Peru Is Default-Swap Darling as Humala No Chavez: Andes Credit

Peru Is Default-Swap Darling as Humala No Chavez
A freighter is towed to the docks at the APM Terminals BV area of the Port of Callao in Lima, Peru. Photographer: Dado Galdieri/Bloomberg

For the first time in four years, the cost of insuring against a default by Peru is falling faster than for any Latin American nation as President Ollanta Humala, a former ally of Venezuela’s Hugo Chavez, embraces investors.

Peru’s five-year credit default swaps have fallen 36.4 percent in the past six months, more than the six larger Latin American economies. The nation’s dollar bonds yield an average 1.24 percentage points more than U.S. Treasuries, the least in emerging markets after Bulgaria, Malaysia and the Philippines, according to JPMorgan Chase & Co.’s EMBI Global index.

Investors anticipate the rally in Peru’s assets will continue as Humala cuts international debt and builds a budget surplus. Foreign direct investment more than doubled to a record $5.4 billion in the first six months and the economy grew at a 6.1 percent pace in the second quarter, the fastest in South America. Default swaps fell 32 percent in the six months through May 2008 and have dropped by 46 percent since Humala lost in presidential elections in June 2006 pledging to seize mining assets in the third-biggest copper producer.

“Peru is one of the investor darlings, not just in Latin America but worldwide,” Jonathan Lemco, a principal of Vanguard Group Inc., which holds Peruvian government bonds, said in a telephone interview from Valley Forge, Pennsylvania. “It’s consistently strong economically, financially and politically. Political uncertainty related to the elections has gone away.”

Sol Rally

The cost to insure Peruvian bonds against default for five years has fallen 70 basis points this year to 100 basis points as of 1:41 p.m. in New York. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

The sol surged to a 16-year high against the dollar last month, helping to boost returns on local currency debt to 22.9 percent this year in U.S. currency terms. That exceeds the 13.4 percent average advance for local government debt in Latin America.

The sol was little changed today after touching 2.5770 versus the dollar on Oct. 22, the strongest level since December 1996, and has appreciated 3.7 percent this year. The advance prompted the central bank to buy more than $12 billion in the currency market to stem gains. The currency will appreciate 1.5 percent next year, according to the median forecast of 11 analysts surveyed by Bloomberg.

Humala, 50, and Finance Minister Miguel Castilla didn’t respond to e-mail and telephone requests for comment.

Chavez Support

While on the campaign trail six years ago, Humala, who like Chavez is a retired army officer, accused foreign companies of looting the country and said he would renegotiate contracts.

Chavez received Humala in Caracas weeks before Peru’s 2006 election and publicly supported his candidacy. Humala proposed following Venezuela’s lead on increasing royalties and taxes on oil output.

Since taking office in July 2011, he’s been meeting with investors in New York, Madrid and Davos, Switzerland, to tout metal, energy and transport projects as he seeks to prolong an investment boom that’s tripled the size of Peru’s economy in a decade to about $200 billion this year.

With foreign investors snapping up Peruvian assets, yields on its dollar-denominated government debt have fallen 0.99 percentage point this year to 3.48 percent, the biggest decline in Latin America after Venezuela, according to JPMorgan’s EMBI Global index.

Asset Values

Moody’s Investors Service raised its rating on Peru one level to Baa2, the second-lowest investment grade, on Aug. 16, citing the government’s backing of the commodities industry and a rebound in business confidence. The grade is the same as Brazil’s and one level higher than India’s rating.

Further increases in the credit rating will hinge on whether Humala can maintain support for mining investments and reduce the nation’s 29 percent poverty rate, according to Pedro Chirinos, vice president for corporate finance at Citigroup Inc.’s local unit.

Social conflicts and potential bottlenecks in energy projects and regulation may delay mining investment, Fitch Ratings said in a Nov. 9 report.

Newmont Mining Corp., based in Denver, said on July 27 that it postponed its $5 billion Minas Conga gold project after deadly protests by Andean farmers concerned that the mine will dry up water supplies.

“The government needs to show that for each Conga, there are one or two cases where investment did go ahead,” Chirinos said in an Oct. 29 interview in Lima. “Mining protests happen because the population doesn’t see these investments in roads and schools. Peru has the money. Now is the time to invest it.”

Copper Surge

Humala’s efforts to defend the mining industry have reassured investors that a 60 percent jump in copper and gold exports since 2006 will continue, according to Morten Groth, who helps oversee $1.8 billion of debt including Peruvian bonds at Jyske Bank A/S in Sikeborg, Denmark.

His administration negotiated a $1.1 billion increase in mining royalties last year, resisting calls from within his own Gana Peru party for a larger increase.

“People in the market did fear what policies he would run, particularly in the mining sector,” Groth said in a Nov. 14 telephone interview. “Humala’s definitely surprised on the positive side.”

On a percentage basis, the decline in Peru’s credit default swaps during the past six months is the steepest among the seven biggest economies in Latin America, making Peru more creditworthy than Brazil, the region’s biggest economy, in the swaps market, data compiled by Bloomberg show.

Local Appeal

That’s helped the nation’s borrowing costs plummet. The yield on Peru’s 6.55 percent dollar-denominated securities due March 2037 has tumbled 0.98 percentage point to 3.75 percent this year, according to prices compiled by Bloomberg. Yields on the notes touched an all-time low of 3.5 percent last month.

About 53 percent of Peru’s $22.5 billion of government bonds was denominated in local currency as of June 30, according to the Finance Ministry’s website. Non-resident investors held 54 percent of the sol debt, versus 43 percent a year ago.

Demand for the debt has increased as rising tax revenue enabled the government to budget a 13.5 percent increase in spending in 2013 while saying it will maintain the fiscal surplus at about 1 percent of gross domestic product this year and next.

Peru’s $39 billion of gross debt last year was equal to 24.6 percent of the economy, the lowest among Latin America’s seven largest economies after Chile, according to the International Monetary Fund. Debt has fallen from 33.2 percent of GDP in 2006.

Mining Investment

A surge in mining investment, led by Xstrata Plc and Aluminum Corp of China Ltd., will double Peru’s copper output by 2017, according to the central bank. Mining and energy will account for 61 percent of the $31.5 billion in investment projects expected through 2014, according to the bank.

“We have projects in the energy sector such as the creation of a petrochemical complex and residential gas connections,” Humala told a Nov. 15 gathering of French business leaders in Paris. “This is an area of opportunities.”

Humala sold $1.1 billion of dollar- and sol-denominated bonds in international markets in January, the country’s biggest issue since 2007, when it sold $1.5 billion. The government won’t issue bonds overseas next year and instead will tap its savings, Castilla said in a Sept. 26 interview.

“The government seems to be credible and politically stable,” Lemco said. “This is a very strong Latin American credit.”

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