Peru’s dramatic rise from market pariah to investors’ darling was capped this year with investment-grade status awarded by Standard & Poor’s and Fitch, opening Peruvian capital markets to huge interest among institutional investors. Ironically, Alan García, the president who made Peruvian debt a no-go area in the 1980s with soaring inflation and bond defaults, oversaw the upgrades in his second term, two decades later as a free-market convert.
With low inflation, one of Latin America’s fastest economic growth rates at 9% this year and a free-trade agreement with the US, Peru hopes to develop its nascent corporate and local-currency bond markets and create the kind of secondary trading and asset-backed transactions that are rarely seen outside Brazil and Mexico in the region. "There is a whole class of investors who previously never considered entering Peru, but with investment grade that all changes," says Juan Carlos Odar, senior credit analyst at the country’s top bank, BCP.
Although open to foreign investment, Peru’s stock market and a government drive to swap dollar-denominated debt into local paper have been the most active corners of an otherwise arid capital market scene. "The capital markets are very shallow but investment grade should guarantee permanent capital flows from abroad. In the medium term, we should see a more sophisticated market," says Henry Alvarez, director of Lima-based consultancy Maximixe. "Right now, the financial derivatives market is small, with only futures and options to trade. Other types of instruments are almost non-existent."
García has long pledged to make the markets work for Peru in a country where few companies can meet the listings requirements of the Lima bourse and the business sector is under-capitalized and faces high bank financing costs. Even before the rating upgrade, work was well under way. Last year, Peru issued a 30-year local-currency bond that should help establish a local-currency yield curve stretching out to three decades, encouraging corporate issuers to increase their maturities and enabling banks to sell local-currency mortgages at longer tenors. Government agencies such as water utility Sedapal are also planning to raise funds with local-currency bonds for the first time this year. The government is talking to the market about currency and commodity derivatives and is evaluating whether to set up a separate exchange for the instruments.
MiVivienda, the government-housing agency, has meanwhile created an emerging mortgage market for lower-income home buyers by making bank-administered loans of $10,000 or $20,000. With the investment-grade rating, more funds are expected to pour into Peru’s construction boom. Banks are already testing the waters and Peru’s second largest bank, BBVA Banco Continental, last year sold the first residential mortgage-backed securitization in the country, with some $25 million of fixed-rate notes, the first part of a planned $100 million programme.