Choosing between USD or EUR -denominated debt in the international - PowerPoint PPT Presentation

Click to edit Master title style Choosing between USD or EUR -denominated debt in the international markets…or go local !!! Carlos Blanco Cáceres General Director of Indebtedness and Public Treasury Washington, October 19th 2016

Contents 1 Evolution of Public Debt and Finance Strategy 2 Debt Management : Focus on Local Currency and Local Market 3 Composition and Election of Foreign Currency Debt 4 Or go Local !!! 2

1 1 2 …The administration expects indebtedness levels to remain low and below its regional peers as the fiscal deficit continues to consolidate… …while increasing the average life of its debt by printing longer - Both short-term and long-term debt to GDP levels have fallen significantly… dated transactions and executing liability management transactions Debt Average Life Short-term and Long-term Debt (Years)** (% of GDP)* 16.00 50 14.00 12.00 40 10.00 30 8.00 6.00 20 4.00 10 2.00 0.00 - sep.-02 mar.-03 sep.-03 mar.-04 sep.-04 mar.-05 sep.-05 mar.-06 sep.-06 mar.-07 sep.-07 mar.-08 sep.-08 mar.-09 sep.-09 mar.-10 sep.-10 mar.-11 sep.-11 mar.-12 sep.-12 mar.-13 sep.-13 mar.-14 sep.-14 mar.-15 sep.-15 mar.-16 sep.-16 1999 2001 2003 2005 2007 2009 2011 2013 2015 2016 Long Term Short Term * Source: BCRP - Jun16 ** Source: MEF - Forecast Set 16 3

1 1 2 ... the sources of financing of the Republic come from asset management and internal and external liabilities ... Lines of defense to Finance Economic Growth Assets Liabilities Fiscal Stabilization Fund Debt Capital Markets Fund size as of June 30, 2016 Local Market International Market USD 8,165mn Issuance of Soberanos Issuance of Global Bonds National Emergency Savings Usage International Crisis Mechanism Significant shortage of fiscal income Sources of Funds Secondary Liquidity Reserve Multilateral and Bilateral Loans CAF BID BIRF Others Reserve size as of June 30, 2016 Contingency loans PEN 1,978mn; USD603mn equivalent USD 4,400mn 4

Contents 1 Evolution of Public Debt and Finance Strategy 2 Debt Management : Focus on Local Currency and Local Market 3 Composition and Election of Foreign Currency Debt 4 Or go Local !!! 5

1 2 2 ... “ S olarize” debt and develop local debt capital markets… Debt management team has focused, and succeeded, in Peru has successfully issued local currency debt in the de- dollarizing its debt profile… international capital markets Liability Management Composition of Public Debt by Currency (1) 2014 – 2016 (% of total debt) (Millions of dollars) 4 10 14 LM 2016 31 LM 2014 30 52 5 48 LM 2015 64 57 44 42 2004 2009 2014 2016 * Dollars Soles Other • No USD paper • No New money * Proforma Oct 16 - 2028 soberano bond Source: MEF 6

1 2 2 …Peru has significantly increased its Soberanos (PEN) debt stock by focusing on international format debt issuances ( GDNs)… Over the past 10 years Peru has succesfuly increased its Debt Capital Markets Soberanos (PEN) debt stock by 6.7x compared to a growth of 1.9x for its Global Bond (USD and EUR) debt stock … Local Market Soberanos and Global Bonds (PEN MM, USD/EUR MM, nominal) Development of the local debt market through 6.7x 54,563 sovereign bond issues in soles 44,849 Treasury Bills Linkers Soberanos Global Soberanos Local GDN’s 32,961 International Market 26,008 taking advantage of windows of opportunity to maintain liquidity/efficient yield curves 1.9x 12,578 11,440 USD Global Bonds EUR Global Bonds 9,458 8,571 8,092 6,513 Dec 05 Dec 10 Dec 13 Dec 15 Oct 16 * * 07-10-2016 ; Include Issue Bond 2028 Source: MEF 7

1 2 2 …to diversify the basis of non-resident investors who have holdings in local currency debt… …by focusing on PEN -denominated international Historical Series of Holdings – Soberanos Bonds issuances that have further developed the PEN market (% by investor class) and significantly increased foreign-ownership of its 42.00% bonds 41.8% Foreign Ownership Holdings – Soberano Bonds * (as of October 2016 ) 40.00% 7.840% Aug 2020s PEN 4,196 MM Issue date; Nov 10 38.00% 45% 36.00% 5.700% Aug 2024s 6.950% Aug 2031s PEN 7,128 MM PEN 4,392 MM 58.2% 58.2% Issue date; Nov 14 Issue date; Mar 15 34.00% 41.8% 41.8% 41.8% 32.00% 52% 55% 6.350% Aug 2028s PEN 10,251 MM 30.00% Issue date; Set 16 * Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Tender for Cash Aug 2028s Foreign Local 47% 86% Source: MEF and Bloomberg * 07-10-2016 ; Included Soberano Bond 2028 Foreign Local 8

