Peru Sells Domestic Debt at Lowest Yield Ever

Castilla, Luis Miguel - Feb 2013Peru sold sol-denominated sovereign bonds in the domestic market at the lowest yield ever Wednesday, reflecting a strong appetite by investors for the paper, Economy and Finance Minister Luis Miguel Castilla said.

The government placed a total of 1.87 billion soles ($725 million) in two series. The first series of 1.14 billion soles was placed in its 2023 series, with a yield of 4.2 percent. Another 722 million was placed in its 2042 series and has a yield of 5.14 percent.

Castilla said the demand was almost three times the offer.

The funds from the bond issue are to be used to prepay external debt, a measure that is aimed at helping the Central Bank ease the appreciation pressure on Peru’s sol currency.

The Finance ministry said earlier this week that it will prepay about $1.7 billion owed to the Inter-American Development Bank and the International Bank for Reconstruction and Development, IBRD.

Castilla said the government could use more than $4 billion to slow down the appreciation of the sol, which strengthened 5.4 percent against the U.S. dollar in 2012. While the sol has depreciated so far in the first two months of this year, most economists believe it is a temporary bump and the currency will resume its appreciation trend soon.

The Central Bank has also taken a number of measures to ease the appreciation pressures on the sol, countering the strong inflow of foreign capital into the Peruvian economy. It bought more than $13 billion on the spot market last year, while it has also increased the limit that private pension fund managers can invest abroad, thus increasing the demand for dollars.

A stronger currency hurts exporters as it makes their products more expensive in dollars and therefore less competitive in international markets. Economists have also said that a sudden reversal of the sol’s appreciation trend would be a major risk for Peru’s economy.

Moody’s said last week that Peru’s plan to prepay external debt is positive as it will help reduce the country’s exposure to exchange rate risk. At the end of last year, government debt denominated in foreign currency was more than half of its total debt, which is significantly higher than other Baa-rated countries.

“The reduction of the government’s external debt stock would contribute to reducing the share of foreign currency-denominated debt, a positive development that would address one of the sovereign’s main credit challenges,” Moody’s said.

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