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Economy | 1 September, 2006 [ 11:39 ]

Fitch Upgrades Peru's Foreign Currency IDR to 'BB+'

(LIP-wb) Global ratings agency "Fitch Ratings", based in New York and London, has upgraded Peru's Foreign Currency Issuer Default Rating (IDR), Local Currency and "Country Ceiling" to "BB+", meaning a stable outlook.
Peru's President Alan Garcia considered this as "great news" and a fundamental step for increasing investment activities. He attributed the improved qualification to macroeconomic growth and also to the course of action initiated by his governments in order to provide stability and a better social environment. Garcia said the next task is to take this growth into every Peruvian household and emphasized that this upgrade will allow credits to become cheaper and a better capital diffusion to generate jobs in industries and agriculture.


official Fitch Ratings press release (subscription)

31 Aug 2006 11:05 AM (EDT)

Fitch Ratings-New York-31 August 2006: Fitch has today taken the following rating actions on Peru:

--Foreign currency Issuer Default Rating (IDR) upgraded to 'BB+' from 'BB', Stable Outlook;
--Upgraded the local currency IDR to 'BBB-' from 'BB+', Stable Outlook;
--Short-term foreign currency IDR affirmed at 'B';
--Country ceiling upgraded to 'BBB-' from 'BB+';
--Collateralized Brady Bonds upgraded to 'BBB-' from 'BB+'.

'Peru has benefited markedly from favorable trends in the global economy that have underpinned rapidly growing exports, notably of metals and such non-traditional exports as textiles and agro-industrial goods, as well as strong output growth of around 6% per year,' said Theresa Paiz Fredel, Director of Latin American Sovereign Ratings at Fitch Ratings. As a result, key sovereign financial ratios have been improving, evidenced by 2006 forecasts for net external debt (NXD) to current external receipts (CXR) of 41% (close to the 'BB' median), general government debt to GDP of 35% (below the 'BB' median of 41.7%), and external financing needs to official reserves of a comparatively low 4.8%.

'While the commodity export bonanza has underpinned rising tax revenues in Peru,' said Paiz Fredel, 'modest spending restraint through the first half of 2006 has kept fiscal deficits low and may even yield a government surplus this year.' Furthermore, the smooth political transition that took place in July supports the upgrade, with President Alan Garcia's inaugural speech and cabinet appointments pointing toward a continuity of the macroeconomic policies that have served Peru so well in recent years.

Fiscal restraint, liability management operations, and sizable balance of payments surpluses since 2001 have allowed net repayments of public external debt and official foreign exchange reserves to rise to record levels. As a result, the public sector's NXD to CXR ratio has been declining rapidly and is expected to reach around 27.1% by the end of 2006, a material improvement from Fitch's forecast of 35.9% at the time the Rating Outlook was revised to Positive from Stable in November 2005. Although this ratio remains well above the 12.8% forecasted median for Fitch-rated 'BB' sovereigns, it is steadily converging toward the median. Furthermore, the government's external debt burden has been partially mitigated by its astute debt re-profiling operations, which have reduced the public sector's financing requirement to no more than 3% of GDP over the medium term, assuming the non-financial public sector deficit is maintained at the targeted 1% of GDP.

Official reserve accumulation, combined with the reduction of debt service, has boosted Peru's external liquidity ratio to 207% this year. While this compares favorably to a median of 156% for 'BB' rated sovereigns, when adjusting the liquidity ratio to include resident foreign currency bank deposits in the denominator, the liquidity ratio falls to around 92%, highlighting the risks associated with Peru's high, albeit declining, dollarization.

Peru remains vulnerable to a global economic downturn and a consequent commodity price correction. Metals prices - specifically, for copper, gold, molybdenum and zinc, which figure heavily in Peru's exports - have experienced a spectacular rise since mid-2003. While a downward price correction for metals can be expected in the coming years, global supply and demand fundamentals appear sufficiently robust to alleviate concern about a sudden commodity price shock in the near term.

Given the underlying structural weaknesses of Peru's economy (e.g. a narrow economy and export base, sub-par social development indicators), the transition to investment grade will likely take some time to achieve. While Fitch expects the trend in export and economic diversification to continue, the diversification and financial cushion achieved thus far are not yet consistent with an investment grade rating. Further reductions in net external debt, particularly net public external debt, and a broadening of exports and sources of economic growth, would bode well for sovereign creditworthiness, as would further evidence that political shocks will not derail current economic policies and prudent fiscal policy in particular.

Fitch will hold a teleconference on Wednesday, Sept. 6, 2006 at 11 a.m. EDT to explain the rationale underpinning these rating actions on Peru. A further teleconference notice will have additional call-in information. A special report will also be available shortly on the Fitch Ratings web site, at 'www.fitchratings.com.'

Contact: Theresa Paiz Fredel +1-212-908-0534 or Shelly Shetty +1-212-908-0534, New York. Media Relations: Christopher Kimble, New York, Tel: +1 212-908-0226.


tags : Peru economy business investment Fitch ratings Garcia macroeconomics finance

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