Frecuently Asked Questions - Investor

1. What is public debt?

In general, the public debt of any country corresponds to the financial liabilities incurred by the Central Government or Federal Government, i.e. financial instruments under which it has committed to repay on certain dates specified, the amount of principal received along with the corresponding yields. Nowadays, Peru’s public debt comprises mainly issued in the securities market and loans from multilateral agencies. In 2012 the gross debt of the Central Government of the Republic of Peru was approximately 16.5% of GDP and the net debt was 6.8% of GDP, i.e. net of the government’s financial assets except equity. 

10. Where can legal information be found?

Under the section of the website devoted to Deuda Publica there is Normatividad sub-section where can be found all relevant information (in Spanish). Some direct links are:

Regulation of Bills:
http://www.mef.gob.pe/contenidos/deuda_publ/Letras/Reglamento_Letras_del_Tesoro_Publico.pdf

Regulation of Bonds:
http://www.mef.gob.pe/contenidos/deuda_publ/bonos/internos/prog_creadores_mcdo/Reglamento_Bonos_Soberanos.pdf

Regulation of Market Makers:
http://www.mef.gob.pe/contenidos/deuda_publ/bonos/internos/prog_creadores_mcdo/Reglamento_Programa_Creadores_Mercado.pdf  

11. Where can eligible entities to buy on behalf of third parties be found?

In the following direct links can be found names and other details of the eligible entities that can participate in auctions on behalf of third parties:

Securities firms such as brokerage firms and mutual fund managers:
http://wwmv.gob.pe/frm_SABDirectorio.aspx?data=DE3C1EC1CCC6548F68F3FCDC60C3E22EC7EA610E84w.s

http://www.smv.gob.pe/Frm_SabDirectorio_Safm.aspx?data=CDC5A3162B03AD78949F6239A5CE0A5869891CC5BF

Credit institutions such as banks, municipal banks, financials and rural banks:
http://www.sbs.gob.pe/0/modulos/JER/JER_Interna.aspx?ARE=0&PFL=0&JER=1736
http://www.sbs.gob.pe/0/modulos/JER/JER_Interna.aspx?ARE=0&PFL=0&JER=1742
http://www.sbs.gob.pe/0/modulos/JER/JER_Interna.aspx?ARE=0&PFL=0&JER=1739
http://www.sbs.gob.pe/0/modulos/JER/JER_Interna.aspx?ARE=0&PFL=0&JER=1741 

2. What is the objective of the issuance of public debt in Peru?

In most countries debt is incurred by government borrowing to finance a gap between revenue and expenditure. But in Peru, with a strong fiscal position, the main objective of domestic issuance is the development of debt market in local currency. This was set out in the government’s strategy for its management of assets and liabilities (see “Estrategia de Gestión Global de Activos y Pasivos 2013-2016” at www.mef.gob.pe/tesoro/strategy.php). To this end, the government has established a weekly auction schedule in order to maintain a liquid sovereign yield curve which provides a reference for local companies issuing their own local currency bonds, as well as a wider range of risk-management options. 

3. What are the principal domestic public debt securities?

The Government of Peru issues in the domestic market bills and bonds. Bills are in nominal local currency and bonds are in nominal local currency and real local currency (inflation-adjusted). Bills or “Letras del Tesoro” are aimed at retail purchasers who participate (through their brokers) in the local stock market. Nominal and real bonds are, respectively, referred to as “Bonos Soberanos nominales” and “Bonos Soberanos VAC”, both with fixed coupons. The Republic has not issued either global depository notes (known as GDN) representing sovereign bonds in escrow, nor other similar financial instruments. This clarification is important because, for example, the GDN incorporates the counterparty risk of their issuers plus the fiduciary risk of the custodians of the sovereign bonds of Peru that serve as their collateral. 

