Light at the end of the tunnel: Peru's economy is improving due to higher mining production
Peru’s country risk score rose in Q1 2016, sending the borrower three places higher in the third of five tiered categories of investor risk Euromoney uses to split sovereign credits.
The country is now 42nd out of 186 countries overall.
Its rise so far this year is mostly due to an improving capital-access score, but there is every reason to expect higher scores for the economic and political risk indicators with the electoral uncertainty diminishing.
“The first round of the elections [in April] erased the market’s fears about radical changes to the economic model that Peru has applied since 1992,” says Guillermo Díaz, the Lima-based country economist at CAF, the Andean development bank.
The left was denied the possibility of taking control and therefore altering the free-market path when Veronika Mendoza came third.
The run-off in June to replace the incumbent Ollanta Humala will see either the Princeton and Oxford educated, former finance minister Pedro Pablo Kuczynski, of the centre-right Peruanos por el Kambio, take control, or Keiko Fujimori, the conservative daughter of the former president, Alberto.
Both candidates are pro-business and will win over the confidence of investors, which will likely see scores upgraded for policymaking and government stability, among other factors.
Not only that, but the economy is also now improving.
“Economic activity has recovered onto a gradually improving trend due to higher mining production, especially copper,” says CAF’s Diaz.
“Consumer and investor confidence indexes will also recover gradually, partly because the new administration will apply a fiscal impulse, and our forecast for real GDP growth in 2016 is 3.5% (with an upward bias) and 4.3% for 2017.”
IMF projections are similar, showing 3.7% growth this year and 4.1% next. These are among the highest in Latin America, better than Chile and Uruguay, and contrasting with the higher risk macroeconomic profiles of Argentina, Brazil, Ecuador and Venezuela.
Although the country endured fiscal and external deficits last year, both are expected to improve in 2016 as copper mining increases.
Increased copper-producing capacity at the Constancia, Cerro Verde and Toromocho mines, and the start-up of Las Bambas in Apurímac, are leading to a huge increase in production, putting Peru on a path to replace China as the world’s second-largest producer and a virtual halving of the trade gap to $1.7 billion.
Efforts to overcome the crisis caused by the fall in commodity prices are bearing fruit and the political signals are similarly good.
Therefore, Peru’s reputation for bondholder safety appears intact.
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