Peru Central Bank Prepares Measures to Stem USD Loans

Peru’s Central Bank is preparing measures to stem the number of bank loans in dollars, as a weakening sol currency could threaten borrowers who owe money in greenbacks, daily Peru.21 reported.

Central Bank president Julio Velarde said the measures will be announced before the end of this year.

Around 50 percent of Peru’s total loans are in US dollars. Many people and companies borrowed in US dollars over the past decade as the sol steadily appreciated against the dollar, like other emerging market currencies.

For those earning their income in soles, it was beneficial to have loans in dollars as long as the Peruvian currency continued to strengthen. At one point, the sol reached almost 2.50 per dollar, and many economists thought it would continue to appreciate.

But earlier this year, that trend reversed as the US government announced it would start to pull back on its multibillion dollar bond buying program, known as quantitative easing, and as China’s economy weakened.

This has made it more costly to pay back loans in dollars for those with sol-denominated income. The sol is now trading at about 2.970, which is more than a 6% depreciation against the dollar so far this year.

For the Central Bank, this is one of the main risks for the health of Peru’s banking system.

“We have a problem that consists in still having a large part of the credit in dollars,” Velarde said.

“The projections for next year show that there will be more volatility, even though it is difficult to quantify,” he added. “We are taking measures to de-dollarize more credit.”

Velarde said he hopes the amount of dollar loans falls by 10% in the first half of next year, and by 20% in all of 2015.

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