Non-performing portfolio in foreign currency and the real exchange rate: Evidence for Peru, 2003-2018

The aim of this paper is to assess whether unexpected changes in the real exchange rate have an effect on the dynamics of the delinquent portfolio of foreign currency loans. The paper estimates the dynamic relationship between delinquencies in foreign currency and the real exchange rate. We use a VAR with foreign exchange shocks identified via both a recursive and long-run restriction approaches. The results indicate that in the face of a greater real depreciation of the local currency, the delinquent portfolio in foreign currency increases at an aggregate level and by type of portfolio (firms, households consumption and mortgages), reaching its maximum effect between 7 and 10 months after the occurrence of the exchange shock. In addition, we find that the firms’ delinquent portfolio is the one that registers the greatest increase.