With the market attempting to weigh up when Brazil will become an investment-grade credit, another Latin American sovereign, Peru, could enjoy that status as early as the year-end, according to analysts.
Moody’s Investors Service upgraded Peru’s foreign-currency bond rating to Ba2 from Ba3 last month – still two notches below investment grade. Standard & Poor’s, though, has the Andean nation at BB+, which is just one level below.
Peru is now a net creditor and is paying off external obligations. In May, for example, it reached an agreement with the Paris Club of official creditors to prepay $2.6 billion of the outstanding $5.6 billion debt stock. The government is also relying less on the external markets to fund itself and looking more at developing its local capital markets.
Best candidate
"All of these factors are the reasons why Peru is one of the best candidates in the region for elevation into the investment-grade club," says Walter Molano, head of research at BCP Securities in Greenwich, Connecticut. "With a rating of [BB+/Ba2], Peru should vault into the inner circle by the end of this year."
Mauro Leos, Moody’s vice-president, says: "External debt ratios have moved towards those observed in other Ba-rated countries, while the share of foreign-currency-denominated government debt and the degree of financial dollarization in the Peruvian banking system have reported steady reductions."
He adds: "The rating action is also consistent with Moody’s emphasis on the need to more closely align foreign- and domestic-currency bond ratings." Peru’s local-currency government bond rating is Baa3.
The turnaround in Peru’s fortunes over the past few years is one of the unheralded stories in international finance. At the turn of the century, the economy was stagnating, a result of El Niño, global financial turmoil, political uncertainty and a stalled privatization programme.
Strong exports
Now the economy is one of the best performing in Latin America and is expected to grow by 7.5% this year. This is largely on the back of strong export growth, although domestic demand is also rising. International reserves have jumped $4.5 billion since the start of the year, according to Molano.
"The strong export performance reflects a combination of increased export volumes and higher export prices," says Leos.
Another reason why Moody’s feels more comfortable with Peru’s debt profile is the declining degree of dollarization evident in the banking system, although credit risks from this policy remain a concern for the rating agency.
"While somewhat mitigated, credit risks derived from financial dollarization continue to constrain the ratings, marking a difference with respect to similarly rated countries that do not experience this condition," says Leos.
He adds that the sovereign’s foreign currency ratings remain constrained by the country’s exposure to adverse external conditions, "reflecting the sensitivity of commodity-based exports to changes in international prices".