By John Quigley and Christine Jenkins
For more than a decade, Peru has been a rising star of emerging economies, with fast growth, declining public debt and healthy expansion of its international reserves. It has been widely viewed as one of the most credit worthy states in Latin America.
When the commodities bust hit, Peru, like its neighbors, took it on the chin. Government budgets were sliced, unemployment rose, exports suffered. But something else was happening and no one reacted: the number of companies big enough to keep Lima’s stock market in the “emerging” category was falling dangerously. Four years ago, there were close to a dozen; now there are barely three.
The result is a potential catastrophe: a likely downgrading by June of the Lima stock market to “frontier” status by MSCI Inc, whose indexes are the benchmark for more than $9.5 trillion in assets worldwide. If Peru slips into the ranking of countries like Kazakhstan, international investors may simply ignore it, meaning billions of dollars may flow out from mutual funds. The government is scrambling, but the clock is ticking.
“The authorities have just woken up,” said Cesar Alvarez, the head of economy and finance at the Centrum Catolica business school in Lima. “They need little short of a miracle to increase trading at a time when investor confidence is in the doldrums. There’s a very high possibility we become frontier.”
Lima’s main stock index dropped 33 percent last year, the world’s worst return after war-torn Ukraine. Average daily trading volumes were $15m in the first 11 months of 2015, half the level during the same period of 2012. The 4,470 trades on the bourse in November represent the lowest level since June 2002. That’s even as Peru’s economic growth, the fastest in Latin America for more than a decade, shows signs of recovering from the collapse of metal exports.
Some have blamed the government of President Ollanta Humala, who took office in 2011. They note that stock trading volume has plummeted 70 percent since 2007, yet it took until two years ago for it to take steps to increase trading, including lowering transaction costs and regulating real-estate investment trusts. Only after an MSCI ultimatum in August, the government approved the elimination of a 5 percent tax on equity gains, which took effect on January 1.
Critics say the steps are too little, too late. Alfredo Thorne, founder of Thorne & Associates, a research firm, and a board member of the Lima Stock Exchange, said there’s a long list of measures that the government should have taken to lure investors and propel companies to sell their shares: allowing state companies to sell stocks, removing restrictions on how brokerages attract private capital and creating new securities to spur trading of corporate bonds.
The Finance Ministry said in response to queries that there is no concrete evidence the tax rules of the last few years have helped reduce liquidity. It said it has taken measures to increase trading, such as eliminating restrictions for listing small caps, easing rules for share sales and recently changing market maker rules.
“The decision to take advantage of these changes to increase liquidity is purely up to the private sector,” the ministry said.
Even after fees and commissions were reduced and the stock tax exempted, Peru remains more expensive than neighbours Chile and Colombia, that are bigger and more liquid. Coupled with structural problems, Peru is at a clear disadvantage as it competes for overseas investors, said Carlos Rojas, managing partner at Lima-based Andino Asset Management.
While there is close to $2 trillion coveting emerging-market equities, there’s no more than $20bn invested in frontier markets. Peru would lose its 0.2 percent slice of the emerging basket and gain a 15 percent chunk of the frontier segment , according to BlackRock Inc.
Alberto Arispe, chief executive officer of Lima-based Kallpa Securities SAB, said the capital markets haven’t been a priority for Peru’s last three governments, which tinkered at the margin and avoided the deep, structural changes needed. The responsibility for a reclassification by MSCI would be shared by all — the finance ministry, the securities regulator, the stock exchange, institutional investors and brokerages.
Bloomberg
By John Quigley and Christine Jenkins
For more than a decade, Peru has been a rising star of emerging economies, with fast growth, declining public debt and healthy expansion of its international reserves. It has been widely viewed as one of the most credit worthy states in Latin America.
When the commodities bust hit, Peru, like its neighbors, took it on the chin. Government budgets were sliced, unemployment rose, exports suffered. But something else was happening and no one reacted: the number of companies big enough to keep Lima’s stock market in the “emerging” category was falling dangerously. Four years ago, there were close to a dozen; now there are barely three.
The result is a potential catastrophe: a likely downgrading by June of the Lima stock market to “frontier” status by MSCI Inc, whose indexes are the benchmark for more than $9.5 trillion in assets worldwide. If Peru slips into the ranking of countries like Kazakhstan, international investors may simply ignore it, meaning billions of dollars may flow out from mutual funds. The government is scrambling, but the clock is ticking.
“The authorities have just woken up,” said Cesar Alvarez, the head of economy and finance at the Centrum Catolica business school in Lima. “They need little short of a miracle to increase trading at a time when investor confidence is in the doldrums. There’s a very high possibility we become frontier.”
Lima’s main stock index dropped 33 percent last year, the world’s worst return after war-torn Ukraine. Average daily trading volumes were $15m in the first 11 months of 2015, half the level during the same period of 2012. The 4,470 trades on the bourse in November represent the lowest level since June 2002. That’s even as Peru’s economic growth, the fastest in Latin America for more than a decade, shows signs of recovering from the collapse of metal exports.
Some have blamed the government of President Ollanta Humala, who took office in 2011. They note that stock trading volume has plummeted 70 percent since 2007, yet it took until two years ago for it to take steps to increase trading, including lowering transaction costs and regulating real-estate investment trusts. Only after an MSCI ultimatum in August, the government approved the elimination of a 5 percent tax on equity gains, which took effect on January 1.
Critics say the steps are too little, too late. Alfredo Thorne, founder of Thorne & Associates, a research firm, and a board member of the Lima Stock Exchange, said there’s a long list of measures that the government should have taken to lure investors and propel companies to sell their shares: allowing state companies to sell stocks, removing restrictions on how brokerages attract private capital and creating new securities to spur trading of corporate bonds.
The Finance Ministry said in response to queries that there is no concrete evidence the tax rules of the last few years have helped reduce liquidity. It said it has taken measures to increase trading, such as eliminating restrictions for listing small caps, easing rules for share sales and recently changing market maker rules.
“The decision to take advantage of these changes to increase liquidity is purely up to the private sector,” the ministry said.
Even after fees and commissions were reduced and the stock tax exempted, Peru remains more expensive than neighbours Chile and Colombia, that are bigger and more liquid. Coupled with structural problems, Peru is at a clear disadvantage as it competes for overseas investors, said Carlos Rojas, managing partner at Lima-based Andino Asset Management.
While there is close to $2 trillion coveting emerging-market equities, there’s no more than $20bn invested in frontier markets. Peru would lose its 0.2 percent slice of the emerging basket and gain a 15 percent chunk of the frontier segment , according to BlackRock Inc.
Alberto Arispe, chief executive officer of Lima-based Kallpa Securities SAB, said the capital markets haven’t been a priority for Peru’s last three governments, which tinkered at the margin and avoided the deep, structural changes needed. The responsibility for a reclassification by MSCI would be shared by all — the finance ministry, the securities regulator, the stock exchange, institutional investors and brokerages.
Bloomberg
