Compliance Risk Management in Peru: A Model for Latin America
Peru’s ability to maintain a strong credit rating during the COVID-19 pandemic is a testament to its effective debt management and compliance risk management strategies. According to Standard & Poor’s (S&P), Peru’s credit rating is BBB+, while Moody’s assigns an A3 rating and Fitch a BBB+ rating.
Lessons Learned from Previous Economic Shocks
Peru’s success can be attributed to its ability to learn from previous economic shocks, including the 2008 global financial crisis. The country recognized the importance of reducing vulnerabilities and increasing fiscal resilience, leading it to develop a robust debt management framework.
Implementing Reforms
The Ministry of Finance worked closely with the World Bank under the Government Debt and Risk Management (GDRM) Program to implement several reforms aimed at deepening the domestic debt market. A key aspect of this strategy was the “solarization” of Peru’s debt, which involved reducing foreign-currency exposure and increasing the liquidity of government securities denominated in local currency.
Analysis and Recommendations
The World Bank’s GDRM program partnered with Peru to identify obstacles to domestic market development, including analyzing government security auctions and gathering information from market participants. The analysis revealed areas for improvement, such as:
- Reducing the number of securities in the market
- Improving communication with investors
Debt Management Reforms
Peru implemented a series of debt management reforms between 2015 and 2018, including:
- Publishing clearer strategy documents
- Developing benchmark bonds
- Establishing access to international clearing and settlement houses
- Diversifying its investor base
The Benefits of “Solarization”
The “solarization” of Peru’s debt has increased the country’s flexibility to absorb economic and financial shocks, reducing foreign exchange rate risk, interest-rate risk, and refinancing risk while improving liquidity in the secondary market. According to Guadalupe Pizarro, Director General of Treasury and Public Debt in Peru, this strategy has helped set the stage for a more robust demand and lower borrowing costs.
Expert Insights
Antonio Gragnani, a GDRM program expert from the Finance Competitiveness & Innovation Global Practice at the World Bank Group, noted that the “solarization” of Peru’s debt has been crucial in reducing refinancing risk. Cigdem Aslan, Peru Task Team Leader for the GDRM Program, added that the country’s compliance risk management strategy has enabled it to navigate economic uncertainty with greater ease.
A Model for Latin America
Peru’s experience serves as a model for other countries in Latin America seeking to improve their debt management frameworks and reduce compliance risks. By implementing robust debt management strategies and partnering with international organizations, countries can strengthen their financial resilience and improve their credit ratings.