As he prepares to hand over the reins, Peru’s finance minister Alonso Segura hopes the next administration will build on pan-Andean financial integration projects such as the Mercardo Integrado Latinoamericano (Mila).
Segura says that while trading volumes on the Mila platform – involving the stock markets of Chile, Colombia and Peru, and latterly Mexico – have been low, the momentum to further financial integration between the Pacific Alliance countries is inexorable.
“Mila is the first touch point in terms of financial integration for the capital markets in the Pacific Alliance,” he tells Euromoney as he enters his final couple of months in office. “You need to keep in mind that Mila was a very powerful initiative, a very good one and it still is, but we launched it with very bad timing. It went operational as the external shock hit the four countries so, with capital outflows from the region, you couldn’t see the impact. When things start stabilising you will see better [the positive impact of Mila].”
As the region’s economies rebound, Segura says the next phase of Mila, secondary trading, will move to equity IPOs and there are some small IPOs already in the pipeline that will be launched and marketed simultaneously across the member countries.
“Secondary trading was just a stepping stone to simultaneous IPOs,” says Segura. “We have already adjusted the legislation in each country so that when you issue a fixed income transaction in any of the four countries it is automatically traded in Peru. That’s already up and running [in Peru] and our neighbours are doing the same. And from equities and fixed income we will move on to other instruments – that’s the future.”
The need to encourage greater private participation in infrastructure finance is leading the four countries to develop a common market for this type of financing. “We are not restricting our integration to capital markets,” says Segura. “We are looking at ways to harmonise investment frameworks to try to foster the creation of investment funds that are dedicated to infrastructure projects in the Pacific Alliance. It is going to take a couple of years but it is a clear aim [of further financial integration].”
The current Peruvian administration, which will leave office on July 28 when the winner of the June 5 presidential election takes over, has awarded 30 PPPs worth a combined $20 billion, so the government is keen to tap other pockets of institutional investor liquidity in the Pacific Alliance. The need for pension funds across the Andean countries to diversify their investments is also a strong driving force behind regional integration.
“We are building common platforms that should help us generate more liquidity across countries over time and there are several initiative that are focused specifically at the pension funds,” says Segura. “We are working to establish a framework that makes it more flexible for private pension funds to invest across the region.”The finance ministry and the central bank are looking at pensions mobility legislation, says Segura, to allow the portability of personal pensions throughout the Pacific Alliance. “There are several initiatives that are very technical in nature and so these couldn’t be completed in a few months but they are already being studied.”
However, while Segura hopes the next administration wastes no time in furthering pan-regional financial integration, Peru’s next finance minister will be in no rush to access the international markets. Peru’s €1.1 billion international bond in February this year was its second in four months, as the sovereign took advantage of attractive financing conditions to pre-fund the country’s debt needs. The bond, led by BBVA, BNP Paribas and HSBC, drew a book of more than €2 billion and priced with a 3.75% coupon at 99.743 to yield 3.77%, or 295bp over mid-swaps (from initial thoughts of around 300bp).
“We have pre-funded the 2016 budget and fully pre-funded the 2017 debt servicing requirement,” says Segura. “We have also already signed agreements with the World Bank for major contingency lines so in terms of public sector liquidity we are leaving the next administration very well positioned.”
Segura says international investor demand has enabled, and been sustained by, the sovereign’s improvement in its debt profile. Peru not only has low overall debt, at 20.1% of GDP at the end of 2014, but has also improved the profile of that debt. Domestic debt now accounts for 43.7%, up from 10.8% in a decade, reducing Peru’s exposure to FX volatility. The past 10 years have also seen a steep increase in fixed rate debt, as the sovereign has locked in historic low financing costs (now at 77%, up from 48.4% in 2014) and the average maturity has more than doubled between 2015 and 2004 (to 14.7 years from 7.3 years). Peru’s gross interest payments are just 1.1% of GDP.
“We are handing over a country with a clear and solid view about a responsible fiscal trajectory and one that has the second highest investment grade rating in the region,” says Segura, explaining the relative lack of volatility that the coming presidential election is causing in the markets. “All of that points to a very stable and responsible transition and that is being well perceived by the international community.”