DBRS Confirms Peru’s Ratings on Economic Growth Momentum

DBRS has today confirmed its ratings on the Republic of Peru’s long-term local and foreign currency debt at BBB (low). The trends on both ratings remain Stable, reflecting DBRS’s view that Peru is relatively well-positioned to weather current market volatility and the global economic downturn.

“Peru’s economy has expanded for twenty-nine consecutive quarters and, while it is slowing, we expect Peru to post one of the highest growth rates in Latin America in 2009,” says Michael Heydt, Senior Financial Analyst at DBRS. “This performance, combined with a low debt burden and sound macroeconomic policies, should provide Peru with the resources and flexibility to cushion an external shock.”

Exemplary debt management and a strong external liquidity position underpin the ratings. Public debt-to-GDP declined from 47.1% in 2003 to 23.7% in September 2008. Debt reduction has been accompanied by an improvement in the composition of the debt. Local currency-denominated debt increased from 21% of total debt in 2003 to 38% in September 2008, most of which was fixed rate with long maturities. This has reduced exchange rate risk and encouraged the development of local currency markets in an economy that is still highly dollarized. Furthermore, the Central Bank of Peru has $30.9 billion in net international reserves and the government has $9.25 billion in contingent credit lines to manage external liquidity pressures.

A second strength is high rates of investment and greater openness to trade, which have increased productivity and raised the country’s potential rate of growth. Private investment has been a key source of the economic expansion over the last four years, and a series of bilateral trade agreements with key trading partners, such as the United States, China, Japan and the European Union, have either been signed or are in negotiation, attracting further investment in coming years.

Nevertheless, Peru faces challenges that, if inadequately addressed, could weigh against its creditworthiness. First, poverty remains widespread. If the benefits of economic growth are not more widely shared, the risk remains that a populist politician could come to power in 2011 and undermine Peru’s sound macroeconomic policies.

Second, fiscal policy is generally sound and the government has some space to provide counter-cyclical stimulus in 2009. However, the tax burden is low and sub-national governments lack the institutional capacity to allocate public resources in an efficient and effective manner and to address the country’s deep social development needs. Third, the economy remains relatively dependent on the mining and energy sectors, exposing exports to the commodity-price cycle. This exposure is evident in lower exports and a sharp increase in the current account deficit. Fourth, labor market rigidity hinders productivity and contributes to a large, inefficient and informal economy.

President Alan García has laid out a strategy to reduce poverty and inequality while maintaining sound macroeconomic policies. From 2005 to 2007, the poverty rate fell from 48.7% to 39.3%, and DBRS expects that increased public investment in poorer parts of the country will lead to further reductions. The coming months will be an important gauge of Peru’s resilience. If economic growth proves to be sustainable and Peru’s social indicators continue to improve, DBRS could change the trend to Positive. On the other hand, if social conditions worsen, the ratings could come under downward pressure.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies.

This is a Sovereign rating.

This rating is based on public information.