Economist: Artificially strong Peru currency hurting exporters, dollar reserves

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Unlike other countries in Latin America with freer exchange systems that have seen deep depreciations of their currencies against the U.S. dollar, Peru keeps its sol currency overvalued through interventions, which not only hurts local exporters, but is destroying its dollar reserves, an expert told Latin Business Daily.

“Other countries have depreciated ... their currency. They have more freedom, and their central banks have not intervened like the Central Bank of Peru has done,” Carlos Gonzalez, an economist at the Peruvian Association of Exporters (ADEX) said.

“With the bigger devaluation, their products are more competitive. Colombians, for example, are going into the U.S. market in a much more aggressive way lowering prices,” Gonzalez said.

Between January 2014 and July of 2015, Chile and Mexico have seen depreciations of their currency by nearly 23 percent, while Colombia has had a depreciation of about 40 percent and Brazil more than 30 percent, Gonzalez said.

Peru, in that time, has seen a currency depreciation of only 14 percent against the U.S. dollar.

“What the Central Bank does is to enter the exchange markets and sell dollars to buy the sol currency. Just in August, it sold $1.7 billion and from February 2012 to date, it has sold $8.5 billion to keep the sol from depreciating,” Gonzalez said.

The Central Bank does this because it wants to prevent bankruptcies of companies that have dollar-denominated debt. It also wants to control inflation, which already has overcome the barrier of an annualized 4 percent rate, compared with 2 percent to 3 percent in previous years.

However, this policy has cost Peru a significant decline in U.S. dollar reserves, which now stand at only about $61 billion, compared with $68 billion in March 2012, Gonzalez said.

“The concern is on the fact that the country is losing reserves, and the current account balance is deteriorating more, “ Gonzales said.

Peruvian exports and services revenue have been, for the past two years, lower than the expenses on imports of goods and services, Gonzalez said.

The decline is much steeper this year, and there is weakness not just in traditional commodities exports, but also in those of manufactured goods, such as textiles or agroindustrial products, Gonzalez said.

A recent press release by the exporters association described as “destruction” the situation that the guild of Peruvian exporters faces because of this policy of keeping the sol value against the dollar higher than it should be in a free system.

“Between January and July, there were 2,505 companies that abandoned international trading. As a result, there are now only 5,794 active exporters. This means that only 60 percent of those companies that started the year as exporters remain,” ADEX said.

Gonzales also told Latin Business Daily that it is not just Latin American countries that have depreciated their currencies more than Peru, but also those in Asia, which makes imports into Peru more attractive, Gonzalez said.

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