Do Industries Naturally Hedge? From Dollarization of Deposits to Loans at the Sectoral Level in Peru

Credit and deposit dollarization have been declining in Peru since the adoption of explicit inflation targeting, greater confidence in the local currency, and a set of policies promoted by the central bank. However, the pace of de-dollarization appears to have moderated in recent years, following a significant earlier decline. Do sectoral structural characteristics play a role? If deposit dollarization reflects foreign-currency exposure and loan dollarization reflects the use of dollar-denominated liabilities to match that exposure, do bank–sector patterns reveal evidence of natural hedging? Using previously unexplored data from sectorized financial institution balance sheets for Peru, we study these links at the bank–sector level. Using dynamic panel models, we find a statistically significant relationship between deposit and loan dollarization, even after accounting for the strong persistence of loan dollarization. This relationship is heterogeneous across sectors and is particularly strong in tradable sectors such as mining, fishing, agriculture, and manufacturing. Our findings are consistent with firms matching foreign currency assets and cash flows with dollar-denominated liabilities, as reflected in bank–sector data, suggesting the presence of partial natural hedging mechanisms, which may mitigate but not eliminate foreign-exchange risks. We also find evidence that bank-level balance sheet matching and regulatory constraints, including currency-matching requirements, play a role in shaping dollarization patterns.