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 5^th) 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 18^th 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!

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