Appendix. Decomposition of Commercial and Small Business Sector De-dollarization
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Mercedes Garcia-Escribano is an economist at the Western Hemisphere Department, International Monetary Fund. The authors would like to thank Martín Kaufman, Luis Cortavarría, Alain Ize, Gastón Gelos, Gilbert Terrier, Rodrigo Valdés, and participants at the BCRP and WHD-IMF seminars for their feedback and extensive discussions. Data for this paper has kindly been provided by the Central Bank of Peru (BCRP) and the Superintendence of Banks (SBS).
Financial dollarization occurs when a large share of residents’ assets and liabilities are denominated in foreign currency. Dollarization ratios in the paper refer to commercial banks, unless noted otherwise.
Other countries in Latin America with widespread dollarization have also experienced a process of market-driven de-dollarization during the last decade, including Bolivia, Uruguay and Paraguay.
Transaction dollarization has also declined and is now minimal.
To avoid the impact of valuation changes, deposits and credits in foreign currency are evaluated at a constant exchange.
Net international reserves increased from US$ 9.6 billion in 2002 to US$ 33.1 billion in 2009.
In addition to the financial prudential measures listed below, the following regulatory measure may have an impact on the demand for local currency. In particular, the Consumer Protection Law was amended in 2004 forcing retailers and wholesalers to list prices in domestic currency. However, the law leaves agents free to list prices also in dollars.
Cayazzo et al. (2006) indicate that only Peru among 17 surveyed countries that are partially dollarized reports requiring higher provisions for foreign currency loans relative to domestic currency ones.
Cayazzo et al (2006) indicate that Poland, Singapore and Sweden have capital charges on foreign exchange exposures. Argentina, Bolivia, Chile, Costa Rica, Honduras and Uruguay have only limits on these exposures. The remaining of the 17 countries surveyed, including Peru, have both capital charges and limits on foreign currency exposures.
Ministerial Resolution 106-2003; Supreme Decree 189-2004; and Supreme Decree 137-2005.
The two types of domestic public bonds (known as Soberanos) are the fixed-coupon “Tasa Fija” bonds and the inflation adjusted, “VAC” bonds. The Tasa Fija bonds are the most liquid instruments and represent nearly 90 percent of Soberanos.
The longest maturity of fixed-rate government paper in domestic currency is 32 years, as of February 2010. It was 5 years in 2003. The VAC curve extends up to 39-year tenors, but has limited liquidity, as the total outstanding amount is US$700 million.
Reflecting the availability of domestic debt instruments in soles, the portfolio of local pension funds (AFPs) denominated in dollars declined to 32 percent in November 2008 from 50 percent in 2000, and has recently increased to 41 percent in December 2009 as the limits on AFP foreign investments have been raised. AFPs hold more than 50 percent of the stock of Soberanos, followed by foreign investors (21 percent), local banks (15 percent), and insurance companies (4 percent).
The hypothesis of stable demand for credit in dollars implies that (dit − diτ)(rit − riτ) < 0, where
Granger causality was verified from deposit to credit dollarization.
All series are valued at constant nominal exchange rate. The series of total credit and deposit dollarization used for the analysis in this section are constructed using December 2008 weights to avoid composition changes among types of credit and among types of deposits. Cointegration tests were performed in both specifications but rejected. Cointegration tests allowing for structural breaks were not performed as the period under analysis is characterized by macroeconomic stability and coincides with the introduction of the IT framework. Dollarization series in first-differences are I(0) processes.
A dummy variable for the 2004 legal change forcing retailers to list prices in domestic currency was tested as an explanatory variable but it was not significant; thus, this variable was not included in the set of exogenous variables used in the paper.
The discontinuation of the provision of credit risk guarantees by MiVivienda (a government-sponsored housing program) for new mortgages denominated in foreign currency extended by financial institutions took place in January 2008. Therefore, this change in MiVivienda is not driving the results.
Currently, the interest rate on mortgages in soles is fixed for the first five years and then converts to a variable rate that changes with the Limabor.
Currently, regulation allows insurance companies to offer pensions in either dollars or soles VAC, but in practice, all pensions (about 95 percent) are denominated in dollars since availability of sol VAC instruments in the market is very limited. An alternative approach to promote de-dollarization of pensions would entail changing the legislation to permit pensions in nominal soles, and then, insurance companies would be able to offer pensions in soles adjusted with a fixed-factor, while hedging themselves with bonds in nominal soles.