Morgan Stanley Capital International recently gave Peruvian officials nine months to raise trading volumes in the Lima stock exchange or else it will move the exchange out of the emerging markets category to one named Frontier.
Authorities from the Peruvian Economy and Finance Minister said that the decision “recognized the work being carried out by the public and private sector” in Peru to increase liquidity. An analyst told Latin Business Daily, however, that there is no reason for Peruvians to celebrate.
A group of government and private officials headed by the country´s Economy and Finance Minister Alonso Segura traveled to New York in September to meet with Morgan Stanley Capital International officials to try to persuade them to keep the Peruvian market in the “emerging market” category in line with countries such as China, Brazil, India and Mexico.
This happened shortly after Morgan Stanley put the Peru exchange under review.
Carlos Melendez Serrano, an analyst at Mirador Financiero, told Latin Business Daily by email that the decision by Morgan Stanley fell short of the government's and stock exchange participants' expectations.
“Our authorities had requested 30 months, which, according to them, would have been enough time to give liquidity and depth to our stock exchange," Melendez Serrano said. "They were optimistic because the [Morgan Stanley] officials had heard their arguments and it all looked like it was going in a positive way."
The Lima stock exchange's loss of liquidity started earlier this decade after the government imposed new taxes on stock trading gains that not only were high but also required cumbersome documentation paperwork and other bureaucratic demands. This led foreign investors to disappear while locals chose easier options such as investing in mutual funds.
“The reply is surprising because of the little time provided," Melendez Serrano said. "A June 2016 deadline is too little time for a market that has lost liquidity for many years."
The initial reaction in the Lima stock exchange after the Morgan Stanley announcement of the decision on Thursday was a “shy” 0.84 percent increase of the stock exchange main index to 10,114.65 points.
“I think it will remain like this until next year when investors will come back with more confidence as the taxes on gains are eliminated,” Melendez Serrano added.
Peruvian authorities have approved a law to bring back exemptions to capital gains in the Lima exchange and keep them in place from next year until 2018.
The Peruvian exchange index has lost more than 20 percent since May. Trading volumes have declined to approximately $3 million currently from more than $20 million daily four years ago.