Strengthening Peruvian Capital Markets

Work under the Sustainable Financial Facility (SFF) in Peru has followed both broad and narrow approaches, as World Bank staff has worked with the government on its overall approach to improving capital markets, while simultaneously pursuing important, more specific initiatives that built on experience elsewhere.

The Capital Markets Roadmap, which was presented to the government in January 2025 and made public in March, represented a first step in strategic planning around developing Peruvian capital markets.

The roadmap contains 41 recommendations for boosting the supply and demand for securities – the core element of vibrant capital markets – and the adoption of best practices that will boost investor confidence to align with issuers’ financing needs.

In the roadmap as adopted, 12 of the 41 recommendations were designated as “critical,” including government measures to prepare and support companies for public listings, and measures to improve access to credit for small and medium-sized enterprises.

In the policy realm, the government needs to foster greater competition in Peruvian securities markets in order to bring down prices for issuers and investors. Additionally, it needs to prioritize eliminating regulatory arbitrage between supervised and unsupervised companies, such as private fund managers and investment advisors, which complicates efforts to promote competition. Achieving these goals will also require strengthening government regulators.

Parallel to work on the roadmap, the SFF also supported the implementation of a project that showed success in Brazil and Colombia: the issuer-driven exchange-traded fund (ID ETF).

Many developing countries lack vital parts of the basic plumbing of capital markets. One such example is the lack of availability to investors of a reference price – similar to a US Treasury or German government debt – for other securities.

The ID ETF, an innovative concept pioneered by the World Bank, relies on the ongoing participation of the issuer to ensure the market is liquid.  By ensuring access to the full basket of securities in sufficient quantities, the ID ETF only Colombian government securities with more than USD 1 billion outstanding and more than six months of remaining maturity are eligible, ensuring that purchasers will not face scarcity or liquidity constraints.

The government can also, in turn, tie the ID ETF directly to sustainable development goals, which strengthens support for the initiative. With a continuously quoted baseline price of government debt, denominated in pesos, investors have a reference price for other issuances.

The World Bank’s convening power brought together the resources needed to build and support the product. The bank’s global reach, in turn, allows it to set standards that can be replicated across other markets.

The ID ETF structure improves the functioning of capital markets in several ways, some very technical, such as:

• Minimum Asset Levels. The ID ETF launch must adhere to a minimum required amount and be conducted through a public offering. This feature enables the ID ETF to achieve immediate scale, unlike traditional ETFs that grow more gradually.
• Diversified Investor Base. The ID ETF is designed for both beginners and sophisticated investors. It attracts beginners through its transparency, liquidity, low minimum investment requirements and cost-effectiveness. At the same time, sophisticated investors can leverage the ID ETF as an efficient instrument for portfolio diversification.
• Liquidity and Price Discovery. The ID ETF becomes, from the moment of launch, an additional instrument that helps with secondary market liquidity and price discovery.

In Peru’s case, the launch of the ID ETF was about far more than financial plumbing. It occasioned much media coverage about the “democratization” of the country’s capital markets – financial inclusion by another name – and with good reason. The fund racked up over 340 transactions the first day.

Peru’s Minister of Economy and Finance José Antonio Salardi touted the ID ETF as a “milestone” in making the country’s capital markets more accessible. "There is full support for this flagship product that we will have as a country.” “The idea is to have a greater offering of financial assets; this is the first milestone in expanding the menu of available financial assets," he said.

The normal cost of an investment fund in Peru lies around 1.5 percent; the ID ETF pegged pricing at 0.25 percent of purchases. It does not matter if someone invests 100 Peruvian soles or 100 million. The product is simple and transparent. One broker even decided to eliminate any fees on the product for the purpose of attracting new clients.

The ID ETF will expand the investor base for Peruvian sovereign debt. Currently, 55 percent of Peru's sovereign bonds are held by Peruvian institutional investors and 45 percent by foreign institutional investors, with the retail segment playing a minor role.

In the next phase of work in Peru under the SFF, the World Bank – in partnership with the International Finance Corporation – intends to tackle the challenge of credit provision to small and medium enterprises (SMEs) by exploring opportunities for a corporate debt fund that can fill the gaps left by bank-based financing.

The Peruvian government is striving, in the medium term, to achieve the country’s accession to the Organization for Economic Cooperation and Development. Strengthening capital markets, through careful strategic planning and targeted projects, will be essential to that goal.