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Peru seeks Mexican boost to Mila

With Mexico in, market could rival Brazil’s; Peru undertakes capital markets reform.

Peru’s finance minister, Luis Miguel Castilla, told the delegates of the Institute of International Finance’s Latin American Forum, held in Panama in mid March, that he would like to see Mexico integrate its capital markets with Peru, Chile and Colombia.

“We think that with Mexico, along with Chile and Colombia [Mila] can be a true alternative to the Brazilian capital market,” he said. There has long been speculation that Mexico might join the pan-Andean trading platform project, dubbed Mila, but for the Peruvian minister to openly advocate Mexican membership is seen as a hint that discussions on the subject have been positive.

Castilla also confirmed that the forthcoming reform of Peruvian capital markets legislation was in part driven by a desire to harmonize its regulation with Colombia and Chile. “We are trying as much as we can to harmonize the regulatory and tax frameworks with our Mila neighbours,” he said.

The current 5% capital gains tax levied on Peruvian capital markets instruments is widely thought to be one of the key measures to be reformed. Castilla didn’t set a date for the publication of proposed new legislation.

Castilla also said that he would be seeking to encourage the growth of the local capital markets. “We have a very small, illiquid domestic capital market that is over-regulated; we need to make it an attractive source of financing. Today over 70% of Peruvian firms’ finance comes from the banking system and 30% from the domestic capital markets.

"So the reforms we are trying to put in place are [to create] more neutrality in the tax structure between the finance [raised in] the banking and the capital markets.”

In addition to tax neutrality, Castilla said he will be seeking reforms that reduce issuance costs and create “hybrid regimes that would incentivize SMEs or firms that are not blue chips” to participate.

Peruvian firms are increasingly seeking external financing to take advantage of the growing economy. Peru’s GDP grew at 6.3% in 2012, the second-highest rate in the region after Panama. Inflation is also in check – at 2% – and Castilla says the economy’s long-term growth rate is around 6.5%.

However, growth has meant an appreciation in its currency and Castilla hopes that generating a more liquid, deep domestic capital market will help avoid future appreciation.

“A stronger domestic capital market will help us tackle the needs [that Peruvian] firms have for financing,” said Castilla. “If they want to finance themselves in their own currency and in their own market, it will also help alleviate the pressures from capital inflows. We need to increase our domestic savings and a way to do that is to develop deeper and more effective capital markets.”

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