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Credit Analyst
Huang Zhigang
Huangzhigang@Dagongcredit.com
Sovereign Credit Rating
Local
Currency/Outlook BBB+/Stable
Foreign
Currency/Outlook BBB+/Stable
Rating Time October, 2010
Rationale
Dagong assigns “BBB+” local and foreign currency long term sovereign credit
ratings on the Republic of Peru (hereinafter referred to as “Peru”). The ratings
are based on a comprehensive assessment on a range of key factors that are
closely related to the sovereign’s credit risk, such as national management
capability, economic strength, financial strength, fiscal strength, foreign
exchange strength, and so on.
In Peru, the ratio of public debt to GDP significantly decreased in recent
years. Thanks to the global financial crisis, there were apparent rebounds on
the series of government debt indicators in 2009, but the country’s public debt
to GDP ratio is still lower than most other countries in the world, which was
only 26.6% by the end of 2009, with a grand total of about 33.83 billion U.S.
dollars. To further optimize the debt structure, in the past three years the
government has frequently issued Global Bonds for the prepayment of part of the
outstanding debt. As a result, the government's borrowing requirement remained
relatively high during the period, and the reoccurrence of fiscal deficit in
2009 pushed the borrowing requirement still upward. Considering the fact that
the general government deficit is quite likely to continue at least in the short
term, and a growing amount of government debt will mature in 2010 and 2011, the
Peruvian government’s borrowing requirement is expected to remain at a
relatively high level for the next 1 or 2 years.
In light of the limited
government debt burden, as well as the sound economic fundamentals, Dagong
believes that the debt repayment capability of the Peruvian government is well
assured, and the sovereign’s default risk is relatively low. The main reasons
can be listed as follows:
Benefiting from the comparative advantages in resource endowments and the
boom of external demands, Peru has experienced strong economic growth in recent
years, but there was no substantial improvement in terms of the quality of
economic growth. However, with the pick up of the resource commodity prices
after the global financial crisis and the influx of foreign direct investment,
the Peruvian economy is expected to be able to return to the previous track of
rapid growth after 2010;
The degree of financial depth in Peru has been constantly advancing, and the
banking system has successfully withstood the challenge of the global financial
crisis, with the non-performing loan ratio remaining at a low level. Peru is a
country of dual currency, and the degree of dollarization in this country tends
to decline in recent years, though still high, herein adding to the potential
vulnerability of the financial system;
Since 2000, the fiscal indicators of Peru have been maintained at sound
levels. Despite the impact of global financial crisis, the government deficit in
2009 was still well under control. With the steady recovery of domestic economy
and the gradual climbing-up of metal prices, the growth potential of Peruvian
government revenue is rather optimistic;
In recent years, Peru has maintained trade surplus, and the inflow of foreign
direct investment was in large amount. As a result, the foreign exchange
reserves of Peru grew rapidly, and the country’s external debt burden has been
decreasing year by year. In addition, the Government's external funding channels
as well as its financing capacity has also been expanded. Therefore the
sovereign’s future external debt solvency has got quite solid support and
assurance.
Outlook
The recovery of global economy is still fragile and unbalanced, but the
possibility of a double dip is gradually declining. With the current political
and economic system keeping unchanged, both private investment and consumption
are expected to remain prosperous in Peru, which are quite likely to result in
the recurrence of a persistent and rapid economic growth. In addition, although
there have appeared clear signals of the withdrawing of expansionary monetary
policy ever since the first half of 2010, but the withdrawal of fiscal stimulus
will be relatively late, Dagong predicts that general government deficit in Peru
will tend to narrow within the next two years, until finally a fiscal surplus is
reached. Taking all the above mentioned factors into account, Dagong holds that
the outlook on both the local currency and foreign currency sovereign credit
risk of Peru is stable for the next 1 or 2 years.
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