"Solarizing" Peru — strengthening Peru's fiscal resilience amid COVID-19

Following the 2008 global financial crisis, Peru looked for ways to further strengthen its fiscal resilience and reduce debt vulnerability. The Peruvian government partnered with the World Bank's Government Debt and Risk Management (GDRM) Program to build a deep and liquid domestic government-securities market, dominated in soles, the local currency. The "Solarization" strategy served as one of the main drivers to absorb the shock induced by the COVID-19 crisis.

On October 16, 2020, Reuters News reported the downgrading of nearly 60 sovereigns by the Standard & Poor's (S&P) rating agency. By the end of 2020, Fitch Ratings had also downgraded several of Peru's regional neighbors. Yet, even the COVID-19 crisis did not impact Peru's credit-rating levels, which remained above investment grade (S&P BBB+, Moody's A3, Fitch BBB+).

One main driver of Peru's rating performance was efficient debt management. Even before the pandemic, Peru had built efficient debt-management frameworks to provide the necessary flexibility to absorb fiscal shocks.

The country had learned from an earlier economic shock—the 2008 global financial crisis, which prompted it to look for ways to reduce vulnerabilities and increase fiscal resilience. After the 2008 crisis, the government explored developing the domestic debt market. In 2009, only 30 percent of its debt was denominated in local currency, well below Colombia's 78 percent and Brazil's 89 percent. Peru’s dependency on foreign-currency (FX) financing constituted an Achille's heel. The Ministry of Finance needed to “solarize” its debt - reduce the country’s FX exposure and increase the liquidity of the existing soles-denominated government securities.

Implementing this strategy was crucial to deepen the domestic debt market. "One of the most important actions a government can undertake to support efficient borrowing is to promote the development of its domestic government bond market," said Guadalupe Pizarro, Director General of Treasury and Public Debt in Peru. "This helps set the stage for a more robust demand and lower borrowing costs. A deeper domestic market provides an efficient alternative, even in moments of turbulence." […]