Peru officials to plead with Morgan Stanley to avoid market downgrade

A delegation from the Peruvian government headed by the country´s economy and finance minister Alonso Segura was set to travel to New York this week for a last-minute plea to avoid being downgraded by the Morgan Stanley Capital Index from an “emerging” to a “frontier” market.

The officials are doing nothing but trying to solve a problem created by the government in the first place, Carlos Melendez Serrano, stock market analyst and senior investment adviser at Grupo Coril in Lima, said in a telephone interview with Latin Business Daily.

Melendez Serrano said that a downgrade of Peru to a “frontier” market would aggravate the problems that the Lima exchange faces. Those include a decline of the general index by 24 percent since May as well as a drop in daily trading volumes from $20 million five years ago to $3 million today.

The problems started about four years ago when authorities imposed taxes on stock gains with rates that ranged from 5 to 30 percent for trades on the Lima stock exchange, which at the time was buoyant with foreign investors taking advantage of rising mineral prices and a fast-growing economy in Peru.

Not only were taxes much higher than those elsewhere in the region, but “the documentation paperwork for filing those taxes was so cumbersome that foreign investors simply disappeared and locals also got tired,” Melendez Serrano said.

As a result, trading volumes even for the most important shares of financial holding Credicorp and mining companies like Compania De Minas Buenaventura and Southern Peru Copper Corp. plunged, he said.

Local authorities and government did not act for years until Morgan Stanley Capital Index recently put the Peruvian shares into evaluation because the level of liquidity was too low, he said.

“The stock market was once buoyant and fast. The damage is done,” Melendez Serrano said. The investors who remain have learned to put their money in investment funds, he said.

His comments came two days after the Lima Stock Exchange issued a news release to inform that top officials from the exchange and government authorities are acting to prevent that Peru be placed in a lower category.

“By maintaining its emerging market category, this will allow Peru to receive and manage investment flows similar to other thriving emerging countries, such as China, Brazil, India, Mexico, Colombia and Chile,” the stock exchange said in its release.

“In addition to the increased perception of risk, (a downgrade) will affect the currency exchange rate and local interest rates within Peru, impoverishing all Peruvians by reducing the value of their assets,” it said.

If taxes on gains in stock trading remain, they “won´t collect absolutely nothing as the market is already dry. Investors have lost 30 percent of their equity last year. The capital gains tax was a failure,” Melendez Serrano said.

The general index of the exchange was 13,595 points in May; it has dropped to 10,246 as of Thursday.