Category: Peru

Peru has robust fiscal and external solvency ratios, as well as high external liquidity, according to Fitch, which Wednesday affirmed the sovereign at BBB minus (stable). On the downside, the country has a concentrated export base, weak social and governance indicators relative to similarly rated peers and still high dollarization, the agency adds. But even though Fitch expects Peru’s growth to decelerate sharply to around 3.0% in 2009 from an estimated 9.8% in 2008, it will still be among the highest rates of growth in LatAm, the agency says. “Peru’s solid macroeconomic fundamentals have increased the economy’s capacity to withstand a commodity price collapse, a recession in the world’s advanced economies, as well as reduced capital and financial flows,” says Theresa Paiz Fredel, senior director for LatAm sovereign ratings at Fitch. Gross and net government debt/GDP ratios, at 24% and 15%, are below the 10-year BBB medians of 35% and 25%, respectively, the agency adds. “Even with the anti-crisis measures announced by the government late last year, which include a 2% of GDP economic stimulus package, and marked growth deceleration, Peru’s debt indicators will deteriorate only marginally and continue to compare favorably to BBB peers, while the downward trajectory of these ratios is expected to resume as the economy recovers in 2010,” adds Paiz Fredel. In addition, the average maturity of the government’s debt is longer than rating peers, minimizing roll-over risk, she adds.

Bank of America-Merrill Lynch believes Peru’s central bank will continue aggressive easing and cut the reference rate by another 100bp, to 4.00%, May 7. JPMorgan, meanwhile, changed its forecast and now also sees a 100bp reduction, versus a previous estimate of 50bp. The shop also revises downward its forecast for 2009 GDP growth to 2.7% from 3.5%. Morgan Stanley, meanwhile, expects 75bp easing, with rates dropping to 3.5% by the end of the year.

There is no stigma attached to multilateral support through an IMF flexible credit line (FCL), according to major fixed income investor Pimco, which advises Peru to seek one. “Countries like South Africa and Peru that likely would qualify for the FCL should . . . take advantage of the program’s embedded optionality to strongly signal to investors their capacity to secure scarce funding even amid the most volatile markets,” says Michael Gomez, executive vice president at the bond fund, which had $750 billion under management at the end of 2008. “This way, it becomes even less likely that these countries would ever have to tap the program for funds in the first place,” he adds. Officials at Peru’s finance ministry did not return a request for comment on the possibility of obtaining an FCL. Countries should take every possible step to ensure economic stability, says Gomez, who praises Mexico, Colombia and Poland for exploiting the FCL. The IMF approved a $47bn credit facility for Mexico this month, a move that, along with use of a US Federal Reserve swap line, has been cheered by investors. In general, Pimco advises moving EM exposure into higher-quality credits to provide a greater level of principal preservation and still offer reasonable carry. “Brazil and Mexico in particular still have nominal local rates well in excess of their developed world counterparts and have just started what appear to be long and aggressive monetary policy easing cycles,” adds Gomez.

Credit Suisse is reducing its year-end forecast for Peru’s monetary policy rate to 2.5% from 4.5% after the central bank decided to make a 100bp cut to its monetary policy rate April 8. “The steady decline in inflation and the improvement in market inflation expectations give the central bank room to continue to lower interest rates sharply and, thus, to attempt to counter the rapid decline in the economy’s growth rate,” the shop says. Credit Suisse sees inflation at 2.5% by the end of the year, within the central bank’s target range of 1%-3%.

Barclays has chopped the forecast for this year’s Peru GDP growth to 0.4% from 1.9%. The shop says most recent data shows GDP expanded just 0.19% year-on-year in February, well below expectations of 1.3%. It also revised the inflation forecast to 2.6% from 2.7%. The currency is also expected to lose value, reaching PES3.35 per dollar by the end of the year. April 16 it closed at PES3.08. Barclays also expects the central bank to become more aggressive in cutting rates, and predicts a 150bp reduction in May, followed by 100bp in June, from 5% this week.

Peru’s central bank has cut the monetary policy rate by 100bp to 5.0%, deeper than the market consensus of 50bp. The bank says the decision is based on easing in inflationary pressure. Inflation stood at 4.8% in March, down from 6.7% in December. While Barclays and Banco de Credito called for a 50bp move, Bulltick Capital expected 75bp.

Stanford’s allegedly fraudulent financial schemes may cause more havoc than initially expected, as Peruvian investors could lose as much as $120m, according to a local source involved in the investigation of the financial entity. Peruvian media previously estimated local investors’ losses at between $50m and $100m. The Lima-based source explains that the government may have a hard time recouping investors’ losses as funds are thought to have been funneled to Stanford’s bank in Antigua.

Peru’s central bank is expected to lop 50bp off its monetary policy rate as inflation continues to fall. “Considering that inflation and inflation expectations are declining, and taking into account the rapid economic deceleration under way, we expect the central bank to cut the policy rate by 50bp on April 8 and continue front-loading monetary easing in later months,” says Barclays. The shop says the rate will reach 3.5% by September from a current 6.0%. Peru’s Banco de Credito says that inflation has dropped to 4.8%, its lowest level since February 2008, which suggests the central bank will go for a 50bp easing. Bulltick, meanwhile, maintains its call for a 200bp reduction by the end of the year.

A new infrastructure fund to invest in hydroelectric projects in Peru, Energy Capital, is about to start raising capital. “We created a SAFI [investment fund management company] and will register with the local financial superintendence in 30 days,” says Juan Solidoro, CEO of Lima-based S&Z Consultores, one of the owners of the fund. For its first vehicle, Enercap I, Solidoro expects to raise $150m, rising to $1bn in 5 years, he tells LatinFinance. Fundraising will begin as soon as the entity is registered, says the investor. He expects international institutional investors to participate, alongside local and foreign investment and pension funds. Local ratings agency Class & Asociados initiated coverage of Energy Capital with an A minus rating and a stable outlook. S&Z is a consulting firm working on the design of hydroelectric projects. It is working on a 2,000MW Inambari project in southern Peru that will export energy to Brazil. The venture requires an estimated investment of $4bn, Solidoro says. It is also working on a 180MW Belo Horizonte project, which requires a $300m investment, as well as an 800MW Veracruz project, expected to cost $1bn to build, according to Solidoro.