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In compliance with article 84 of the Constitution, the Central Reserve Bank of Peru (BCRP) is in charge of the administration of international reserves. In undertaking this function, the BCRP follows the security, liquidity and profitability criteria established in article 71 of its Charter.

General Aspects

International reserves help a country preserving economic and financial stability as they guarantee the foreign currency availability in unusual situations such as possible and significant withdrawals from the financial system or in temporary external shocks which could generate imbalance in the real sector and feedback into expectations. Also, an adequate availability of foreign exchange reserves helps to reduce the country-risk with the subsequent improvement of the country credit ratings, therefore providing enterprises of both public and private sectors better conditions to access international capital markets.

International reserves are particularly important in a context of globalization of international markets, reduction of barriers to capital flows and volatility of financial, foreign exchange and metal markets.

According to article 72 of the BCRP Charter, international reserves managed by the BCRP are comprised of:
  1. Gold and silver holdings.
  2. Foreign banknotes and coins internationally accepted as means of payment.
  3. Foreign-currency-denominated bank deposits with maturities up to 90 days, in the opinion of the Board of Directors.
  4. Foreign-currency-denominated certificates of deposit with maturities up to 90 days, in the opinion of the Board of Directors.
  5. First-class liquid securities issued by international organizations or foreign public entities, in the opinion of the Board of Directors.
  6. Banker's acceptances with maturities up to 90 days.
  7. Special Drawing Rights (SDRs).
  8. Debt balances outstanding from reciprocal credit agreements with similar entities.
  9. Gold, foreign currency and SDR subscriptions to international monetary organizations.

Investment Policy

The BCRP’s international reserve policy emphasizes capital preservation and liquidity. Once these criteria are met, the BCRP seeks to maximize the return on its foreign assets.

Management of international assets takes into consideration the source and characteristics of BCRP liabilities (amount, currency, maturity and volatility). Such policy is oriented towards minimizing market risks that could affect the value and availability of the resources managed by the BCRP.

The investment portfolio of the BCRP is distributed in tranches that reflect the diverse nature of the sources of funds. The liquidity tranche corresponds to deposits in foreign currency (mainly reserve requirements) held by financial entities in the BCRP; the intermediation tranche is related to deposits in foreign currency placed by the public sector in the BCRP; the investment tranche is made up of the own resources of BCRP (Net International Position); and the immediate availability tranche includes very short-term investments mainly aim to cover liabilities payable to local banks and the excess of resources of both liquidity and investment tranches, which are temporarily accumulated before being distributed accordingly.

Benchmark Portfolio

The benchmark or reference portfolio represents a fundamental tool for international reserves management. The risk-return combination chosen by the Board of Directors is reflected in the benchmark portfolio's characteristics (liquidity, credit quality, duration and diversification). The BCRP's asset management involves choosing a risk-neutral and replicable portfolio, specially when the market is extremely volatile. The BCRP builds its own benchmark portfolio on the basis of market indices.

Investments of international reserve compose the actual portfolio, which may differ from the benchmark portfolio regarding investments' maturities, duration, total banking risk and issuer credit risk. Risk management is oriented towards maximizing return and takes into consideration the deviation margins authorized by the BCRP's Board of Directors.

The actual and benchmark portfolio are valued daily at market prices. Even though most investments are held to maturity, the market value of both portfolios is an important indicator of reserves management efficiency.

Risk Management

Regarding investment management, the following risks are taken into account:

Liquidity Risk: It arises from the impossibility of redeeming the trading securities timely or due to the fact of converting them into cash at a very high transaction cost. In order to mitigate this risk, portfolio managers control the liquidity degree of fixed-income instruments taking into consideration issue amounts, the participation of the bank investments in each issue and bid-ask spreads. Additionally, this risk is minimized by distributing assets in four tranches:

  1. Immediate availability: very short-term investments, including overnight (one-day) deposits, to face obligations and unexpected events.
  2. Liquidity: Maturities up to one year, including bank deposits with staggering maturities and highly liquid, internationally tradable fixed-income instruments.
  3. Intermediation: Investments that replicate deposits of the public sector in the BCRP.
  4. Investment: Maturities longer than one year (mainly bonds), which imply higher price volatility but also higher return.

Credit Risk: It is associated with the possibility of default on obligations owed to the BCRP due to insolvency. In order to face credit risk, investments are diversified among the following:

  1. Deposits in first class international banks, defined in terms of equity and long-term and short-term credit ratings (A-1 and A as a minimum, respectively) assigned by the most recognized credit rating agencies such as Standard & Poor’s, Moody’s and Fitch.
  2. Fixed-income securities issued or guaranteed by international organizations, governments and governmental agencies. These obligations must be rated at least AA-, that is within the fourth highest categories out of 20 or more established by the credit rating agencies mentioned above.
  3. Investment in corporate debt issues are not permitted.

Exchange Risk: It is associated with exchange rate fluctuations between the currencies in which investments are denominated, which could cause losses in the currency used for international reserves accounting (the US dollar).

Most assets are dollar-denominated, reflecting both the currency denomination of liabilities (reserve requirements and almost all deposits made by the public sector) and the BCRP’s currency of intervention in its domestic open market operations. It should be noted that most of the Peruvian external debt and international trade are denominated in US dollars. The second hard currency in terms of international reserves' currency composition is the euro.

Interest Rate Risk: It arises as a consequence of unexpected variations in the rates of return of fixed-income assets held in the portfolio, which could affect their market value before maturity. The longer the maturity of investments, the greater the impact of changes in the rates of return on their market value. The measurement of this impact is reflected in the portfolio duration.

The BCRP manages this risk adhering to an asset-liability management (ALM) in the sense of matching the term structure of assets and liabilities. This results in a low portfolio duration thus minimizing the impact of international interest rates fluctuations on the market value of the portfolio. Additionally, risk management policy establishes maximum maturities for longer-term investments, consistent with the market risk profile planned for each instrument of the portfolio.