Boosting Peruvian government bond liquidity

Historically, Peru relied on foreign currency-denominated debt issuance. In 2004, Nuevo sol (‘Sol’) issues made up only 5% of government debt stock. Domestic liquidity was limited and it was not easy for global investors to buy in the domestic market unless they had a local presence or a local custodian.

In 2007, the government set out to reduce its dependency on foreign currencies, ‘solarise’ its debt and diversify its investor base. It turned to Global Depositary Notes (GDNs), which converted sol bonds into dollar instruments that could be traded, cleared and settled the same as other international dollar bonds. By 2013, Nuevo sol bonds made up 42% of Peru’s government debt. The government is looking to reduce dollar borrowings to no more than 30%  of the total.

The success of the programme demonstrated there was international appetite for sol bonds, but liquidity in the domestic market remained low.

Aware that there was strong investor interest, Euroclear approached the Peruvian authorities in early 2014 to discuss the possibility of Peruvian government bonds becoming Euroclearable. There was a positive response.

In 2015, Euroclear started working with the Peruvian authorities to identify the necessary changes. These included the introduction of the twin concepts of nominee holdings and a registrar agent, reforms to the tax laws and amendments to a number of local regulations.

Work was also put on hold for presidential elections starting in March 2016. However, following the arrival of a new Finance Minister in August 2016 who was keen to continue the ‘solarisation’ of Peru’s debt, the process was completed in April 2017.

The new bond is on average ten times more liquid than old sol-denominated bonds and is index-eligible. It has helped create a single pool of liquidity, lowering the cost of borrowing by between 20 and 25 basis points.

Peru’s weighting in the JP Morgan Emerging Markets Bond index has been raised from 2.3% to 2.7%.

Fernando Zavala, former Minister of Economy and Finance in Peru concludes: “This is an important milestone for the capital market in Peru that will allow us to refinance our government bonds under better conditions. We already offer a solid macro-economic environment and a favourable investment and business climate.”