December 22, 2012 / 6:26 PM / 5 years ago

Peru says will prepay up to $1.5 bln in debt to curb sol's gains

* Country a magnet for foreign capital inflows

* Sol currency trading at 16-year high vs dollar

LIMA, Dec 22 (Reuters) - Peru will launch an aggressive plan to prepay up to $1.5 billion in debt in 2013 to try to stem the Peruvian sol’s appreciation by soaking up foreign currency in the local market, Finance Minister Luis Miguel Castilla said on Saturday.

“We are going to use and make prepayments of between $1 billion and $1.5 billion in 2013, and this will serve to absorb some of the appreciating pressure that exists in the economy,” the minister told a news conference.

Peru’s sol closed on Friday at its strongest level in more than 16 years, with a bid price of 2.558 per dollar.

Yield-hungry investors have poured money into emerging markets such as Peru, which has expanded on average by 6 percent a year in the last decade. It currently ranks as South America’s fastest-growing economy.

Castilla also raised his forecast for 2013 economic growth to 6.3 percent from 6.0 percent previously. The new number matches the government’s growth forecast for 2012.

The minister mentioned the possibility of debt prepayment during an interview with Reuters nearly two months ago. He said the debt prepayment was part of a “liability management policy” that seeks to improve and extend the Andean country’s debt profile.

Paying foreign bonds early would complement other measures the government has applied to curb the sol’s rally, such as raising deposit requirements on bank accounts denominated in dollars or allowing local pension funds to invest more money abroad.

Peru has local and foreign debt in dollars and soles that are equivalent to about $36.6 billion, or nearly 20 percent of gross domestic product. About $20 billion is foreign debt, according to the central bank.

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