1. BOND MARKET DEVELOPMENT PERUVIAN CASE BOND MARKET DEVELOPMENT PERUVIAN CASE Carlos A. Castro Manager Intermediaries and Funds Division CONASEV Virginia - June 19-21, 2002 FINANCE FORUM 2002: ALIGNING FINANCIAL SECTOR KNOWLEDGE AND OPERATIONS

2. 2 The Peruvian Public Debt sums US$ 23,1 billion as of 03/31/2002. US$ 19,1 billion (83%) of Public External Debt and US$ 3,99 billion (17%) of Public Domestic Debt. PERUVIAN PUBLIC DEBT As of 03/31/2002

3. 3 MEDIUM AND LONG TERM PUBLIC EXTERNAL DEBT OUTSTANDING DEBT BY FINANCIAL SOURCES (Millions of US$) Paris Club and Multilateral Organizations concentrate 74% of the outstanding debt.

4. 4 PUBLIC EXTERNAL DEBT RATIOS Source: BCRP-DGCP

5. 5 DOMESTIC DEBT OF THE CENTRAL GOVERNMENT OUTSTANDING DEBT BY TYPE AND CREDITORS (Thousands of US$) The Domestic Public Debt has to main creditors: “Bonos de Reconocimiento” of people who affiliated to the private pension system and Banco de la Nación (mainly credits in dollars and Bonds).

6. 6 The portfolio of Public Debt is mainly represented in foreign currency. Only 8,8% is in Nuevos Soles (Peruvian currency). Debt in US Dollars is the most representative (54,2%). Debts in Single Currency Pool (SCP) and Unit Account Value (UAV) represent together 10,2%. Only 40% of the Public Debt is denominated in fixed rate. PUBLIC DEBT BY CURRENCIES AND INTEREST RATE

7. 7 REGULATORY FRAMEWORK ABOUT GOVERNMENT BONDS (1/2) Public offerings of securities are regulated under Securities Market Act of 1996. They generate to the issuer obligations of disclosure to the market participants. The compliance of all these obligations are overseen by CONASEV, the governmental agency in charge of regulating the Securities Market.

8. 8 The issue and trading of securities by the Central Government, Regional Governments, Local Governments and the Central Reserve Bank are subject to the provisions contained in the respective authorizing legal rule (article 49 of the Securities Market Act). REGULATORY FRAMEWORK ABOUT GOVERNMENT BONDS (2/2)

9. 9 Peruvian Government issued US$ 300 million in 1998, US$ 870 million in 1999 and US$ 700 million in 2000. It was given as a part of the governmental programs oriented to the financial assistance to Farming Sector, Bankruptcy Programs and Commercial Banks. None of these issues were placed by public offerings and the securities are not listed in any Stock Exchange or another kind of organized securities market. They do not have any secondary market. PERUVIAN GOVERNMENT BONDS ISSUED 1998-2000

10. 10 Recently, the first step was given to the formation of a market for Sovereign Bonds in Peru. In the first quarter of 2001 Peruvian Government issued S/. 500 million (US$ 142 million) in Sovereign Bonds with the following profile: Local currency (S/.). Low face value (S/. 1 000 equivalent to US$ 285). Traded in Lima Stock Exchange (LSE). During the second half of year 2001 Peruvian Government issued S/. 700 million (US$ 200 million) in Sovereign Bonds. SOVEREIGN BONDS ISSUE PROGRAM 2001

11. 11 From 01/18/2002 to now, Peruvian Government has issued S/. 634 million (US$ 183 million) in Sovereign Bonds. Ten auctions have been celebrated as on 06/18/2002. Nine of them were oversubscribed (2.6 times in total average). The sum of next issues of Sovereign Bonds during this year will be S/. 1,2 billion (US$ 336 million). The IPO of these Bonds are through Dutch auctions, structured directly by the Ministry of Finance. SOVEREIGN BONDS ISSUE PROGRAM 2002

12. 12 SOVEREIGN BONDS ISSUE PROGRAM 2001 S/. 500 million (US$ 142 million) Pension Funds bought 71,2% of the total amount issued. Banks and Financial Institutions bought 18,9%.

13. 13 SECOND SOVEREIGN BONDS ISSUE PROGRAM 2001 S/. 700 million (US$ 200 million) Pension Funds bought 41,9% of the total amount issued and Banks and Financial Institutions bought 41,6%.

14. 14 SOVEREIGN BONDS ISSUE PROGRAM 2002 S/. 634 million (US$ 183 million) Banks and Financial Institutions bought 63% of the total amount issued and Pension Funds bought 13%. The sum of next issues of Sovereign Bonds during this year is S/. 1,166 million (US$ 338 million).

15. 15 PERUVIAN STOCK MARKET Statistical Information Since 1997, Peruvian Stock Market has showed an important reduction in its market capitalization and traded value in LSE. 2001 Traded Value was US$ 3.4 billion, that represents 28% of 1997 negotiation (US$ 12 billion). 2001 Market Capitalization was US$ 10.9 billion, 62% of 1997 (US$ 17.4 billion).

