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.