Peru’s low risks call for A-ratings across the board

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By:
Jeremy Weltman
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With analysts rating Peru a similar risk to China and Malaysia, Euromoney’s survey indicates that Fitch and Standard & Poor’s should upgrade in line with Moody’s.

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Peruvian festival mural: Credit-rating party invites have gone out, but so far only Moody's has RSVP'd

Economists and other risk experts taking part in Euromoney’s country risk survey awarded a more favourable risk score to Peru in Q3 2018, including prospects for growth, unemployment and government finances.

The country is receiving more investment in the copper-mining sector, and budget priorities – ranging from education and healthcare to infrastructure projects – are supporting a structural risk profile improving across the board as the income gap closes and poverty declines.

Political risk has also ameliorated, notably the corruption indicator stemming from president Martín Vizcarra’s personal crusade to root out the endemic graft blighting the business environment and implicating several leading officials.

They include judges and Vizcarra’s predecessor Pedro Pablo Kuczynski, who resigned in March during an impeachment process after less than two years in office.

Vizcarra has gained support for a constitutional referendum to be held in conjunction with regional elections on December 9, aiming to root out corruption and cronyism.

The referendum bill proposes creating a second chamber of Congress with term limits for members of both houses, as well as new regulations governing political party financing, with penalties for illegal donations.

The National Council of Magistrates, which selects and oversees public prosecutors, could also be renamed and obliged to follow new procedures for appointing its members.

Country on the move

During the past decade, Peru’s country risk score has risen by almost nine points to 58.6 out of 100.

This is the largest upgrade in the region, beating other strong performers Chile, Colombia and Paraguay, resulting in the country now lying in third place for safety, behind Chile and Mexico:


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On a global scale, Peru is a high-ranking tier-three investment, lying within the third of five categories of risk, only half a point behind Malaysia and China, which are both rated higher by Fitch and Standard & Poor’s.

The two agencies maintain Peru is a BBB+ investment grade, but its risk score suggests it might not be long before the country is considered for an A-grade, matching those countries and moving in line with Moody’s A3 rating.

Endorsing this view, BBVA Research economists are bullish on economic growth prospects, noting the recent slowdown as temporary, and predicting GDP will rise at the faster pace of 3.9% next year compared with 3.6% in 2018, as the El Niño effects subside and damage reconstruction bolsters the economy.

IMF predictions suggest it might reach 4.1%, putting Peru alongside the fastest-growing economies on the continent, with inflation of 2% sitting comfortably within the central bank’s 1% to 3% target range and a current-account deficit of 2.2%.

Economic growth will be further uplifted by constructing new mines at Mina Justa and Quellaveco, along with the expansion of Toromocho.

“We estimate that, as a result of the construction of these mines, investment in the mining sector will increase next year by $2 billion,” says BBVA’s Peru chief economist Francisco Grippa and his team contributing to Euromoney’s survey, adding that business sentiment will continue to be relatively favourable for investment.

Peru’s fiscal indicators are also impressive, with the deficit falling from 3.1% of GDP in 2017 to around 2.5% this year, which will continue to decline in 2019, most economists agree.

“The planned fiscal consolidation process and the low level of gross public debt are favourable for the country, especially in a context of tightening international financing conditions and increased external risks,” notes BBVA, which also considers depreciation of the Peruvian sol to be “relatively limited in the context of emerging economies”.

This can be ascribed to solid macroeconomic fundamentals, including a safe current-account deficit below the 3% of GDP acceptable risk level, and a high level of foreign currency reserves totalling more than $60 billion and covering four times Peru’s short-term debt repayments.