Why is dollar debt Cheaper? Evidence from Peru

Many emerging market business loans are denominated in dollars, according to loan-level currency and credit cost data. The popularity of dollar credit is not due to exchange rate expectations. Dollar-denominated loans have a 2% lower annual interest rate than local currency loans, as in the deposit market. Local depositors prefer dollar deposits and the banking sector has a strong incentive to align foreign currency assets and liabilities, thus dollar loans are preferred. Market rivalry makes banks pass through this interest rate gap.

Image courtesy of interviewee. December 21, 2023

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