Non-performing Loans in Foreign Currency and the Real Exchange Rate: Evidence for Peru, 2003–2018

The objective of this study is to empirically assess whether unexpected changes in the real exchange rate have an effect on the nonperforming foreign-currency loan portfolio. To this end, we estimate the dynamic response of the nonperforming foreign-currency loan portfolio to exogenous shocks in the real exchange rate using vector autoregressive models, in which exchange rate shocks are identified recursively and structurally. The results show that in the face of a greater real depreciation of the local currency, the nonperforming foreign-currency loan portfolio increases across all loan types (corporate, consumer, and mortgage) and at the aggregate level, reaching its maximum effect between 7 and 10 months after the exchange rate shock occurs. Furthermore, the analysis finds that the corporate nonperforming loan portfolio experiences the largest increase.