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					Compatibility of Financial Management
 of Debt and Open Market Operations
                     Fernando Vásquez




  Fourth Annual Meeting of Group of Latin American and the
          Caribbean Debt Management Specialists
                      LAC Debt Group
                         May 2008
                                                             1
   Contents
    1. Background
    2. Open Market Operations in Peru
        • Types and titles accepted
    3. Open Market Operations and Debt Management
        • Market Makers Program
        • Coordination
        • OMA and development of Government Debt Market
    4. Conclusions



BANCO CENTRAL DE RESERVA DEL PERÚ                         2
     I. Background
   Since 2002 BCRP Inflation Targeting

       Target:             2,0% +/- 1 punto
       Operative target: Policy Interest Rate for the
        Overnight Interbank market

   Flexibility in the use of monetary instruments subject to
    the inflation target compliance.

   Long Run Commitment to price stability improving
    confidence in domestic currency, reducing risks associated to
    financial dollarization of the economy.

BANCO CENTRAL DE RESERVA DEL PERÚ                               3
        I. Background: Milestones
 •Fighting hyperinflation with                                     •Replacement of the money
 a monetary targeting scheme.                                      base target for the liquidity
                                                                   of banks in the CB.
 •FX intervention to
 accumulate NIR and                                                •Introduction of a interest
 remonetize the economy.                                           rate band for CB rediscount
                                                                                                   •Full-fledge
                                                                   and overnight deposits.
                                                                                                   inflation targeting
   •Commitee of Monetary         •CB independence.
                                                                                                   regime
   Policy Operations
                                 •New Constituion.                                                       •Adoption of
   •Introduction of a                                                                                    the overnight
   standing CB rediscount        •New CB charter.
                                                                                                         interbank rate
   facility.                                                                                             as operational
                                                                 •Introduction of                        target
            •Issuance of CB              •CB started to          REPO with CB
            certificates to              publish                 certificate
            sterilize excess                                     auctions.
                                         Inflation objetives
            liquidity.
                                         (range).




1990    1991       1992        1993     1994        1995       1996   1997          2000    2001     2002 2003

  BANCO CENTRAL DE RESERVA DEL PERÚ                                                                                       4
         I. Background

                                     Benchmark              Interbak
Monetary             Monetary
                                       Band for             interest
 Target               Target
                                    time interbak              rate
   1                    2
                                     interest rate            (O/N)

                                                         The daily
                      Banking       Upper bound:         open market
Money base
                      Reserves      - Rediscount         operations of
Aug 1990 –
                    (deposited in   rate                 the CB are
 Dec 2000
                     CB in PEN)                          geared to keep
                    Jan 2001-Dec    Lower bound:         the interbank
                        2002        - Deposit facility   rate equal to
                                    in PEN               the policy rate
                                    Jan 2003 – Aug       Sep 2003 -
                                    2003                 currently
BANCO CENTRAL DE RESERVA DEL PERÚ                                      5
                 Effects on Interest Rates
                     Interbank Interest Rate: 1995-2007
                          16.9
                                 (percent)
       14.1                                                                                The new
              12.8   12.9
12.0
                                   11.4
                                                    Inflation Targeting
                                                                                           framework has
                                                           regime                          reduced interest
                                                 More stable and lower rates
                                                                             4.5    4.7
                                                                                           rate uncertainty...
                                                 3.8
                                          3.1                  3.0    3.3
                                                        2.5



1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007




 ...Improving the
 pass through to
 other market
 rates

 BANCO CENTRAL DE RESERVA DEL PERÚ                                                                               6
   II. Open Market Operations in Peru
 Monetary Policy Instruments:
                                      CDBCRP
    Open Market Operations
                                      Repo
    Discount Window and Deposit Facilities
    Reserve Requirements




BANCO CENTRAL DE RESERVA DEL PERÚ              7
   II. Open Market Operations

   Monetary Sterilization:
   Through Central Bank Paper:       CDBCRP,
                                      CDBCRP-NR,
                                      CDRBCRP
   Why?
       At the time of introduction no Government Paper exists


       Art. 84° of the Constitution: Prohibition of Government
       Financing.
           Exception: Through Secondary Market up to 5% of
           the Monetary Base.
BANCO CENTRAL DE RESERVA DEL PERÚ                                 8
   II. Open Market Operations


   CDBCRP                          Treasury Bonds (BTP)
       Discount                       Coupon Bonds
       From O/N up to 3               From 5 to 30 years.
       years.



