Last updated: 17:43 / Wednesday, 23 October 2013
By Fitch Ratings

Peru's External and Fiscal Balance Sheets Underpinn Upgrade to BBB+

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Peru's External and Fiscal Balance Sheets Underpinn Upgrade to BBB+
  • Peru's economic growth performance will be one of the strongest in the BBB category during 2013-2015
  • The new upgrade places the Andean country above Mexico and Brazil

Fitch Ratings has upgraded Peru's long-term foreign Issuer Default Ratings (IDR) to BBB+ from BBB. According to Fitch Ratings, Peru's upgrade is underpinned by the strength of the sovereign's external and fiscal balance sheets, continued growth outperformance in relation to BBB peers and a long track record of macroeconomic and financial stability. The rating agency also highlights Peru's established track record of "policy coherence and credibility" and its "strong shock absorption capacity". Finally, it adds that "continued pragmatism under the Humala administration and a steady progress on reforms suggests that the risk of a marked departure of economic policies has reduced".

Fitch's new rating for Peru, following an upgrade from Standard & Poor's to BBB+ in August, places the Andean country above Mexico and Brazil and only below Chile in the region. Moody's rates the country Baa2 with a positive outlook.

Macroeconomic vulnerabilities posed by strong credit growth and an elevated current account deficit (forecasted to reach 5% of GDP) appear manageable

The long-term local currency IDR to A- from BBB+. The Rating Outlook is Stable. Fitch has also upgraded the country ceiling to A- from BBB+ and affirmed the short-term foreign currency IDR at 'F2'.

Despite the slowdown to an estimated 5.4% in 2013, Peru's economic growth performance will be one of the strongest in the BBB category during 2013-2015. Growth prospects appear favorable in the coming years due to strong mining investment flows and the expected doubling of copper production by 2016.

Government debt remains low relative to rating peers and is expected to decline to 18.9% of GDP in 2013, likely approaching 15% over the forecast period. While foreign currency debt stands at 49%, which is above similarly rated peers, the strengthened net FX position of the central government partly mitigates this vulnerability.

Peru's international reserves (33% of GDP) mitigate risks related to high commodity dependence, the large participation of non-residents in the domestic debt market and financial dollarization. The central bank has also been gradually increasing the flexibility of the PEN.

Macroeconomic vulnerabilities posed by strong credit growth and an elevated current account deficit (forecasted to reach 5% of GDP) appear manageable. After rapid loan expansion in 2011 and 2012, authorities took measures to bring credit growth under control and improve its composition, thus reducing potential risks to financial stability. Strong FDI flows, relatively manageable external financing requirements (at around 20% of international reserves in 2013-2014) and Peru's position as the second strongest net sovereign external creditor in the BBB category should allow the country, accoriding to Fitch Ratings,  to navigate through temporary higher current account deficits.

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