Peruvians Increased Dollar Deposits In May As Sol Slid

Dollar deposits grew in May on a year earlier, as Peru’s financial institutions and households held fewer assets in domestic currency, as it weakened on the Federal Reserve’s easing of monetary stimulus. 

Deposits in dollars increased 30.5 percent in May, compared with a 7.5 percent rise a year earlier, according to a report published today by the Peruvian unit of Toronto-based Scotiabank.

Individuals tend to convert assets into a strengthening currency as a hedge against a loss of value in their holdings in domestic currency. The Peruvian currency, the nuevo sol declined 9.2 percent in the period.

“A reason behind this change were expectations with respect to the higher exchange rate that took place in April-May 2013, in the context of the announcement of the tapering of monetary stimulus in the United States,” said analyst, Mario Guerrero.

Sol deposits were little changed, rising 0.6 percent, compared with a 19 percent rise last year, as capital flight from emerging markets contributed to the greenback’s appreciation.

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Peruvians favoured dollar over sol deposits in May on a year earlier (photo: Wikimedia Commons)

Slowing dollarization

While the proportion of Peru’s assets in dollars in the period rose from 41 to 48 percent, Mr Guerrero said, “the speed of dollarization has been falling, in that the exchange rate has been relatively stable, contributing in a reduction of initial expectations that it would depreciate.”

Peru’s economy and sol has become less wedded to the dollar, with dollarization as high as 82 percent at the end of 1999.

Dollars, a store of value in times of currency crisis or inflation, as experienced by Peru in the 1990s, are widely accepted. White goods, vehicles and property prices are commonly given in dollars, still.

“Between January and May, dollar deposits by financial institutions grew 4.6 per cent, followed very closely by the growth of sol deposits (3.5 percent),” he added.

Growth in national income (6 percent a year) and employment (2 percent) has driven the 14 percent rise in saving deposits, which makes up over half of personal deposits.

Dollar and sol deposits could equalise, reducing worry about further depreciation of the sol. The Peruvian Central Bank regularly sells foreign reserves to offset adverse exchange rate movements.

A dollar traded at 2.774 soles today at 1:24 p.m. in New York.

Moody’s Investors Service, this month raised Peru’s sovereign debt three levels from Baa2 to A3, the second-vest improvement in Latin America since 1999, after Chile.

It noted its low public debt (18.3 percent of GDP) and growth forecasts indicating the economy will improve until at least 2016.

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