4. How big is the sovereign bond market in Peru?

The issuance of sovereign debt securities in Peru has had a boost with the approval of the “Estrategia de Gestión Global de Activos y Pasivos 2013-2016”. For example, the stock of domestic government bonds outstanding, which was S/. 28.8 billion at the end of 2011 and S/. 31.7 billion at end 2012, had risen to S/. 35.1 billion by mid 2013, approximately 6.8% of GDP. This increase in the stock of sovereign bonds issued does not reflect an increase in gross debt, but follows a strategy to substitute progressively foreign debt with domestic debt to reduce the country's financial vulnerability and debt dollarization. Nowadays, local currency debt of the Republic of Peru has a rating of “A-“ by Standard and Poor's and Fitch Ratings, "BBB+” by Nice Rating, and “BBB” by Moody's and DBRS, in all cases with stable or positive outlooks. 

5. Is there a sovereign yield curve in Peru? Is it liquid?

Yes, there is a sovereign yield curve in local currency in Peru with a range of securities with terms up to 30 years. In nominal currency, the longest maturity bond is the “Bono Soberano nominal 2042”, and in real or VAC currency, the longest maturity bond is the “Bono Soberano VAC 2046”. In order to promote liquidity in the domestic bond market, the government approved in 2013 new regulations, applying to bills, bonds and market-makers, which allow the Peruvian Treasury itself to repurchase and resell its own securities (with or without “repo” transactions). Furthermore, the Law was amended so that, from this year, the Superintendent of Securities Market (SMV) will take over the supervision of the secondary market in order to give greater transparency to the formation of prices in the market and to ensure that centralized trading mechanisms, after a period of adjustment, must meet international best practice standards. 

6. Who can buy sovereign bonds in the primary market?

Purchases in the primary market are made by “eligible entities”. They will have applied to the Ministry of Economy and Finance (MEF), and obtained the necessary approval. Eligible entities that can participate on their own and for third parties are: (i) securities firms such as brokerage firms authorized by the SMV, and (ii) credit institutions such as banks, municipal banks, financials and rural banks authorized by the Superintendent of Banking, Insurance and Pension Funds (SBS), as well as state-owned financial institutions like the Banco de la Nacion, Cofide, Agrobanco and Mivivienda. Individuals and companies will usually apply through one of the approved brokers or credit institutions. In addition there are eligible entities that can participate only by their own account, including: (i) insurance entities as life insurers and general insurers authorized by the SBS, and (ii) investment entities such as mutual funds, investment funds, pension funds and trust funds authorized by the SMV or SBS through their managers, administrators or trustees. Foreign entities registered as insurance companies, investment firms, securities firms or credit institutions may also obtain authorization to participate, but only in non-competitive proposals, if and only if they are subject to financial regulation and supervision in their country of residence. 

7. When are bonds auctioned; and when are they issued?

An auction of government bonds in the primary market is usually held on the second and fourth Tuesday of each month. The issuance and delivery of the securities to investors, against payment, takes place the next day, unless instructed otherwise in the auction listing. The auction call is made at least one day in advance by the various media, including the e-mail lists of the Investor Relations Office ( investor@mef.gob.pe) and on the Ministry’s website www.mef.gob.pe

8. How are government bonds cleared and settled?

Both primary market and secondary market operations are settled through the clearing and settlement company CAVALI (Central Securities Register and Depositary of Peru) using the delivery versus payment mechanism. CAVALI maintains the accounts for each final holder which the Republic of Peru will recognize as the owner of the bonds. At maturity, the bonds are redeemed automatically by the MEF through CAVALI, with payment made to each final holder of the securities. More details at www.cavali.com.pe

9. What kind of costs or taxes are there?

In an effort to promote the development of the market of public debt securities in domestic currency, the SMV has reduced to zero the rate of contribution applicable to transactions of debt securities (bonds) issued by the central government until December 31, 2018. Furthermore, there is currently no tax on bond holdings, or income or capital gains earned, for either local investors or foreign investors.

Legal basis (in Spanish): Resolución SMV N° 037-2017-SMV/01