Having won International Monetary Fund support for his economic
program, and political backing with a successful donors’ conference
in October 2001 that achieved $600 million of donations and $1
billion in other resources, Pedro-Pablo Kuczynski had one other
important international audience to woo: Wall Street, where the
former investment banker and private equity investor has won a warm
welcome.

Recent positive statements by the two largest credit rating
agencies were a prelude to Peru launching its first sovereign bond
issue since 1928. Suddenly, to investors horrified by Argentina’s
meltdown, Peru seemed a good bet. Many seem to have forgotten, or
at least forgiven, Peru’s default and hyperinflation in the 1980s
under President Alan García.

In February, Peru launched its first sovereign bond in 74 years,
raising $500 million with a 10-year global bond. It has coupon of
9.125% and a yield of 9.481%, with a respectable spread of 455
basis points (lower than Peru’s EMBI+ spread). The bond was more
than three times over-subscribed. At the same time, Peru retired
$1.21 billion in Brady bonds in exchange for a further $930 million
of the global issue, leaving it with single and a highly liquid
$1.43 billion bond. Peru’s Brady spreads had narrowed to historical
lows before the issue.

Because the exchange lowered Peru’s debt by $280 million and freed
up a further $50 million in collateral backing the Bradys, the new
global issue only pushed up total debt by $170 million.

Kuczynski said before the issue that “one of the big priorities”
was to keep the country’s external public debt stable at about $19
billion. Peru’s interest payments fell by an estimated $25 million
last year, though of course Peru now faces a significant
amortization payment in 2012.

Public sector medium- and long-term
external
debt annual % change
Sources: Central Reserve Bank of Peru;
and IMF staff estimates and
projections.

The government will use the bond to finance part of its
estimated 2002 budget deficit of $2.2 billion. The remainder of the
deficit will be covered by multilateral disbursements,
privatization receipts that the government is conservatively
forecasting at $700 million. Kuczynski plans to make up the balance
by issuing $300 million to $400 million in domestic bonds with two
to three-year maturities.

Other key aims of the issue were to provide a benchmark and
diversify Peru’s sources of credit. Previously, 59% of the
country’s debt was owed to bilateral lenders and 41% to
multilateral agencies. The Corporación Andina de Fomento (CAF) is
currently the biggest lender to Peru. “CAF is a wonderful
organization, but it has a tenuous group of countries as its
shareholders,” Kuczynski says, “You cannot rely on CAF to be your
rich uncle forever.”

The government awarded the mandate to JP Morgan and Citigroup,
leading to criticism that the bookrunner selection process was not
transparent. Kuczynski says the two banks are the most experienced
in the business, handling more than half of Latin American debt in
the past two years.