Jose Luque Otero, President of Lima stock exchange, outlines a guide to Peru's fast developing markets
Why go to a Latin American stock exchange when you could go to New York or London?
In the face of other international markets,the markets in the region are consistently endeavoring to strengthen their relations. The growth experienced by the Latin American securities markets and, particularly, the Lima stock exchange, has provided a series of efforts aimed at their institutional development through the creation of new products and the implementation of new services according to international standards.
On the other hand, the significant changes experienced by Latin American economies have attracted foreign capital which has contributed to the financing of such economics. The reforms applied in these countries have been oriented to their liberalisation, deregulation and privatisation processes.
These changes have also been implemented in Peru. The economic policy applied since l990 has implemented a stabilisation programme aimed at eliminating inflation, and fiscal and foreign sector imbalances. This policy includes competitiveness and the necessary liberalisation to participate in the world economy, in addition to achieving the acceptance of international financial markets.
Likewise, the application of a number of legal provisions with the intention of establishing an attractive legal framework to promote investment has contributed to the significant growth of our securities market. The modification of the foreign investment system and the privatisation programme of State-owned companies are some of the main regulations which have effectively contributed to the international image of our country. These regulations establish clear and transparent rules for the free and unrestricted participation of investors in any activity.
Several legal provisions granting tax benefits were also a major incentive for the growth of the securities market. Outstanding among these measures are ths income tax exemption granted until the year 2000 to gains from transactions made in centralised trading mechanisms, and the tax exemption to interests and capital adjustments paid to holders of personal securities representing outstanding debts. Similarly, the dividends or profits distributed by companies to their shareholders shall not be considered taxable items.
On the other hand, the current Securities Market Law offers companies the possibility of diversifying their sources of financing, and to the institutional investors the possibility of expanding their investments.
Are there any sectors that have been performing strongly recently and, if so, why are they performing well?
Thus far this year mining stocks have taken the lead in price indices. The employee stock of mining companies mainly producing zinc have recorded a 140 per cent return up to 20 May 1997.
This growth is largely explained by the expansion of projects in this activity in Peru in both the medium and long-term, and the orientation of the current economic models to support primary activities. At present, more than 23 investment projects including expansion, construction, feasibility studies and exploration are in the pipeline. According to international statistics, Peru is the world's seventh biggest producing mining country. The abundance of these resources has made mining up to now one of the major economic activities in Peru. It contributes with 11 per cent to the Gross Domestic Product (GDP) and represents almost 50 per cent of Peru's total exports. Likewise, the favourable trend in international mining prices, particularly zinc and copper, has contributed to raise the prices of mining stocks in the exchange.
Banking is also a sector which has shown great dynanism over the past year. This may be mainly accounted for by the appearance of foreign banks and the introduction of innovative products, as well as to the rapid action of national entities to maintain their competitiveness. So far this year, the price of banking stocks records a yield of 27.7 per cent.
How greatly influenced are you by activities in the large US markets?
Because of globalisation we have been increasingly influenced by the behaviour of other international markets. An example of this is the behaviour of interest rates in the US announced by the Federal Reserve, which has become one of the factors with an impact on the behaviour of our securities market.
Likewise, the behaviour of the main indicators of the Lima stock exchange was affected by the political and economic instability suffered by some countries in the Latin American region during 1995. An explanation may be found in the growing inflow of foreign capital in the exchange. Therefore, the occurrence of any of these event gives rise to adjustments in the portfolios of investors who seek to minimise risks and increase their returns.
What will be the impact on your stock exchange of the increaing globalisation of capital markets?
The favourable conditions in the international markets has been a positive influence on the behaviour of our market. The internationalisation of our securities markets has become evident not only with respect to the coming of foreign investors, but also in the Peruvian companies desire to participate in foreign markets. An example of this development is the growing number of issues of stocks made abroad by these companies.
Although in a certain way this has been translated into a decrease in the volumes traded in our market, it has also permitted the access of these companies to the financing they require to continue this growth. However, it should be noted that the possibility exists for these foreign companies to be listed in our exchange. Consequently, local investors could have access to the stock of these companies.
Within this context, it is important to mention the agreement entered into with the Depository Trust Company of New York through which the Lima stock exchange becomes the world's third and Latin Americas first entity accepted as direct participant in the settlement of transactions with securities traded in both the Lima and New York Stock Exchange.
What incentives are there for foreign investors to place investments through your brokers instead of going through larger international exchanges? And if there is a lack of sufficient direct investment, what plans are there to rectify the problem?
The present legislation grants a series of general guarantees for foreign investment. It establishes the non-discrimination principle between local and foreign capitals recognised in the Constitution, and acknowledges the right to foreign remittances without prior authorisation. There are no restrictions on foreign capital to be invested in any sector of the Peruvian economy.
