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Standard & Poor’s Ratings Services has revised its outlook on its ratings on the Republic of Peru to positive from stable. At the same time, Standard & Poor’s affirmed its ‘BB’ long-term foreign currency, ‘BB+’ long-term local currency, and ‘B’ short-term sovereign credit ratings on the republic.


Standard & Poor’s also assigned its ‘BB+’ local currency rating to the NS1.5bn (US$460mn) in bonds due in 2017 issued on July 7, 2005, as part of Peru’s the overall strategy to exchange external debt held with the Paris Club.


According to Standard & Poor’s credit analyst Sebastian Briozzo, the change in outlook reflects the growing prospect that the improvement in Peru’s economic and fiscal profile in recent years may continue over the medium term, notwithstanding a cyclical downturn in commodity prices.


“Favourable external conditions, as well as cautious macroeconomic management, have boosted

  • GDP growth and kept fiscal deficits at around 1% of GDP,” Briozzo says. “The increasing credibility of the country’s monetary authority has also helped to develop domestic debt markets and modestly reduce the high level of dollarisation in the economy.”


    Briozzo explains that a smooth transition to a new administration after the presidential elections in 2006 could provide a stronger political anchor to economic management and strengthen economic institutions. “That, combined with the continuing declining trend in the government’s debt burden and the strengthening of the country’s external liquidity position, could bring Peru’s economic and financial profile closer in line with higher-rated sovereigns over the next two years,” he says.

    Standard & Poor’s said that Peru’s government has been taking advantage of the favourable international environment to reduce some of its major credit vulnerabilities over the last three years, in the fiscal and external sectors in particular, despite a relatively weak political environment. However, the country’s fiscal flexibility remains limited and Peru’s net external public sector debt, at 80% of current account receipts in 2005, is still significantly higher than the 30% median for similarly rated sovereigns.


    Peru’s credit story also benefits from appropriate government liability management, including the development of the domestic capital market for local currency government debt. Further, the debt exchange finalised with the Paris Club both smoothes and lengthens the debt amortisation schedule, and serves to facilitate the replacement of some foreign-currency-denominated debt with PNS debt.


    “Despite the improvement in economic indicators, Peru’s political and social environment remains weak and could still undermine future improvements in creditworthiness,” notes Briozzo. “Despite relatively strong growth prospects over the medium term, the government is challenged to deepen the sources of growth to ensure their sustainability and facilitate job creation. Increasing political or social instability that undermines the consensus on, and implementation of, economic policy would increase the risk of policy reversal, possibly resulting in Standard & Poor’s revising its outlook back to stable,” he concludes.