Peru Tax Part of Trend ?

Last year Brazil imposed a 2% tax on BRL purchases related to fixed income and equity purchases. Taiwan took steps to discourage foreign investors from parking funds in short-term instruments, which it saw as speculation in currency appreciation. Starting this week Peru's 30% tax on foreign investors profits from short-term (up to 60 days) currency forwards (including NDFs). Anecdotal information suggests that the NDF positions are concentrated in one month tenors. In some ways this is simply an extension of legislation from the end of last year that included a capital gains tax on equity.

There have been some reports in recent days that some of the liquidity in the two month NDFs has been reduced. Given that the buyers of sol NDFs are the drivers in the current environment rather than sellers, allowing the current contracts to expire and new renewing, may exert some downward pressure on the currency. The sol appreciated 8.5% against the dollar last year and was off to a strong start this year, rising a bit more than 1% this month. If the sol does come under some pressure, which we think likely, given the pressure on commodity prices, including copper, and the bout of profit-taking in emerging markets in general, coupled with the country specific news, the central bank is unlikely to object.

The central bank appears to have intervened more this year already than all of last year to stem the sol's appreciation. The is not an official target, though its seems that the PEN2.85 level may be some sort of threshold. In a larger sense, given that many investors have little exposure to Peru, the take away is that it appears to be another country that is wrestling with a problem that ails many in the developing world. The global liquidity that officials provided to combat the potential deflationary spiral emanating from the credit crisis has encouraged hot money flows that is difficult for developing countries to absorb. In effect the clearing price of foreign exchange for the capital markets may not be compatible with the clearing price for the real economy (trade and productiveness).