The law creates tax stability regimes for foreign investors, authorising the National Commission for Foreign investment and Technology (CONITE), to enter into contracts with foreign investors which cannot be amended by the State. Moreover, internationally guaranteed agreements for foreign investment have been signed. The main guarantee agreement for foreign investment subscribed to and ratified by Peru is the Multilateral Investment Guarantee Agency (MIGA), which grants guarantees to foreign investors for investments between member countries against non-commercial risks. Another agreement of important multilateral nature entered into by Peru is the one created by the International Center for the Settlement of Investment Disputes (ICSID). This is a court of settlement for investment matters to which the majority of countries resort to.
There are no retrictions on repatriating capital in the currency required by the investor.
Do you think that the proposed spread of NAFTA could bring benefits to your markets?
One of the advantages to be obtained from being part of the Free Trade Treaty (FTT or NAFTA) would be the expansion of the range of options for a development policy. However, this would also lead us to the full opening of our economy with the lifting of barriers to foreign trade and, as a consequence, an intensified inflow of imported goods. However, this further liberalisation of trade would enable the placing of exports in markets to which access is difficult.
To the extent that the integration to NAFTA would increase the efficiency of our productive system and also considering that a greater competitiveness demands perfection and quality, this would be reflected in higher savings, investment and growth levels in the productivity of the country. So the incorporation into this treaty would be beneficial for Lima stock exchange. It is also important to point out that this would also bring about technological advantages.
Has the establishment of Mercosur by your neighboring countries had a detrimental effect on your markets, and do you hope to join that trading area?
There is no doubt that Mercosur has had positive results. The trade in this block has grown significantly and the global trade of Brazil with the other members of Mercosur has doubled. The option of joining Mercosur is tempting for Peru, particularly because it represents a market with a potential demand of 200 million people and a GDP of almost 80 billion dollars, equivalent to half the GDP of Latin America.
However, there are some drawbacks which prevent us from contemplating the possibility of the participation of Peru in Mercosur. Peru applies two levels of tariffs - 12 per cent and 20 per cent - while the Mercosur tariffs fluctuate between O and 20 per cent. Likewise, Peru would have to eliminate some internal surcharges to compete on equal terms with the block. Until these two main difficulties resolved, we cannot expect Peru to be part of Mercosur.
According to an official source of the Government, preliminary negotiations with this block should have been formally initiated in Montevideo, Uruguay by 11 June 1997. It was foreseen that the negotiations would extend for a period of seven months to one year in the first stage. Peru shall continue negotiations for the establishment of bilateral trade agrements with Chile, Mexico and Colombia.
What plans are there for any future privatisations? Will foreign investment play a part in any privatisation?
From the time it was started in l991 up to the end of 1996, the privatisation programme has generated incomes for approximately US$5 billion, and it is expected to generate about $700 million in 1997. In the first four months this year, the Government sold a power distribution plant, two fishmeal plants and several units of the CENTROMIN mining complex, including the smelter and processing plant of Metalroya. During the rest of the year, the privatisation schedule includes some companies in the energy, fishery and mining sectors. To promote private property in the agricultural sector, the Government will sell large sections of irrigated public lands on the coastal area with an agricultural-exporting potential.
How is the stock market regulated? What powers does any supervisory body have, and do you think greater regulation is necessary?
The Peruvian Securities Exchange Board (CONASEV), a public institution of the economy and finance sector is responsible for the supervision of the securities market. Its purpose is to promote the securities market, ensure appropriate management practices of the companies, and establish accounting rules. It is an internal public entity created by law and enjoys functional administrative and economic autonomy.
Additionally, the exchanges shall regulate their own activities and those of their members, monitoring their strict compliance. We consider that this self-regulated framework is the basis for a coordinated and modern supervision of the securities market, in its relation with brokerage firms and issuers of listed companies.
Is new technology going to have any impact on your stock exchange?
Caja de Valores y Liquidaciones was created in 1989 as a service of the Lima stock exchange for the clearing card settlement of transactions. At this stage, this system uses state of the art technology which allows local and foreign users to gain online access to real-time information on their securities holdings through tota]ly secure and reliable systems.
In November 1994, a new Clearing and Settlement System was implemented for the settlement of transactions. Thus cash transactions made in an exchange session are setted on a net basis, to replace the drawing of checks for the payment of selling transactions. This system also decentralises the placement of funds from the settlement of transactions which previously was being made through a single bank.
In addition, in August 1995, the new technological trading platform ELEX was brought into operation for the electronic trading of shares, bonds, mortgage drafts, report operations and short-term instruments through the terminals located in the offices of the exchange intermediaries. The system operates in a continuous auction with automated marketing, on an 'order driven' scheme.
These and other changes have contributed significantly to the growth of Peruvian securities market providing the different participants in the market with the most sophisticated services for the fulfillment of their activities.