BBVA Says Moody’s Is Outlier as Peru Gain Overdone: Andes CreditJohn Quigley and Andrea Jaramillo
Bond investors are piling into Peru after it was unexpectedly awarded a two-level ratings boost. To Banco Bilbao Vizcaya Argentaria and Barclays Plc, the rally is overdone as the economy posts it weakest growth in five years.
The nation’s dollar-denominated notes have gained 1.1 percent, almost three times the average gain in emerging markets, since Moody’s Investors Service raised Peru’s rating to A3 from Baa2 on July 2, data compiled by Bloomberg show. The two-level increase, triggered by the government’s budget surpluses, was the first awarded to an investment-grade developing country since 2006.
While Moody’s expects President Ollanta Humala’s infrastructure spending projects will help the $200 billion economy rebound, BBVA strategist Carolina Ramirez says weakening Chinese demand for the metals that make up half of Peru’s exports will prove a drag on the bond market. As growth slows for a fourth straight year, a surge in food prices is at the same time fanning inflation, pushing the annual rate above the central bank’s target for the past six months.
“There are prospects for slowing growth, and inflation is above target,” Ramirez, who expects other ratings companies to hold off on following Moody’s move, said in a telephone interview from Bogota. “The rally left the bonds a bit rich. Investors will probably be more cautious.”
Peru’s rating from Moody’s is now in line with that of Mexico and three steps below Chile, Latin America’s most creditworthy nation. Standard & Poor’s and Fitch Ratings both rank Peru BBB+, one level below Moody’s, with a stable outlook.
The sol was little changed at 2.78 per U.S. dollar at the close in Lima, according to Datatec prices.
Yields on Peru’s dollar bonds due 2019 have fallen 0.08 percentage point to 2.25 percent since the ratings boost. The securities now yield 0.06 percentage point less than similar-maturity Mexican notes. The gap was 0.11 percentage point on July 3, its widest since October 2013.
After expanding at an average rate of 6.3 percent in the past decade, the fastest in South America, Peru’s growth will slow to 5.3 percent this year, according to the median estimate in a Bloomberg survey of economists. Moody’s said in its July statement that the expansion will rebound to about 6 percent in 2015 and 2016.
“We’re not as bullish as Moody’s in terms of the growth prospects,” Donato Guarino, a credit strategist at Barclays, said in a telephone interview from New York. Placing Peru in the A rating category came “much sooner than expected. I would rather position in other credits within the region,” he said.
The economy expanded just 2 percent in April from a year earlier as the mining and construction industries contracted. Prices for copper, Peru’s biggest export, have fallen 4.7 percent this year after a 7.2 percent drop in 2013 as demand from China slumps.
At 3.45 percent, annual inflation is above the central bank’s goal of 1 percent to 3 percent.
Jaime Reusche, an analyst at Moody’s, said Peru has taken steps to make itself less vulnerable to swings in prices for raw materials. The Andean nation has cut debt as a percentage of gross domestic product to a record low 20 percent and posted a budget surplus last year even amid the economic slowdown.
“The economy’s not immune from volatility in commodity prices, but it’s Peru’s fiscal accounts that seem to have become more resilient against price swings,” Reusche said in a July 7 telephone interview from New York. “We try to look beyond the cycle. The way the authorities responded shows a lot of institutional maturity in terms of starting to pursue supply-side reforms.”
On June 11, Humala proposed legislation to forgive some back taxes, accelerate public works and boost investment in mining, hydrocarbons and telecommunications.
The measures may help pave the way for additional upgrades, according to the Finance Ministry.
“The structural reforms being implemented will fuel economic growth, in a context of responsible and sustainable management of the public finances, which will translate into improvements in the different indicators that ratings agencies monitor,” the Finance Ministry said in an e-mailed response to questions.
Yields on Peru’s 2019 bonds dropped 1.35 percentage points since Humala took office in July 2011. The cost to insure the country’s debt against default for five years fell 0.45 percentage point to 0.8 percentage point in the same period.
The two-level increase is “unjustified,” and the gains in Peru’s bonds are “excessive,” said Jane Brauer, a strategist at Bank of America Corp.
“We remain bearish on Peru,” she said by phone from New York. “We would not expect that the market price the bonds at that quality.”