Peruvians ditch the dollar, move savings to soles
Wed Apr 30, 2008 - Reuters

By Dana Ford

LIMA, April 30 (Reuters) - Max Campos, one of hundreds of money changers who works the street corners of Lima, Peru's capital, spent years trying to get his hands on U.S. dollars. Now he dumps them for the once beleaguered Peruvian sol.

Campos, 32, has become part of a sea change of savvy consumers helping to break the Peruvian economy's link to the dollar faster than the government expected.

In recent weeks, after years of trailing the dollar, the sol <PEN=PE> has become the dominant currency of bank deposits in Peru. The sol now makes up nearly 52 percent of all deposits, up from 39 percent a year ago.

"There is more confidence in the sol right now," said Campos, who two months ago switched his personal bank accounts from dollars into soles.

The accelerating trend marks a welcome change for the government, which has been trying to de-dollarize the economy for years, sometimes with limited success.

In decades past, rampant inflation tore away at the buying power of deposits in the country's currency, driving Peruvians to buy dollars as a hedge against inflation. To crack down, President Alan Garcia in the 1980s froze and then seized dollar bank accounts in his first term in office, telling Peruvians to withdraw funds in the country's currency, then called the inti, named after the Inca sun god.

Garcia's successors liberalized the banking system and the dollarization process resumed apace, driving the amount of dollars in the banking system to more than 80 percent at its peak.

People have been slowly gaining confidence in the sol over the last decade as inflation has ebbed. More recently booming domestic growth and a weakening dollar globally have boosted the the sol's popularity.

The sol has rallied as much as 14 percent against the dollar over the last 12 months as Garcia, who returned to office in 2006, has stuck to policies favored by investors. The sol Wednesday traded at around 2.85 per dollar.

"The de-dollarization is pushed by various factors, but more than anything, it is being pushed by the exchange rate," said Alberto Morisaki, head analyst for a Peruvian bank group.

The government wants to squeeze dollars out of the economy to avoid problems that could arise during quick changes in exchange rates, a risk that some credit rating agencies have cited as a stumbling block to granting Peru investment grade. Fitch lifted Peru to investment grade earlier this year, but Standard & Poor's and Moody's have not.

About half of home loans are made in dollars, and Peruvians can still use greenbacks to buy their morning coffee.

The central bank has spent $8.7 billion in 2008 intervening in foreign exchange markets to restrain the sol's climb, saying it wants to deter overconfident Peruvians from borrowing heavily in dollars, only to suffer if the sol weakens.

Central Bank President Julio Velarde has acknowledged that tracking those potential credit risks can make it harder to conduct monetary policy and fight inflation.


As Peru's economy grows about 9 percent a year, the blistering expansion has rekindled inflation, raising the prospect of a slower de-dollarization pace.

In the 12 months through March, inflation hit 5.5 percent, above last year's 4 percent and above the central bank's annual target of 2 percent, plus or minus 1 percentage point.

To slow the surge in consumer prices, the central bank has raised interest rates and deposit requirements. The government has also slashed tariffs and taxes on imported food and fuel.

For people like Campos, the sol is hot at the moment, but he doubts Peruvians who remember the turmoil of the 1980s will allow the government to fully de-dollarize the economy.

"In the long term, there is still more confidence in the dollar than in the sol. The dollar is a global currency. It will always be in Peru," he said.

(Editing by Terry Wade and Walker Simon)