Peru has introduced a new range of measures to cut the level of dollar-denominated loans in its banking system. Peru’s Central Bank [BCRP] has consistently looked to reduce dollarized liabilities in the system in recent years: foreign currency lending accounted for 37% of all loans in November 2014, down from 50% in 2011 and a peak of 75% in 2005.
These latest measures to lower dollar loans in the banking system come at a sensitive time: the central bank is balancing the need to encourage growth with the risk of allowing the currency to depreciate too quickly and exposing FX mismatches in the system.
The new measures aim to discourage banks from dollar-based lending by reducing (from 9.5% to 9%) the reserve requirement for local currency loans, while adding additional reserve requirements for dollar-denominated loans for banks that do not decrease their dollar-denominated liabilities.
Institutions that do not reduce dollar loans by 5% by June, or by 10% by December will be subject to these additional reserve requirements.
In the case of mortgages and car loans – deemed the riskier, retail segments and that have a dollarization rate of nearly 70% – the cut-off is a 10% reduction by June and 15% by December. The bank is also aiming to target dollar-denominated deposits, by increasing the marginal reserve requirement on these to 60% from 50%.
This is more about creating a discipline when banks go to lend in a growing economy
Jeanne Del Casino
The level of corporate loan debt in the banking system is about 60%, but despite this high level Jeanne Del Casino, banking analyst at Moody’s in New York, says the government is more concerned with lowering dollarization in retail segments.
“Where you have companies that generate dollars, 60% isn’t alarming,” she says. “Even with auto loans, which are about 70% in dollars, it isn’t a huge concern in that the segment only accounts for about 9%. This is more about creating a discipline when banks go to lend in a growing economy – and bank lending in Peru is maintaining high levels of growth despite the slowdown. Adding expense to dollar-based loans is going to put a crimp in that business, and if you look at the impact of all the central bank’s measures to limit dollar-based lending in recent years there has been a lot of progress made in encouraging the banks to lend in domestic currency.”
In November 2014, the most recent available data, the banking system saw a 10.7% rise in annual credit growth, with a 17.7% increase in domestic-currency lending and just 0.7% in US dollars. Meanwhile, the central bank expects the relaxation of the reserve requirements to release NS9.6 billion ($3.17 billion) into the system. Some analysts think these changes were motivated more by a desire to provide monetary stimulus to the banking sector than specifically target dollarization.
However, the BCRP is also concerned about the fall in the Soles, which fell more than 6% against the dollar in 2014 and has come under further pressure at the beginning of 2015.
Growth expectations for Peru are around 4% – healthy in regional terms but lower than Peru’s recent history. The subsequent surprise cut in the base rate, to 3.25% from 3.5%, in mid-January revealed the bank’s concerns about slowing growth.
“These measures and the reduction in interest rates go hand in hand,” says Del Casino. “The central bank is signalling that it is comfortable with where inflation is but thinks that the economy is growing below potential – which it is. When I saw the rate cut, it said to me that the economy is a more important concern than FX.”
The BCRP also lowered its FX intervention in January. A Bank of America research note says this is a “signal to us that the central bank has taken the decision to allow the exchange rate to depreciate further in order to close the current-account gap in response to the decline in commodity prices. We also expect monetary policy to receive some respite from the decline in oil prices and its consequent effect on headline inflation”.
Moody’s says the de-dollarization measures are credit positive, while Fitch argues that with 48% of Peruvian deposits in dollars (which pay little or no interest and therefore cannot be discouraged through interest-rate cuts) a lop-sided increase in local-currency lending could lead to “pressures on local currency liquidity [that could] rise to levels that would present a burden for the industry”.
However, while both agencies monitor the situation the consolidation of the sector into four big banks that have about 90% of the system’s assets and liabilities has seen all report strong capitalization and liquidity ratios.
Scotiabank, the third largest financial institution in Peru with about 18% of system assets, has just further consolidated the Peruvian banking market with its acquisition, announced in late December 2014, of Citi’s retail operation in the country.