OBG talks to Julio Velarde, President, Central Reserve Bank of Peru (BCRP)

Interview: Julio Velarde,

How is the BCRP dealing with exchange rate volatility and what development do expect?

JULIO VELARDE: Despite several factors such as lower commodity prices and perhaps any increase in yields in emerging markets, capital has continued to enter the country, the supply of dollars from non-residents has remained important and treasury bonds in local currency held by foreigners have continued to increase. In the near future we are expecting some significant export projects, particularly in mining, that will double copper production by 2016, so volumes will compensate for lower prices. In addition, foreign direct investment has remained significant. We expect a total for 2013 of around $12bn, and we hope to continue more or less at the same level. The intervention in the forex market was to compensate portfolio movements from local players, like pension funds and other institutional investors.

Scaling down quantitative easing in the US will push up the dollar. In your opinion, what is likely to be the effect on Peru?

VELARDE: In May 2013 the US Federal Reserve announced the possible reduction of quantitative easing. The positive consequence of the subsequent jump in the exchange rate was that firms in the real and financial sector internalised the exchange rate risk. Since June, in order to reduce their exposure, they have being asking for more loans in local currency, and dollarisation has fallen from 44% to 40%.

This is a trend that we expect to continue because whenever the tapering of the stimulus begins, it will generate upward pressure on the exchange rate and interest rate. Once this happens loans will become more expensive, but we should keep in mind that they were already too favourable in fast growing countries and normalisation had to come at some point, although it is going to take a while. Despite this, one factor to be taken into account is that federal short-term interest rates will be kept low for a long time.

What is the likelihood of more reductions in reserve requirements to stimulate loans?

VELARDE: The reduction is facilitating the expansion of credit in soles, which has been growing more than that in foreign currency. It was also useful to compensate the withdraw of local currency from the market when we sold dollars to offset excessive volatility in the exchange rate, so the reduction of reserve requirements was a way to inject soles back into the banks. The idea is to help credit in soles grow in an orderly way, which is why we are releasing resources for the banks to lend. We will continue with this policy if the current conditions are maintained, but the pace will depend on the context each time.

Are you likely to raise the 36% foreign investment limit for private pension funds?

VELARDE: Current investment abroad is slightly under 34%, and usually when we see that they are close to the limit, we raise it. Even in countries that have eliminated the ceiling, such as Chile, foreign investments remain at around 38%.

In our case, we like a gradual increase in the limit of foreign investment abroad, to have an orderly diversification of the pension funds.

How are you helping micro and small firms?

VELARDE: Peru is one of the countries where microfinance has been developed the most. Municipal banks have been expanding credit delivery for nearly 30 years, and many non-governmental organisations are also allowed to enter this market. Mobile banking will also be very important.

Telephone operators and banks are working to simplify the process so that many more people have phone access to transfers, bill payments and so on. A third factor is the cashiers inside small businesses – cajeros corresponsales (correspondent offices) – who offer some banking functions. The process takes time but it is shorter than what we might think.