                     SEGMENTATION BY
                     MATURITY



BANCO CENTRAL DE RESERVA DEL PERÚ                             9
   II. Open Market Operations

   Liquidity Injection: Repo
   Paper:                  Central Bank Paper
                            Government Bonds
   From 1 to 6 months




BANCO CENTRAL DE RESERVA DEL PERÚ                10
   III. OMO and Public Debt

   Coordination:
        Treasury Cash Management Comitee
            •Vice Minister Economy, Treasury and Debt
            Directors, Central Bank and B. Nación (General
            Managers)
            •Monthly Decisions:
               •Global Revenue and Expenditures
               •Forex purchases to the Central Bank
               •Public debt issuance


BANCO CENTRAL DE RESERVA DEL PERÚ                            11
   III. OMO and Debt Management
   Coordination:
       •Example: Paris Club Debt Pre-Payment (august 2005)




BANCO CENTRAL DE RESERVA DEL PERÚ                            12
   III. OMO and Debt Management

                                TREASURY BONDS (BTP) SECONDARY MARKET



                  14.00
                                                      Jun 01
                                        12.9


                  12.00       12.3




                  10.00
      Yield (%)




                                                                                  Jul 05
                                                                         8.5                                       May 06
                                                                                                             8.2                  Abr 08
                   8.00                                   7.9
                                                                                          7.9
                                                    7.2
                                          6.8                             6.6                                                          6.9
                               6.2                                                                      6.5
                   6.00                                       6.2
                                                                                    6.3
                                                                                                                            Jul 07
                              5.2         5.2
                   4.00             4.2

                          0         2           4    6    8         10     12     14      16       18   20     22    24     26   28   30
                                                                                Maturity (years)




BANCO CENTRAL DE RESERVA DEL PERÚ                                                                                                            13
   III. OMO and Debt Management

                     CDBCRP and Treasury Bonds
                      (Millions of Nuevos Soles)
     25 000




     20 000




     15 000
                   Foreign Debt
                   Prepayment
     10 000




      5 000




          2002    2003            2004     2005         2006       2007

                                  CDBCRP    BTP (Treasury Bonds)


BANCO CENTRAL DE RESERVA DEL PERÚ                                         14
   III. OMO and Debt Management

                    PUBLIC DEBT COMPOSITION
                87.5%                                                                                58.0%
                          86.5% 84.6% 85.1 84.9%
                                          %      84.6% 78.4%
                                                             75,6% 66,3%                                    56.8% 56.4% 54.9% 50.1% 48.4% 45.6%




                                                                                                                                  49.9%              54.4%
                                                                                                                                             51.6%
                                                                                                              43.2% 43.6% 45.1%
                                                                                                    35,5%
                                                                                          33,7%
                                                                                24,4%
                                                                     21.6%
                12.5% 13.5%        15.4% 1      5.1
                                          4.9% 1 %           15.4%
                   1999

                            2000

                                      2001

                                               2002

                                                      2003

                                                                2004

                                                                         2005

                                                                                   2006

                                                                                             2007

                                                                                                       2008

                                                                                                                 2009

                                                                                                                        2010

                                                                                                                               2011

                                                                                                                                      2012

                                                                                                                                                2013
                                             Deuda ME/Deuda Total
                                             Deuda Soles/Deuda Total


BANCO CENTRAL DE RESERVA DEL PERÚ                                                                                                                      15
     IV. Conclusion



• OMA has helped the development of the capital market in
domestic currency
• Coordination improves debt management operations.




BANCO CENTRAL DE RESERVA DEL PERÚ                           16

				
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