Peru’s country rating reaches record high

Contrasting with most of Latin America, Peru’s long-term ascent through ECR’s global rankings continued during Q3, with the sovereign gaining 3.1 points to take it six places higher to 38th out of 186 countries surveyed.

Marginally behind China and trailing Mexico by barely more than a point, Peru’s score of 60.3 out of 100 is a record high for the sovereign.

The improvement has resulted from a 12-place jump in as many months and 20 in total since 2010, signalling that perhaps it will be Peru not Mexico that will soon follow Chile into the second of ECR’s five tiered groups.

Tier two, normally associated with A- to AA rated sovereigns, on a score of 65 to 79.9, is the second-safest category. Tier-two countries typically exhibit characteristics similar to tier one – the safest grouping – but with some economic, political and/or structural weaknesses of note.

Favourable dynamics

As in other countries, Chile’s economic growth has been under pressure this year, culminating in a disappointing 4.4% year-on-year real GDP growth rate during Q3. However, the central bank implemented a precautionary interest-rate reduction of 25 basis points earlier this month, taking the policy rate down to 4%.

This, and the start-up in December of one of the world’s largest copper-mining projects – a $4 billion investment by the Chinese firm Chinalco – should provide a springboard for stronger expansion in exports and GDP in 2014.

Business confidence is already improving, buttressed by the central bank’s forex market intervention supporting the currency and efforts to tackle the red-tape crimping non-mining investment.

While Peru still endures various risks, ranging from political and institutional weaknesses to the threat of labour unrest and weakened metals prices, most of its economic indicators are expected to remain favourable in 2014, including inflation, which should stay below 3%, according to the IMF.

Fiscal indicators, too, are commendable. The budget surplus has been sliding of late, but the prospect of a deficit next year – if it occurs at all – would not be particularly large; below 1% of GDP, most forecasters believe.

Moreover, a low net debt-to-GDP ratio (of less than 5%), compared to say Brazil or Colombia, and a gross debt of some 20% of GDP – currently half that of Mexico’s and a third of Brazil’s – underline the sovereign’s investment-grade status.

A rise in the current-account surplus to some 5% of GDP, or even larger in the short term, is superficially rather worrying, particularly as it could further undermine a currency that came under pressure earlier in the year.

However, analysis produced recently by the research team at BBVA details reasons why it is not a concern. It states: “A significant part of the imbalance is linked to profits from foreign companies (mainly mining) that operate in Peru. Nonetheless, a major share of profits, instead of being sent back overseas, is reinvested in the country in tradable activities.

“In addition, given that a major part of the economy’s exports are commodities that depend on international prices, net factor income shows revenues linked to these exports and would act as an automatic stabilizer that would diminish in the face of a decline in the prices of export products, easing pressures on the current account.

“Both reasons suggest that an imbalance created by profits from foreign companies is more sustainable than one linked to persistent deficit trade balances or high interest payments.”

It continues: “The current-account deficit in Peru has been financed mainly through FDI, which we forecast will continue to be the most important component in the future for the financial account. Moreover, it is important to highlight that the structural level is sustainable in the medium term (in the sense that foreign liabilities as a percentage of GDP do not grow exponentially).”

Consequently, the source of the deficit (linked to investment), its funding (mostly long-term in nature) and its sustainability in structural terms minimise the risks of a sudden adjustment.

Peru is not without its risks, the BBVA research team admits, notably where its politics is concerned, as ECR’s survey data indicate (see chart). However, in comparison with Mexico it is stronger on most economic indicators, notably for the economic-GNP outlook and government finances.

If Peru’s current trend persists, an A grade might not be too far away.