NEW YORK--()--Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) and Country Ceiling for Peru as follows:
--Foreign currency IDR at 'BBB';
--Local currency IDR at 'BBB+';
--Foreign currency short-term IDR at 'F2';
--Country ceiling at 'BBB+'.
The Rating Outlook is Stable.
Peru's ratings are underpinned by its solid macroeconomic performance, the strength of its economic policy framework and the sovereign's robust external and fiscal balance sheets. These credit strengths are balanced against high commodity dependence, still significant levels of financial dollarization, a narrow government revenue base, large foreign currency exposure of government debt, and weaker structural factors such as income per capita and institutional quality.
In spite of softer commodity prices and the sluggish pace of the global economy, Peru's GDP growth, expected to reach a five-year average of 6.5% in 2012, continues to outperform the 'BBB' median. Fitch expects Peru's growth to remain at 6% over the forecast period supported by domestic demand, especially investment.
Inflation has risen above the central bank's target range in 2011 and 2012. Peru's monetary policy credibility and inflation record, though, continue to compare favorably to investment grade (IG) peers, and given recent readings, inflation could converge to the target range by the end of the year. Fitch notes that sustained rapid credit growth to private sector, if unchecked, could create risks to macroeconomic and financial stability. Authorities have reacted by increasing reserve requirements to curb credit growth, especially in USD.
Despite the changes to the fiscal contribution of the mining sector introduced by the Humala administration, Peru could receive significant investments in the mining sector and double its copper production by 2014. Nevertheless, social conflicts and potential bottlenecks in the energy and regulatory structure could pose some delays in the implementation of the project pipeline.
Consistent fiscal surpluses and strong growth has led to a decline in the general government debt to 20% in 2012 (compared with 40% for the 'BBB' median) and this trend is expected to continue during the forecast period. Fitch estimates that net government debt to GDP could fall to 8.7% of GDP in 2012, quite low compared to the peer median. Nevertheless, government debt is subject to exchange rate risk, as 51% of government debt is foreign currency denominated. The government has increased its fiscal buffers with resources in fiscal stabilization fund reaching USD7.2 billion (3.6% of GDP).
The CAD could widen to near 4% of GDP over the next two years driven by increased import growth and a large deficit in the income account. Nevertheless, Fitch expects this to be fully financed by net FDI. The sovereign's already robust net external creditor position has strengthened further, as gross international reserves have increased YTD to USD62 billion (31% of estimated 2012 GDP), partly made possible by increased external borrowing by the private sector. External liquidity is likely to continue strengthening, and mitigate risks related to still high, albeit declining, financial dollarization, increased private borrowing and high commodity dependence.
Structural factors continue to weigh on Peru's credit profile. Income per capita and human development indicators lag the 'BBB' median and economic base of the country is relatively narrow. Moreover, Peruvian institutions are weaker then those of other IG sovereigns. As exemplified by protests against mining operations, lack of trust in public institutions and their limited presence in certain areas create risks for the country's investment prospects and policy effectiveness.
Further strengthening of the sovereign's external and fiscal balance sheets, out-performance of growth with respect to peers and continued improvements in the government's debt composition and financial dollarization would be positive for Peru's creditworthiness. Over the medium term, progress on social indicators as well as deepening of political institutions would further increase the durability of the current economic model and benefit Peru's creditworthiness. Conversely, policy choices that result in increased macroeconomic volatility, reduced growth prospects, and sustained deterioration in public and external credit metrics in the context of adverse term of trade would weigh on Peru's credit trajectory.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Sovereign Rating Methodology' (Aug. 13, 2012).
Applicable Criteria and Related Research:
Sovereign Rating Methodology