Lima’s capital markets have lagged behind the rest of its financial system in recent years. While the banking sector has been a stabilizing force and the insurance market has attained double-digit growth, the stock exchange has witnessed neither the sophistication of the former nor the rapid expansion of the latter. Industry participants recognize the need for widespread education, development, and implementation of more sophisticated instruments, but there remains a long road ahead in the quest to develop the sector.
Lima’s stock exchange is the Bolsa de Valores (BVL). Founded in 1860, it is a member of the Mercado Integrado Latinoamericano (MILA), a coalition formed to integrate the stock exchanges of Chile, Colombia, Mexico, and Peru through standardization of regulations. As of 2015, the market capitalization of listed Peruvian companies was worth 29.4% of GDP, down from 38.9% in 2014 and 69.9% in 2010. This is just below the Latin American average of 30.3%; for context, Colombia, Mexico, and Chile had market capitalization rates of 29.4%, 35.2%, and 79.2%, respectively. Where the BVL lagged well behind its regional neighbors was in the total value of stocks traded as a percentage of GDP; Peru’s rate of just 0.8% pales in comparison to Colombia’s 4%, Mexico’s 9.1%, and Chile’s 8.2%.
The BVL’s main index is the IGBVL, a value-weighted index that tracks the performance of the 32 most commonly traded stocks on the exchange. After reaching highs of over 20,000 during the commodities boom, the IGBVL fell to a low of under 10,000 in early 2016 before rallying in the spring. After five straight months of growth, the IGBVL reached a 2016 high of 15,296 in September 2016, a 55.32% increase on the year. This growth came from several sectors, with industrial growing by 70.83%, financial by 53.89%, and consumer 28.75%. The total market value of USD115.19 billion as of September 2016 is an increase of 27% from 2015’s value of USD90.65 over the same time period.
The fall early in 2016 was largely due to global trends, particularly the drop in the commodities industry. After a weakening dollar brought relief to the commodities market, the results of the Peruvian election helped restore investor confidence. The election of former World Bank economist Pedro Pablo Kuczynski ensured that Peru would remain in alignment with global macroeconomic principles and continue to welcome foreign investment and streamlined regulation. The BVL also received a boost when the index company Morgan Stanley Capital International (MSCI) ruled that the BVL would remain in its “emerging” markets category instead of moving down to “frontier.” This was more than a minor classification change—downgrading Peru’s stock exchange to a “frontier” market would have dropped it from a group including India, China, Chile, Colombia, and Mexico and likely triggered an exodus of foreign investors concerned about the stability of the market. Peruvian market leaders delivered a presentation to MSCI that included a 10-year plan to develop the BVL and proposed measures to attract foreign investors. MSCI’s decision, combined with the Federal Reserve board’s announcement that interest rates would remain unchanged in the near future, gave investors confidence in the Peruvian exchange going into the end of the year.
A series of changes are under way in the market, some of which were prompted by the possibility of a MSCI downgrade. One of the biggest changes is the elimination of the 5% capital gains tax on shares transferred through the BVL. In September 2015, Peru passed a law exempting taxpayers from capital gains tax so long as they do not transfer more than 10% of the total shares issued by a given company. This is seen as a key step forward by many involved in the sector, as there was a widespread view that the capital gains tax was deterring investors, limiting capital flows, and contributing to the BVL’s decline in traded volume. The exchange also reduced its fees by up to 70% in some cases, increased the ease with which small businesses could participate in the exchange, and took steps toward introducing new instruments onto the exchange.
Alejandro Rubio Silva, CEO of electronic trading platform Datatec, explained to TBY that the path to reform is difficult but necessary for development. “During my 20 years of experience in the financial sector in Peru, I have seen that without proper prioritization and adequate incentives, market participants will not fully engage and moving ahead will be nearly impossible,” he told TBY. “It is necessary to meet with all the stakeholders in the financial industry and get their engagement and compromise… which is good for the development of the financial sector, its companies, the economy, and the whole country.” The reforms in the face of the MSCI downgrade represented a promising step in that government regulators and private firms worked together to form a more robust and efficient market structure. As Peru’s capital markets continue to develop, such a collaboration like this will be essential to continued success.
Moving forward, perhaps the primary goal of Peru’s Capital Markets is to expand market liquidity. As mentioned earlier, the BVL lags well behind its regional peers in volume of trading and total investable securities. The aforementioned reforms include steps to streamline the process of trading, but the core issue facing the market is a lack of new products on the market. As of 2016 there were 298 companies listed on the BVL, and efforts are under way to spur new entrants and introduce new instruments for trading. One plan in the works is to develop an alternative investment market that would give medium-sized companies access to capital markets. This would bring new activity through offering a path for formalization and funding through capital markets instead of commercial banks. TBVL saw success in this strategy in 2015, as the alternatives market grew from USD 12 million in 2014 to USD 22 million in 2015. Firms are still learning the ins and outs of the alternative market, so traders are optimistic that there is a great deal of untapped potential.
At the same time, regulators and brokers are working together to introduce instruments that have long since been a staple in more sophisticated exchanges. “There are many new regulations addressing the need for more instruments and derivatives that have been happening in the past seven to nine years worldwide,” Silva told TBY. “The market needs to grow and it needs more financial instruments.” Silva cited the lack of futures in the forex market as an example of a service not currently provided that has the potential to boost trading. “Prices are more transparent for futures than for forwards,” he said. “In the forex market, people would be more comfortable to see the price and the volume and take their chances when they feel comfortable with the price.”
Peru issued USD3 billion in sol-denominated bonds in October 2016 in an effort to convert its dollarized debt to soles. Alfredo Thorne, Peru’s finance minster, announced that the bond was the largest-ever issued by an emerging market using its own currency. Demand for Peruvian debt was driven by a receptive international market and investor confidence after the election of Kuczynski. With interest rates at a two-year low and an investment-grade rating, market circumstances coalesced to create an ideal opportunity for the Peruvian financial sector to refinance its debt at a time when the government is looking to increase spending. The operation reduced the government’s liabilities by USD70 million a year, limited its exposure to currency volatility and should boost liquidity by allowing the government to be more aggressive in the local market.