMV is studying ways to improve the regulatory system to encourage and facilitate portfolio investment.
Morgan Stanley Capital International (MSCI) maintained the Emerging Market status of the Lima Stock Exchange (BVL), which was under review for reclassification to Frontier status as it included only three securities meeting the size and liquidity requirements for emerging-market equities.
The private sector has access to a variety of credit instruments. Mutual funds managed USD 7.8 billion in December 2016. Private pension funds managed a total of USD 42 billion in February 2017.
Money and Banking System
The banking system is considered generally sound, thanks to lessons learned during the 1997-1998 Asian crises, and continues to revamp operations, increase capitalization, and reduce costs. Non-performing bank loans rose to 4.3 percent of gross loans as of September 2015, down from a high of 11 percent in early 2001. Capable bank supervision and strong GDP growth over the last decade also helped banks weather the 2008-2009 global financial crises with little trouble.
Economic opening since the 1990s, coupled with competition, has led to banking sector consolidation. Sixteen commercial banks comprise the system, with assets accounting for 84.6 percent of Peru’s financial system. In 2014, three banks accounted for 73 percent of local loans and deposits among commercial banks. Of USD 105.1 billion in total banking assets at the end of January 2016, assets of the three largest commercial banks amounted to USD 74.36 billion.
The Central Reserve Bank of Peru (BCRP) serves as the country’s central bank. The BCRP is an independent institution, free to manage monetary policy to maintain financial stability. The BCRP’s primary goal is to maintain price stability, via inflation targeting. Inflation at year-end in Peru reached 3.2 percent in 2014, 4.4 percent in 2015, and 3.2 percent in 2016. Peru’s target inflation range is 1-3 percent.
Under the PTPA, U.S. financial service suppliers have full rights to establish subsidiaries or branches for banks and insurance companies. As of December 2013, foreigners had significant shares in thirteen banks, of which they were majority owners of 11 (including one of the country’s largest banks) and operator of one of the largest commercial banks. Notably, two of the four banks that are majority-owned by residents account for 45.1 percent of commercial banks’ assets.
Peru’s financial system has 11 specialized institutions (“financieras”), 31 thriving micro-lenders and savings banks (although several large banks also lend to small enterprises), two leasing institutions, two state-owned banks, and one state-owned development bank. In 2015, the Economist Intelligence Unit ranked Peru number one worldwide on microfinance business environment for the eighth consecutive year because of its sophisticated legal and regulatory framework and competitive microfinance sector. Nevertheless, Peru’s over 150 savings and loan cooperatives operate in an environment almost devoid of government oversight.
Peruvian law and regulations do not authorize or encourage private firms to adopt articles of incorporation or association to limit or restrict foreign participation. There are no private or public sector efforts to restrict foreign participation in industry standards-setting organizations. However, larger private firms often use “cross-shareholding” and “stable shareholder” arrangements to restrict investment by outsiders — not necessarily foreigners — in their firms. As close families or associates generally control ownership of Peruvian corporations, hostile takeovers are practically non-existent. In the past few years, several companies from the region, China, North America, and Europe have begun actively buying local companies in power transmission, retail trade, fishmeal production, and other industries. While foreign banks are allowed to freely establish banks in the country, they are subject to the supervision of Peru’s Superintendent of Banks and Securities (SBS).
Foreign Exchange and Remittances
There are no reported difficulties in obtaining foreign exchange. Under Article 64 of the 1993 Constitution, the GOP guarantees the freedom to hold and dispose of foreign currency. The GOP has eliminated all restrictions on remittances of profits, dividends, royalties, and capital, although foreign investors are advised to register their investments with ProInversion to ensure these guarantees. Exporters and importers are not required to channel foreign exchange transactions through the BCRP and can conduct transactions freely on the open market. Anyone may open and maintain foreign currency accounts in Peruvian commercial banks. U.S. firms have reported no problems or delays in transferring funds or remitting capital, earnings, loan repayments or lease payments since Peru’s economic reforms of the early 1990s. Under the PTPA, portfolio managers in the United States are able to provide portfolio management services to both mutual funds and pension funds in Peru, including funds that manage Peru’s privatized social security accounts.
The 1993 Constitution guarantees free convertibility of currency. However, limited capital controls still exist as private pension fund managers (AFPs) are constrained by how much of their portfolio can be invested in foreign securities. The maximum limit is set by law (currently 50 percent since July 2011), but the BCRP sets the operating limit AFPs can invest abroad. Over the years, the BCRP has gradually increased the operating limit, which reached 42 percent in January 2015.
A combination of GOP policies and market forces has led to gradual de-dollarization of the economy. U.S. dollars account for a decreasing share of banking system transactions, according to SBS. In 2001, U.S. dollars accounted for 82 percent of loans and 73 percent of deposits. The amount of credit issued in USD fell by 4% for commercial loans and 3% for personal loans in July 2016 compared to the same period in 2015. Dollar-denominated loans in these sectors now stand at 45 percent and 24 percent of total credit, respectively, as of October 2016. Funds associated with any form of investment can be freely converted into any world currency.
The foreign exchange market operates freely, for the most part. To quell “extreme variations” of the exchange rate, the BCRP intervenes through purchases and sales in the open market without imposing controls on exchange rates or transactions. Since 2014, the BCRP has pursued de-dollarization to reduce dollar denominated loans in the market and purchased U.S. dollars to mitigate the risk that spillover from expansionary U.S. monetary policy might result in over-valuation of the Peruvian Sol relative to the U.S. dollar. As the U.S. economic recovery begins to tighten credit conditions and stronger terms of trade support a more stable currency, this policy may shift.
Peruvian law grants foreign investors the following rights: freedom to buy shares from national investors; free remittance of earnings and dividends; free capital repatriation; unrestricted access to local credits; freedom to hire technology and to pay back royalties; freedom to hire investment insurance abroad; possibility to sign juridical stability agreements for their investments in Peru with the Peruvian State.
Article 7 of the Legislative Decree N° 662 provides that foreign investors may send, in freely convertible currencies, without a prior authorization from any national government department or decentralized public entities, Regional or Municipal Governments, after having paid all the applicable taxes, remittances of the entirety of their capital derived from investments, including the sale of shares, stocks or rights, capital reduction or partial or total liquidation of companies, the entirety of their dividends or proven net profit derived from their investments, and any considerations for the use or enjoyment of assets that are physically located in Peru, as registered with the competent national entity.
Sovereign Wealth Funds
Peru’s Ministry of Economy and Finance (MEF) manages the Fiscal Stabilization Fund. The fund had a balance of USD 7.9 billion at the end of 2015 and consists of treasury surplus, concessional fees, and privatization proceeds, with a cap of four percent of GDP. The MEF released investment guidelines for the Fiscal Stabilization Fund in December 2015. The guidelines permit investment in demand deposits, variable and fixed interest rate time deposits, and seven currencies including the USD. The Fund is not a party to the IMF International Working Group or a signatory to the Santiago Principles. The fund serves as a buffer for the GOP’s fiscal accounts in the event of adverse economic conditions. The MEF authorized USD 1.3 billion in 2013 as the country was experiencing a fiscal deficit.