Peru Bonds, Stocks, Currency Advance as S&P Raises Foreign Credit Rating
Peru’s dollar bond yields fell to a nine-month low while stocks and the currency gained after Standard & Poor’s raised the country’s foreign debt rating.
The yield on the nation’s benchmark 6.55 percent dollar- denominated bond due 2037 fell nine basis points, or 0.09 percentage point, to 4.99 percent at 4:20 p.m. New York time. The bond’s price rose 1.44 cents to 122.36 cents per dollar.
S&P raised Peru to BBB, the second-lowest investment grade, from BBB- and gave the rating a stable outlook, pointing to signs President Ollanta Humala will continue policies that made the country the region’s fastest-growing economy.
“The rally in bonds can continue as long as the government maintains a more or less market-friendly and sensible budget execution and reform program,” said Jaime Valdivia, who helps manage $1.4 billion of emerging market assets at Bluecrest Capital Management in New York. “The upgrade has mostly to do with what Peru has done up to now, and investors will continue to gauge the depth of the government’s commitment.”
Humala, a former army officer who took office last month, has pledged to honor investors’ contracts and spur private investment, distancing himself from vows during the presidential campaign to expand the government’s control of the economy. Peru’s currency rose to a three-year high this month after Humala signaled he will maintain existing economic policies by reappointing central bank President Julio Velarde and picking Luis Miguel Castilla, a Harvard University-trained economist, as finance minister.
“We expect that broad fiscal and monetary policy continuity under Peruvian President Ollanta Humala’s new government will support stronger economic policy flexibility and growth,” S&P’s analysts, including New York-based Richard Francis, said in a statement.
The yield on Peru’s benchmark dollar bond has fallen 75 basis points since Humala won a June 5 runoff election. The Andean country’s rating is one step above those of Brazil, Latin America’s largest economy, Colombia and Panama, which share the BBB- rating.
“The upgrade represents a challenge for us to retain the higher rating and secure a further increase,” Castilla told lawmakers in Congress today.
S&P’s decision’s was influenced by Peru’s agreement with local mining companies last week on a profit tax that will potentially generate 3 billion soles ($1.1 billion) of additional annual revenue for the government, Castilla said.
Peru’s sol strengthened 0.1 percent to 2.7265 per U.S. dollar, from 2.7300 yesterday. That’s the currency’s strongest level since April 2008.
The Lima General Index of stocks climbed 3.4 percent to 20,697.11, a four-week high.
Peru’s economic growth averaged 6.4 percent in the past decade, almost twice as fast as Brazil, as policy makers tapped into a global mining boom while curbing inflation and the budget deficit. Debt in Peru, the world’s third-largest copper and zinc producer, amounts to 24 percent of its gross domestic product, compared with 61 percent in Brazil and 45 percent in Colombia, according to data compiled by Bloomberg.
Investors remain concerned that Humala may enact pledges to change Peru’s constitution to strengthen the government’s role in industries such as development banking, Valdivia said.
“Peru has all the indicators to have a higher rating, and the only constraint is that the political institution is fragile,” said Pedro Tuesta, a former Peruvian central banker who is a senior economist at 4cast Inc. in Washington. “If investors don’t come back because they are still worried about the role of the state in the economy, growth may not continue at 6, 7 percent. That’s an ongoing concern.”
S&P raised Peru to BBB- in 2008 and boosted the outlook to positive from stable in August 2010.
“The government’s commitment to economic stability and a positive investment climate supports the ratings on Peru,” S&P said. “We believe that these factors likely will underpin solid growth through 2013 despite global uncertainties.”
Peru’s local bonds tumbled on June 6 and stocks lost a record 12.5 percent as Humala’s election victory raised concern that he’ll boost state control of the country’s oil and gas reserves and impose a mining windfall tax.
Bonds have since recovered after Humala pledged in his inaugural speech on July 28 to maintain existing policies that will encourage private investment in mining and energy projects. The yield on the benchmark 7.84 percent sol-denominated bond due August 2020 fell nine basis points to 5.56 percent today, according to prices compiled by Bloomberg.
The rally in Peruvian stocks may continue as the upgrade “could lure investors to enter a market with strong fundamentals that has been severely chastised by the bleak external picture and by the worries of a government that has proved to be more pragmatic and market friendly than many initially feared,” said Roberto Flores, an economist at Inteligo SAB, a Lima-based brokerage.
The cost of protecting Peruvian bonds against non-payment for five years fell 5 basis points, or 0.05 percentage point, to 161 yesterday, trading in credit-default swaps show. The default swaps were 9 basis points higher than Brazil’s, narrowing from 68 basis points in April.
The upgrade “represents a vote of confidence in Humala’s government just a few weeks after his inauguration,” Barclays Capital Inc. analysts Alejandro Arreaza and Donato Guarino wrote in a note to investors yesterday. “However, we remain cautious, expecting significant costs in terms of growth because of the political shock that the country experienced after his election.”
S&P yesterday also lifted Paraguay’s rating to BB-, three steps below investment grade, from B+, because an agreement with Brazil to boost its revenue share from a hydroelectric power plant has improved the country’s “fiscal flexibility.”
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