Fitch Ratings, the international rating agency, expects to assign a long-term foreign currency rating of 'BB' to the Republic of Peru's upcoming US$750 million 20-year bond issue. The rating outlook is stable. This issuance is part of the government's plan to finance a prepayment of US$1.55 billion in Paris Club debt, as well as provide prefinancing for a portion of 2006 public financing needs.
Fitch upgraded Peru's long-term foreign currency rating to 'BB' from 'BB-' in November 2004, reflecting the passage of pension reform and robust macroeconomic and fiscal performance. Since 2002, fiscal deficit reduction has proceeded in the face of a challenging domestic political environment, which combined with stronger growth has contributed to a decline in Peru's public debt burden. The general government deficit, which has declined from 2.1% of GDP in 2002 to 1.2% in 2004, is likely to fall to 1.0% of GDP this year. Given the strong performance of tax revenues through May, even with increased expenditures in the run-up to the 2006 elections, Fitch believes this target will be attainable.
Solid GDP and export growth continues to underpin Peru's sovereign creditworthiness and should provide a sufficient buffer to deal with possible adverse shocks, whether election-related or externally-driven. A revival in private investment has broadened from mining and energy to include the consumer goods sector. A solid balance of payments performance continues to diminish Peru's vulnerability to external shocks, reflected in international reserve accumulation of US$1.3 billion since year-end 2004 and Peru's low external financing needs of about 15% of reserves. Peru's high net external debt declined to 110% of external receipts in 2004 from 175% in 2000 and will continue declining this year given benign external conditions and some reduction of external debt with the prepayment of Paris Club debt. However, this ratio will remain high relative to the median of 49% for similarly rated credits.
Peruvian politics may continue to pose risks to the economic policy framework. However, with the 2006 general election in view, the political parties have been supporting prudent policy settings and modest reforms to enhance their credibility with the electorate. A smooth transition to the next government and maintenance of prudent macroeconomic settings would be positive for creditworthiness. On the other hand, a populist departure from the current policy framework would be negative.