NEW YORK – Fitch Ratings has upgraded Peru’s long-term foreign Issuer Default Ratings (IDR) to ‘BBB+’ from ‘BBB’ and the long-term local currency IDR to ‘A-’ from ‘BBB+’. The Rating Outlook is Stable.
Fitch has also upgraded the country ceiling to ‘A-’ from ‘BBB+’ and affirmed the short-term foreign currency IDR at ‘F2’.
Peru’s upgrade is underpinned by the strength of the sovereign’s external and fiscal balance sheets, continued growth outperformance in relation to ‘BBB’ peers and a long track record of macroeconomic and financial stability. Peru’s established track record of policy coherence and credibility as well as the sovereign’s fiscal and external financing flexibility underpin its strong shock absorption capacity. Finally, continued pragmatism under the Humala administration and a steady progress on reforms suggests that the risk of a marked departure of economic policies has reduced.
Despite the slowdown to an estimated 5.4% in 2013, Peru’s economic growth performance will be one of the strongest in the ‘BBB’ category during 2013-2015. Growth prospects appear favorable in the coming years due to strong mining investment flows and the expected doubling of copper production by 2016.
The general government is on track to record its third consecutive fiscal surplus (0.4% of GDP) in 2013 in spite of slower growth and deterioration in terms of trade (TOT). The Fiscal Responsibility and Transparency Law (LRTF) will be strengthened through the implementation of structural fiscal targets. This would further increase the counter-cyclical character of fiscal accounts, institutionalize the fiscal framework and provide a medium-term anchor for fiscal policy, especially in the context of the narrow government revenue base relative to peers, continued spending pressures and high commodity dependence of the country.
Government debt remains low relative to rating peers and is expected to decline to 18.9% of GDP in 2013, likely approaching 15% over the forecast period. While foreign currency debt stands at 49%, which is above similarly rated peers, the strengthened net FX position of the central government partly mitigates this vulnerability.
Peru’s international reserves (33% of GDP) mitigate risks related to high commodity dependence, the large participation of non-residents in the domestic debt market and financial dollarization. The central bank has also been gradually increasing the flexibility of the PEN.
Macroeconomic vulnerabilities posed by strong credit growth and an elevated current account deficit (forecasted to reach 5% of GDP) appear manageable. After rapid loan expansion in 2011 and 2012, authorities took measures to bring credit growth under control and improve its composition, thus reducing potential risks to financial stability. Strong FDI flows, relatively manageable external financing requirements (at around 20% of international reserves in 2013-2014) and Peru’s position as the second strongest net sovereign external creditor in the ‘BBB’ category should allow the country to navigate through temporary higher current account deficits.
Conservative policy making and a pragmatic approach to attract private investment continues under President Ollanta Humala. His administration has also pushed ahead with an active reform agenda such as the politically sensitive civil service reform and the reform of the fiscal framework.
Localized social conflicts, weak institutions and capacity issues continue to represent challenges to Peru’s political, economic and social development over the medium term. Nevertheless, consensus on the direction of economic policy has increased in recent years in the political leadership and society, thus reducing the risk for a marked policy departure.
The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating are currently balanced. Fitch’s sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change.
The main factors that individually, or collectively, could trigger a positive rating action include:
- Sustained growth that reduces Peru’s income gap with higher rated sovereigns, further progress on social indicators and institutional capacity build-up.
- Significant improvements in Peru’s fiscal and external balance sheets and a build-up of a track record to abide by the institutional enhancements to the fiscal policy framework.
The main factors that individually, or collectively, could trigger a negative rating action include:
- Policy choices that increase macroeconomic volatility, reduce investment and growth prospects.
- Sustained deterioration of external and fiscal credit metrics.