[News] Peru is an example of good policies in the management of capital flows in the region, highlights the IMF

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The International Monetary Fund (IMF) highlighted that Peru is an "example of good policies" in the management of external capital flows in the region, which has allowed it to maintain the financial stability of the country, in a context of fiscal policies and prudent and disciplined monetary policies, the Central Reserve Bank (BCR) reported on Wednesday.

According to the study "IMF Recommendations on Capital Flows", capital flows have created significant challenges for macroeconomic management, particularly in periods when short-term capital flows have increased or decreased significantly.

These challenges were particularly important when Peru was affected by the super cycle of raw materials, between 2006 and 2008 and from 2009 to 2012. This episode was characterized by significant capital flows to the country, an improvement in the terms of trade Peru, the rapid growth of credit and in the level of indebtedness of the private sector, and inflationary pressures.

"In this context, Peru has found different ways to maintain its financial stability and not generate bubbles, while continuing to show great precision in its policies," said Nicoletta Batini, senior economist at the IMF, in a virtual seminar where he presented a study that analyzes how 28 countries manage the volatility of external capital flows.

 

In the current context of the health crisis due to the COVID-19 pandemic, the IMF indicated that the impacts of capital flows in Peru have been relatively contained. Peru has experienced less pressure in financial markets than other Latin American countries, as seen in more moderate increases in bond yields and in new successful sovereign bond issues in April 2020.

"Peru provides an example of good policies, including capital flow management measures for the region and for the world," Batini said.

According to the IMF study, to mitigate the impact of fluctuations in capital flows and associated risks in a dollarized financial system, the BCR has combined unconventional instruments, such as differentiated reserve requirements higher in dollars than in soles, and intervention in exchange markets.

The IMF explained that the BCR frequently intervenes in the foreign exchange market to smooth abrupt movements in the exchange rate that are inconsistent with the fundamentals of the economy. "This hybrid framework aims to provide more space for the BCR to vary its monetary policy rate and allow it to respond countercyclically to domestic conditions," she said. To this is added the adequate management of liquidity in soles, which allows reinforcing the monetary transmission to the rest of the interest rates of the financial system.

He pointed out that, in the case of Peru, the instruments used by the BCR are more useful than, for example, restrictions on capital flows, because in our country the largest volume of financial intermediation occurs through the banking system and not through the capital market.

Amid the uncertain outlook over the health crisis, Peru is backed by a flexible two-year credit line from the IMF for around US $ 11 billion to boost confidence and provide risk insurance.