Peru to repay foriegn debt through bond issue, not with currency reserves

Finance Minister Luis Carranza said today that while net international currency reserves will become larger than foreign debt “some time this year”, they will not be used to pay the debt off early.

He said that the foreign reserves, which stand at around US$21 billion, are for protection against the possibility of external effects damaging the Peruvian economy, and not to be used for other purposes.

Talking about the possibility that the Central Reserve Bank of Peru (BCRP) might buy sovereign bonds, he said that it would be a possibility “once the country has reached investment grade” in terms of credit and international risk.

He said that the prepayment of debt to the Club de Paris countries will be made possible through the sale of bonds on the local and international capital market, with attempts made to keep the bonds in the country by offering 30 year bonds in Peruvian soles and at a fixed interest rate.

Currently, the Andina agency estimates that around 30% of Peruvian bonds in soles are held by foreign investors.

Carranza explained that the bonds will be issued according to a carefully designed program, intended to prevent instabilities in the dollar-sol exchange rate – and perhaps also helping the BCRP to prevent overvaluation of the sol.

The early repayment of the Club de Paris debt will save the country some $400 million per year between now and 2015, and, once finalized, is likely to make Peru’s international risk rating drop below 1% for the first time in history. This will help the country reach the “investment level” of credit, which is expected to bring about a flood in foreign investment.

Carranza also mentioned that Peru’s foreign debt stands at 30.8% of GNP, and is likely to drop below 30% within the year. 

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