1 2 2 …the administration will continue to develop its local market and strengthen its standing as one of the premier issuers in the region… A CTION PLAN TO ENHANCE THE P UBLIC D EBT M ARKET R EPURCHASE A GREEMENT (R EPO ) - Develop and increase repo transactions (i.e. Repo to term) S OVEREIGN D EBT F UND - Develop Peruvian Treasury Index / Securities Lending M ARKET M AKERS P ROGRAM - Increase depth and liquidity and include treasury bills L IABILITY M ANAGEMENT E XERCISES - Manage debt stock to optimize cost and debt profile R ELEVANT B ENCHMARKS - Issue benchmarks with large volumes (liquid) I NTERNATIONAL S ETTLEMENT P LATFORMS - Diversify investor base To come : S ECURITIES LENDING /S HORT S ELLING - Provide liquidity to the secondary market L IABILITY M ANAGEMENT IN LOCAL MARKET - Optimize debt profile 9

Contents 1 Evolution of Public Debt and Finance Strategy 2 Debt Management : Focus on Local Currency and Local Market 3 Composition and Election of Foreign Currency Debt 4 Or go Local !!! 10

1 2 Drivers for decision making on foreign currency debt ... 3  Tap international markets when there is low external-and-domestic-demand for local currency debt (not now !!!)  Look for natural currency hedges (exports revenues vs currency of debt)  Take advantage of windows of opportunity during moments of minimum rate levels  Diversify the investor base  Keep yield curves in USD and EUR updated  Optimize public debt profile through liability management exercises 11

1 ... External Debt Profile... 2 3 External Debt by Currency External Debt by source of funds 90% 62% 61% 87% 83% 82% 56% 68% 47% 39% 38% 36% 31% 27% 26% 26% 14% 13% 12% 11% 11% 12% 11% 10% 7% 9% 6% 5% 4% 4% 3% 2% 2% 1% 1% Dec 05 Dec 10 Dec 13 Dec 15 Aug 16 Dec 05 Dec 10 Dec 14 Dec 15 Aug 16 Bonds Mult. Loans Others USD JPY EUR Others  Redirect the foreign currency debt toward capital markets through global bonds in USD and EUR  Expand and diversify investor base reducing the share of multilaterals  Diversify currencies (EUR vs USD) 1) Source: MEF 12

1 …why are we issuing in EUR rather than USD ? 2 3  Because of low absolute rates/coupons  Access to a new pool of investors  Prepare for OECD access to attract new investors and tighten spreads …what are the main differences between both markets?  The USD market is larger, more liquid and has more players with different profiles  The USD market uses traditional tenors while the EUR market may adapt to issuers’ needs  But, the EUR market still prefers shorter tenors  EUR investors are more buy and hold 13

1 2 ... financing in foreign currency depends on the demand for local debt and 3 windows of opportunity in USD and EUR While the Republic has focused on “ Solarization ”, it remains committed to both its USD and EUR curves, and, over time, will continue to tap these markets to:  Provide better liquidity  Diversify currencies looking for natural hedges  Lower risk of funding by diversifying markets  Continue to grow the depth and breadth of its high quality investor base  Increase pool of investors 14

Contents 1 Evolution of Public Debt and Finance Strategy 2 Debt Management : Focus on Local Currency and Local Market 3 Composition and Election of Foreign Currency Debt 4 Or go Local !!! 15

1 …switch 2017, 2020, 2023 and 2026 Soberanos Bonds and 2019, 2025, 2033 and 2 2037 Global Bonds to new 2028 Soberano Bond 4 Target Bonds Outstanding Switched / Tendered Soberano 2017 Global 2019 Target Bonds (USD MM equivalent) (USD MM equivalent) Soberano 2020 Global 2025 Soberano 2017 682 522 Soberano 2023 Global 2033 Soberano 2026 Global 2037 Soberano 2020 1,842 618 Soberano 2023 1,770 740 Soberano 2026 2,430 368 Global 2019 692 342 2028 SOBERANO BOND Global 2025 2,009 307 Global 2033 2,245 92 Global 2037 1,202 52 2028 Soberano Bond Outstanding ( USD MM equivalent) 3,042.0 TOTAL 12,872 3,042 Maturity August 2028  Total outstanding of target bonds: USD 12,872 MM Cupon 6.350% Price 99.851%  Average success rate: 27% Yield 6.375%  Total switch amount : USD 3,042 MM (S / 10, 251 MM) 16

1 2 ... optimize public debt profile by retiring short-term bonds, both in PEN and USD, with high coupons and/or inefficient prices... 4 New Profile of Public Debt New 2028 soberano bond 17

1 2 ... while generating interest savings, increased “ solarization ” and average life of public debt... 4 Achieved goals:  Generated interest savings for an amount of USD 36.0 MM (S / 121.3 MM)  Increased “ solarization ” from 45.8% to 47.5%.  Increased average life from 11.7 to 12.2 years  Generated positive net present value (NPV) of USD 24.5 MM (S / 82.7 MM)  Reduced “Dollarization” from 54.8% to 53.1% 18