As announced by the Finance Minister of Peru, Luis Castilla, the country is planning to buy back as much as $2 billion in international bonds right on next month, something which is bigger than the initial plans. Apart from that, the treasury will also start purchasing Dollars in an attempt to stem the Sol’s appreciation. Incidentally, Sol is the major currency of this Latin American country.
In 2012, Sol has gained 5.7% on a whole against USD. This marks the best annual performance of the currency since 2009. The Central Bank of Peru last year bought a record making $13.1 billion in the spot market in an attempt to soak up the excess Dollars, however, that didn’t help much. In this month, the currency has actually reached its highest figures in the last 16 months.
During his interview where he announced about the plans, Castilla also added that the biggest challenge that the policy makers of Peru have in hands right now is to deal with the entrance of any capital into the country which is paving way for a stronger Sol. Castilla also cleared that they are not going to opt for any sort of capital controls right at this moment and they want the Central Bank to continue with aggressive intervention.
Peruvian officials are analyzing that which securities should be targeted and will also go for purchase of $1 billion to $2 billion in foreign debt. Incidentally, in December, Castilla stated that Peru will buy around $1.5 billion of foreign debt.
The investors from the developed countries are now plowing money to the higher yielding assets and this may actually lead the world towards a currency war, as warned by countries such as Chile and Russia. The Central Bank of Peru, however, has ruled out any usage of capital controls to depreciate Sol.
Incidentally, Peru is the largest silver producer in the world and holds the position of third largest copper producer as well. The foreign direct investment in the country is on a record high currently and hence, is appreciating the Sol. According to analysts, like other emerging markets, speculative money is not behind the surge of Sol, rather the appreciation corresponds to the fundamentals such as foreign direct investment. Peruvian economy experienced an expansion of 6.3% in 2012 and is expected to have similar growth in 2013.