Category: Peru

Peru has surprised the markets with a 25bp hike in the reference interest rate to 5.00%. The consensus view was that the central bank would leave the rate unchanged and the tightening was the second in three months, totaling a 50bp increase since July. The central bank is apparently being preemptive in fighting inflation amid surging domestic demand and higher prices for imported raw materials. Analysts expect Peruvian rates to remain stable for the rest of 2007.

Canada’s Condor Resources has agreed to acquire a 75% interest in the Ocros porphyry copper project in northern Peru. Condor will pay $875,000, half in cash and half in shares, and incurs exploration expenditures of at least $4m over a five year period. It also retains a right of first refusal on the vendor’s 25% interest.

Peru will lose around 0.3% of real GDP growth this year, according to Goldman Sachs, which cites President Alan García, who also said that real GDP growth should hover at around 7.6% this year, versus an estimate of 7.9%-8.0% before the earthquake. The fiscal cost of reconstruction and social assistance to the affected by the earthquake remains unclear. “At 0.3%-0.4% of GDP, the costs of reconstruction appear to be moderate,” says Goldman. “Given a robust fiscal situation, we believe that the government should be able to absorb such cost, with no major financial implications,” it adds.

Banco de Credito del Peru has priced a dual tranche $500m MT100 issue amid market volatility. The bonds are split into a $350m series A and a $150m series B. The series A have a 10-year final, 7.4 year average life, and pay Libor plus 28bp. The series B have a 7-year final maturity, 5.2-year average life and pay Libor plus 25bp. Ambac wrapped the issue to give it a AAA rating. S&P assigned an underlying rating of A minus to BCP and Moody’s gave it a Baa3 rating. Standard Chartered was sole bookrunner and lead manager with Calyon and BMO as co-managers. The deal, which closed yesterday, was heard to be 40% oversubscribed, though market volatility likely added a premium of a few bp to the margin, says a person close to the deal.

Germany’s Fraport has increased its stake in the Lima airport operating company to 100% from 42.75%. It plans to sell up to 40 % to Peruvian investors and the IFC and retain at least 60%. The Peruvian airport had revenues of about EUR80m and EBITDA of almost EUR20m in 2006. Fraport says Lima Airport Partners (LAP) has invested about EUR150m in modernizing and expanding the passenger terminal as well as improving airside infrastructure. The airport concession runs for 30 years with an option to extend. Bechtel initially held 42.75% and Peru’s Cosapi had the remaining 14.5%. Bechtel subsequently acquired Cosapi’s and has since opted to leave the airport business.

Inflation numbers out this week put pressure on Peru to raise rates Thursday. Higher prices of food and fuels and strong domestic demand growth are fueling inflation. “Given the large inflation surprise and confirmation that inflationary pressures have intensified, we believe the Central Bank is likely to raise the reference interest rate again [today], by 25bp to 5.00%,” says Goldman Sachs.

Peruvian banks have the most exciting industry dynamics in LatAm, says Citi, which has initiated coverage of Credicorp (buy/medium risk) and Intergroup (hold/medium risk). The bank says Peru has Asian levels of GDP growth combined with US levels of inflation, “creating almost the ideal macroeconomic backdrop for financial services to flourish and develop rapidly.” Meanwhile, penetration of deposits and loans in Peru is among the lowest in the EM, suggesting high sustainable growth for Peruvian banks for years to come, Citi adds. In addition, the late 1990s banking crisis prompted a cleanup process that deepened the concentration level in the Peruvian banking sector, which bodes well for ROE. “Peruvian banks have re-emerged with good asset quality, world-class profitability, adequate capitalization, excellent liquidity, and low vulnerability to shocks. In addition, the sector now enjoys one of the best preventive supervisory systems in the region,” says Citi.

Peru’s Central Bank holds its monthly monetary policy meeting Thursday and analysts expect no change, pending no hike in inflation. “We believe the decision will likely be data dependent,” says Goldman Sachs. It predicts that inflation will stay around 0.20%, thus keeping rates unchanged at 4.75%. “However, if inflation exceeds expectations (0.35% MoM or higher), we believe the Central Bank is likely to raise the reference interest again, by 25bp, to 5.0%,” it adds. BBVA on the other hand sees no change to rates.

Peru’s strengthening credit profile has prompted ratings agency Standard & Poor’s to improve its BB+ long-term foreign and BBB- long-term local currency sovereign credit ratings on the Republic to positive from stable. At the same time, S&P affirmed its B short-term foreign and A-3 short-term local currency sovereign credit ratings on Peru. “Strong economic growth prospects from rising investment” and “adept debt management” were cited as two main factors, behind the ratings action. The first factor will help to make Peru “less vulnerable to both terms-of-trade shocks and political instability”, while the second is “reducing the vulnerability of the government’s debt trajectory to adverse foreign exchange movements”, according to S&P’s Buenos Aires-based credit analyst Sebastian Briozzo. Commenting on the action, Goldman Sachs analyst, said the firm believed the outlook change was deserved and that “Peru is in a good position to obtain the investment grade rating over the next 12 to 18 months (late 2008 or 2009). Fitch also rates Peru at BB+ with a stable outlook, just one rating action away from investment grade, while Moody’s is one notch below at Ba2 with a stable outlook.

Following the upgrade on the sovereign, Moody’s Investors Service has upgraded the long-term foreign currency deposit rating of Peru’s largest bank, Banco de Credito del Peru (BCP) to Ba3 from B1. Moody’s also raised its rating for BCP’s Panama branch’s foreign currency subordinated notes maturing in 2021 to Ba1 from Ba2, based on the upgrade of Peru’s foreign currency bond ceiling. The bank is also planning to sell $500m in bonds backed by US dollar cash flows generated by BCP’s electronic remittance business, according to a ratings note by Moody’s. The bonds will likely be sold in two tranches – $350m of Series 2007-A and $150m of Series 2007-B notes. The notes have been assigned a provisional investment-grade rating of AAA by Moody’s, which explained the notes are backed by a guarantee from AAA-rated Ambac Assurance Corp., the main operating unit of Ambac Financial Group (ABK).