Peru Trades A-Rated in Swaps Market as `Scorching' Growth Lures Investment
Peru, the Latin American economy on pace to grow the fastest in 2010, is poised for as many as two credit-rating upgrades after the government cut debt, extended maturities and lured investment, credit-default swaps show.
The cost of protecting Peruvian bonds against non-payment for five years tumbled 46 basis points, or 0.46 percentage point, to 146 in the past year, according to data compiled by CMA DataVision. Swaps for Bahrain, whose debt is rated A by Standard & Poor’s, four levels higher than Peru’s BBB-, cost 173 while contracts for South Africa, ranked three levels higher, trade at 196.
Investors are betting Peru will win rating increases after the International Monetary Fund estimated the commodities-driven economy will expand 6.3 percent this year amid rising foreign- direct investment in mining and energy and record gold prices. President Alan Garcia, who defaulted on debt when he presided over the government in the 1980s, sold local bonds maturing in 2042 this year and issued dollar notes due in 2033 in exchange for securities maturing as soon as 2012.
“Any way you break down the credit profile for Peru, it’s very solid and almost a given that Peru’s going to move up in the credit ratings,” said Alberto Boquin, a Latin America debt and currency strategist at Bank of America Corp., said in a telephone interview from New York. Peru’s rating may rise by two levels in the next 18 to 24 months, Boquin said.
Fitch Ratings lifted its outlook on Peru’s rating to positive on June 2, citing its “solid” economic recovery.
Moody’s Investors Service increased Peru’s rating to Baa3, the lowest investment grade and in line with the BBB- ranking from S&P and Fitch, in December. Moody’s is unlikely to raise Peru soon as “not much has changed since” it last upgraded the country, New York-based analyst Mauro Leos said in a telephone interview. Sebastian Briozzo, an S&P analyst in Buenos Aires, didn’t return a telephone call seeking comment.
Foreign-direct investment in mining and energy projects helped push growth to 6 percent in the first three months of the year from the year-earlier period, the fastest since the final quarter of 2008, according to government data.
Investment will jump to $7 billion this year and a record $8.4 billion in 2011 from $4.4 billion in 2009, according to Charlotte-based Bank of America.
Commodities account for 75 percent of Peruvian exports. Gold, the country’s second-biggest export, rose to a record $1,254.50 an ounce yesterday. Peru is the world’s second-largest copper exporter after Chile, third in zinc and tin, and first in silver.
“Peru has seen a scorching growth recovery” since the economy bottomed with a 2.4 percent annual contraction in June 2009, Morgan Stanley economist Daniel Volberg wrote in a June 7 report. Morgan Stanley boosted its forecast for growth this year to 7 percent from 4.9 percent.
At 146 basis points, it costs $146,000 to protect $10 million of Peruvian debt against default for five years compared with a cost of $626,800 on Oct. 23, 2008, a month after the collapse of Lehman Brothers Holdings Inc. eroded demand for emerging-market assets.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Peru’s foreign debt equals 29.6 percent of gross domestic product, down from 38 percent in 2005 and 52.5 percent a decade ago, Fitch said in a report yesterday. Short-term debt equals 6.4 percent of GDP, Fitch said.
Peru merits further upgrades after Garcia tapped fiscal savings for a $4.8 billion stimulus spending plan and the central bank cut interest rates to a record low to weather the global economic crisis, said Carola Sandy, an economist with Credit Suisse Group AG in New York. Moody’s, Fitch and S&P will likely wait until after April presidential elections to raise Peru’s rating, she said.
The poverty rate, which has remained above 30 percent since Garcia, 61, took office, is fueling voter discontent. In 2008, the most recent year for which statistics are available, poverty was 36.2 percent in Peru, compared with 25.8 percent in Brazil, according to the United Nations Economic Commission for Latin America.
Peruvians’ dissatisfaction with Garcia may boost the candidacy of Ollanta Humala, an ally of Venezuela’s Hugo Chavez who proposed raising corporate taxes and making the government a partner in all mining and energy contracts when he ran in 2006, Sandy said.
Humala, 46, had the support of 13 percent of those surveyed by Ipsos, tied with former President Alejandro Toledo. Lima Mayor Luis Castaneda, with 22 percent support, is the frontrunner. He’s followed by Congresswoman Keiko Fujimori, who has vowed to pardon her father, ex-President Alberto Fujimori, in jail for his role in paramilitary massacres of rebel sympathizers.
Rating companies are probably waiting to see who leads the next government before moving to upgrade the country, Economy Minister Mercedes Araoz said at the Bloomberg Peru Economic Summit in Lima.
“It’s dangerous to upgrade before Garcia leaves office because you don’t know what’s going to happen down the road and if someone like Humala gets votes in the elections,” said Pedro Pablo Kuczynski, who was the country’s finance minister from 2001 to 2005 and is now a senior adviser to the Rohatyn Group. “Peru’s debt rating will be upgraded.”
‘Better Than Brazil’
The Andean nation’s dollar bonds yield on average 206 basis points more than U.S. Treasuries, compared with 242 for Brazil, according to JPMorgan Chase & Co.’s EMBI+ index. Brazil and Peru have the same investment grade rating from S&P.
“The market views Peru as better than Brazil because we have a much lower public debt and we’re a much more open economy,” Kuczynski said.
Peru’s mostly longer-term maturities and “pretty solid” mix of local and international bonds mean it’s less likely to face the financing squeeze that pushed down ratings in countries including Greece, Italy and Spain, Boquin said.
Italy needs 1.07 trillion euros ($1.28 trillion) by 2013 to refinance maturing debt, Spain must raise 546 billion euros and Greece needs 152.6 billion euros, according to a Bank of America estimate in May. Portugal and Ireland each have to raise about 80 billion euros, the data show.
“Peru has issued debt so far out that it isn’t going to have the same issue that other countries have,” Boquin said. “Peru doesn’t really have to worry about anything for the next decade or so.”