(Bloomberg) -- Peru is eager to raise longer-dated, local-currency debt to pay down dollar bonds as soon as the Federal Reserve starts cutting interest rates, according to Finance Minister Alex Contreras.
“We want to continue to transform our debt into soles,” Contreras said Thursday in an interview. “In particular, we want to push back our amortizations further into the future.”
The Andean nation sold in May 9.2 billion soles ($2.5 billion) in bonds maturing in 2033 at a yield of 7.35%, swapping out dollar debt coming due this decade. Contreras said the government can already raise debt that is cheaper than that, but anticipated rates will soon become even more attractive for borrowers.
“Yields could still fall more and we don’t have urgent liquidity needs,” he said. When the Fed starts cutting rates, “we will feel more comfortable.”
Peru is going through a recession as high interest rates take a toll on an economy already reeling from social unrest and farming losses related to the El Nino weather pattern. While annual inflation has slowed to 3.64% in November, allowing the central bank to cut rates to 7% from 7.75% earlier this year, slower activity has hurt tax revenue at a moment the government is struggling to meet its fiscal goal.
“Policies to control inflation have a cost, and it’s hard to balance this trade-off,” Contreras said.
Contreras said Peru will need to implement more spending cuts to achieve a fiscal deficit target of 2.4% of gross domestic product by the end of the year. As of October, that gap stood at 2.8% of GDP.
“We just took a step to use advance profits from Banco de la Nacion,” Contreras said, referring to the government-owned financial institution. “With that, we should be at 2.6% in November. We have some other measures planned, so we need to adjust spending, but I think we can close the year at 2.4%.”
In October, Peru’s fiscal watchdog raised concerns that Peru was going to blow past its fiscal debt ceiling this year and next amid the drop in public revenue. At the time, the finance ministry was adamant that wouldn’t happen. On Thursday, Contreras offered a more nuanced version of that commitment.
“I’m not saying we can comfortably hit the target, but we have the situation under control,” he said.
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