Stronger dollar could cool investment and consumption as indebtedness increases
Published by Anadolu Agency Oct 4.
Peru’s sol slumped to an almost five-year low against the U.S. dollar Friday, threatening to choke growth by raising the debt of Peru’s businesses and households, analysts said.
One nuevo sol closed at $2.90, its lowest level since November 2009, after the central bank held off intervening in the spot market with dollar sales, and U.S. labor figures beat expectations.
A stronger greenback devalues incomes for those who pay dollar-denominated debts including mortages or goods priced in dollars such as automobiles or appliances, in domestic currency.
Passing the 2.90 mark would pose “systemic risk” to the financial system, reducing investment and consumption, Paul Lira, an academic at the Peruvian University of Applies Sciences told the daily El Gestion earlier this week.
Nearly half of Peru’s deposits, from pension funds to individual loans, are in dollars, leaving a degree of exposure to the economy on adverse foreign exchange movements.
Currently, Peru is better insulated when compared to 82 percent of deposits being in dollars in 2001.
The currency has since strengthened after ruinous hyperinflation in the early 1990s, and on a boom that made it South America’s best performer last decade when it averaged 6.4 percent growth.
But dollar deposits rose in May compared to a year earlier from 41 to 48 percent, as the Federal Reserve pared back its bond-buying program and capital left emerging markets, including Peru.
A strengthening dollar was the greatest factor in the slide of the sol, which has fallen 3.4 percent in 2014, Mario Guerrero, analyst at Peru’s Scotiabank, told The Anadolu Agency.
“There’s a general tendency of a strengthening dollar against almost all emerging market currencies, including developed countries, commodities, bonds and stocks.
“A second factor is the general deterioration in the fundamentals of emerging market economies, like Peru, which has been intensified by the dollar,” Guerrero added.
Peru’s economy grew the least in five years, expanding just 0.3 percent in June as the mineral exporter faltered on reduced copper demand, and the trade deficit widened to its greatest shortfall in more than 20 years.
The Andean country’s outlook has been revised to 3.5 percent or less this year, after initial expectations of 6 percent by the monetary authority. A weakening currency may dampen growth further.
Peru’s monetary authority makes regular interventions by selling foreign reserves to stabilize the currency.
Using its $66 billion foreign currency reserves, the central bank last intervened Sept 26. selling $423 million.