16. 16 DEVELOPING SOVEREIGN BOND SECONDARY MARKET IN LIMA STOCK EXCHANGE (Millions of US$) DEVELOPING SOVEREIGN BOND SECONDARY MARKET IN LIMA STOCK EXCHANGE (Millions of US$) The Sovereign Bonds are starting with low participation in transactions with debt instruments in the secondary market in the LSE.

17. 17 TOTAL TRADED VOLUMEN DURING YEAR 2001 IN THE LIMA STOCK EXCHANGE By Instrument TOTAL TRADED VOLUMEN DURING YEAR 2001 IN THE LIMA STOCK EXCHANGE By Instrument Sovereign Bonds only represented 3% of the total amount traded in the secondary market in the Lima Stock Exchange during year 2001.

18. 18 From January 01 to June 17 transactions with Sovereign Bonds increased enormously and represent 16% of total amount traded in secondary market in LSE. TOTAL TRADED VOLUMEN IN THE LIMA STOCK EXCHANGE BY INSTRUMENT (As of 06/01/2002) TOTAL TRADED VOLUMEN IN THE LIMA STOCK EXCHANGE BY INSTRUMENT (As of 06/01/2002)

19. 19 Mutual Funds: Investments in Sovereign Bonds have increased enormously and represent 11% of portfolio. SOVEREIGN BONDS IN MUTUAL FUNDS PORTFOLIOS

20. 20 Pension Funds: Investments in Sovereign Bonds have increased enormously and represent 12% of portfolio. SOVEREIGN BONDS IN PENSION FUNDS PORTFOLIOS

21. 21 Benefits for the Government: Reduces exchange rate risks and effects of global crises, etc. Benefits for the Stock Market: Establishment of a benchmark yield curve.- Because they were Issued in local currency and with different maturities. Useful for for private issues in local currency. Appearance of new instruments and derivates. Increase in depth of secondary market.- The low face value of each Bond make easy the participation of more investors, specially individuals. More Transparency.- The possibility of negotiation in the LSE has established a new relationship between Government (as issuer) and the financial sector (as investor). IMPORTANCE OF SOVEREIGN BONDS ISSUES

22. 22 It is necessary to enhance the market activity. In that sense, it would be important the development of the money market. MEF and CONASEV must check the existing trading platforms to assure that they offer enough transparency to the market. CHALLENGES Market Activity

23. 23 In Peru the role of Financial Regulation and Supervision is conducted by two agencies: the Superintendence for Banks, Pension Funds and Insurance Companies (SBS) and the Securities and Exchange Commission (CONASEV), responsible for mutual funds and brokerage houses. SBS and CONASEV have established four different valuation systems for each type of institutions (banks, pension funds, mutual funds and insurance companies), although they invest in the same instruments. So, it is important to unify the methodology to value portfolios CHALLENGES Unification of Mark to Market Valuation

24. 24 Financial market in Peru is very concentrated. Banks own most Broker/Dealers and Mutual Funds Managers. There is no clear separation between different activities within the same financial group. It is necessary a real separation of activities between banking and fund management. CHALLENGES Chinese Walls

25. 25 In Peru there are only a few Institutional Investors (QIBs), mainly Pension Funds, Banks, Insurance Companies and Mutual Funds, and they are the regular buyers of the new private and government issues. Several governmental managed funds, such as COFIDE, ESSALUD, MIVIVIENDA and ONP, have not had a significant participation as investors in the stock market. In order to increase the competition among buyers and investors, it is important that these governmental institutions participate more actively in the stock market. With the proper transparency, this will contribute in the development of a secondary market. CHALLENGES Government Institutions as investors

26. 26 The Ministry of Finance (MEF) should create a Division responsible to lead a formal program oriented to support the development of Sovereign Bond market and to coordinate the participation of all the key institutions involved (MEF, BCRP, CONASEV and SBS). The staff of this Division must follow a government strategy and should be familiarized with market behavior. CHALLENGES Leading MEF Division

27. 27 The efforts performed by the WB/IMF Technical Assistance to develop a market for Sovereign Bonds have been extremely valuable for countries such as Peru. Lessons received from events like the “1 st Workshop on Developing Government Bond Markets in Latin America” (June 2001 - Rio) and the “Workshop Government Bond Market Development in Peru” (March 2002 – Lima) were transmitted to the market participants through specialized printed journals. WB/IMF TECHNICAL ASSISTANCE AND WORKSHOPS Developing a Market for Government Securities

28. 28 In Peru we have too much challenges to undertake during the next years in order to develop a healthy market for Government Securities. I am sure that WB/IMF technical assistance and Workshops are being essential in that process and the Handbook “Developing Government Bond Markets” is being a useful and valuable reference to achieve this task. WB/IMF TECHNICAL ASSISTANCE AND WORKSHOPS Developing a Market for Government Securities

29. BOND MARKET DEVELOPMENT PERUVIAN CASE BOND MARKET DEVELOPMENT PERUVIAN CASE Carlos A. Castro Manager Intermediaries and Funds Division CONASEV Virginia - June 19-21, 2002 FINANCE FORUM 2002: ALIGNING FINANCIAL SECTOR KNOWLEDGE AND OPERATIONS