DRBS Otorga el Gobierno del Perú Grado de Inversión

DBRS Rates Peru Investment Grade

Date Of Release: Oct 19, 2007 09:00

DBRS has today assigned ratings of BBB (low) to the Republic of Peru’s Long-Term Foreign and Local Currency Debt. The trend on both ratings is Stable.

The investment-grade ratings reflect the country’s achievements of sustained economic growth and declining debt burden within a framework of fiscal discipline and sound monetary policy. In DBRS’s view, Peru’s high reserve levels, low debt-service requirements and flexible exchange rate provide an adequate cushion to absorb potential external shocks during the administration of President Alan García.

“Peru has demonstrated that sound macroeconomic policy pays off in higher growth and greater stability,” says David Roberts, DBRS Chief Economist. “We will be looking for President García to take advantage of the current window of opportunity before the next presidential election in 2011 to deliver results on his commitment to tackle high poverty levels and consolidate macroeconomic reforms.”

Gross public debt-to-GDP has declined from 47% in 2003 to less than 30%, due to fiscal prudence, adept liability management and high GDP growth. President García has announced a goal of reducing public debt to 25% of GDP by 2010. The structure of Peru’s public debt is considerably improved. While almost three-quarters of public debt is external, one-half of the external debt is in bilateral or multilateral loans with long maturities and low interest payments. Foreign currency external bond liabilities are relatively low, at 9% of GDP.

Currently, domestic debt is low at 10% of GDP. Peru has made progress in attracting international investors into local-currency debt. In mid-2007, international investors owned one-third of domestic bonds, most of which were fixed rate. A large share of domestic financial assets and liabilities are dollar-denominated, which reduces the liquidity and resilience of local currency securities. These factors account for the equivalent ratings of BBB (low), both for local currency and foreign currency government securities.

Peru has strengthened its commitment to macroeconomic stability through legislation to constrain public sector deficits, strengthen financial supervision and reinforce the central bank’s inflation-targeting monetary policy. While the Peruvian economy remains relatively dependent on mining and hydrocarbon price cycles, Peru is benefiting from foreign investment inflows and growth in non-traditional exports. Prospective free-trade agreements with the United States, the European Union and China provide reassurance that Peru will further open its economy.

Despite this progress, Peru faces further challenges that, if inadequately addressed, could weigh against its creditworthiness. Most importantly, while poverty and inequality have shown some improvement, social development has not kept pace with the overall rise in economic growth. Second, rigid labour laws hinder productivity and contribute to the large, inefficient informal economy. Third, further fiscal reforms are needed to finance infrastructure investment, improve the technical capabilities of regional governments and redirect government revenues to the poorest regions.

The strong showing of the populist candidate, Ollanta Humala, in the 2006 presidential election revealed the deep discontent of social groups that have not shared the benefits of Peru’s growth. President García has laid out a medium-term strategy to address the social problems underlying this discontent without retreating from Peru’s dedication to sound fiscal policy. With the next presidential election scheduled for 2011, the government has a valuable window of opportunity to show that it can deliver on its promises.