New York, July 02, 2014 -- Moody's Investors Service has today upgraded Peru's sovereign
rating to A3 from Baa2. The outlook on the rating was changed to
stable from positive.
The key drivers of today's rating action are the following:
1) Our expectation of continued strengthening of the government's
balance sheet and fiscal framework.
2) Continued structural reform momentum to boost potential output growth
while addressing institutional constraints.
3) Our expectation that economic activity will accelerate through 2016,
underpinning a sustained improvement in credit metrics relative to similarly-rated
peers.
RATINGS RATIONALE
The principal driver of Moody's decision to upgrade Peru's sovereign
rating is the continued strengthening of the government's balance
sheet. Despite a cyclical slowdown in economic activity and a decrease
in prices of key commodity exports, diversification of tax revenues
has helped underpin fiscal health. The fiscal balance remained
in surplus in 2013, coming to 0.7% of GDP, and
the public debt ratio declined to 19.6% of GDP from 20.4%
in 2012. Sustained fiscal surpluses have generated substantial
liquid assets, driving the sovereign's public debt net of
liquid assets to below 4% of GDP. Moody's forecasts
that gross public debt will continue to decline to around 18% of
GDP by 2016. The average maturity of Peru's government debt,
currently 12.7 years, is likely to remain high, underpinning
the sovereign's relatively low financing needs which Moody's
forecasts will average 1% of GDP over the next three years.
Moreover, measures to diversify revenue sources and widen the tax
base will underpin decreased vulnerability to commodity price volatility
and buffer the fiscal accounts. The authorities have enhanced the
asset and liability management framework to better control for financial
risks, complementing the sovereign's conservative approach
to policymaking that is anchored by fiscal rules to limit structural deficits
and support sound public finances.
The second driver underpinning the upgrade is the continuing momentum
for structural reform. In addition to the new laws and recent changes
to the government's fiscal framework, important structural
reforms have been legislated to increase productivity and support Peru's
comparatively high growth rates. These include measures to decrease
transaction costs and fees, increase coverage, and to foster
greater competition in the pension system. There have also been
education and healthcare reforms, tax reforms, and a landmark
civil service reform that promotes meritocracy and efficiency throughout
the public sector.
More recently, as economic activity has slowed somewhat, the
authorities' response has been to pursue further supply-side
focused reforms. On 11 June, the government approved a new
package of structural reforms that is now being debated in congress.
These measures include changes to the tax system, labor market reform,
cutting red tape, and enhancing transparency in public sector procurement.
Moody's believes that these measures will enhance potential output
and private-sector investment, while they also address concerns
in the business community about red tape that have negatively affected
economic sentiment.
As a result of these reforms and continued public infrastructure investment,
we incorporate an expectation that GDP growth in Peru will accelerate
to around 6% in 2015 and 2016 from a bit over 5% in 2014,
underpinning a sustained improvement in credit metrics relative to similarly-rated
peers.
WHAT COULD MOVE THE RATING UP/DOWN
Although upward pressure on the sovereign's rating is unlikely over
the medium term, a substantial increase in income levels or a significant
strengthening of governance indicators, especially related to political
institutions, would contribute to improving creditworthiness.
Conversely, downward pressure on the rating would develop if the
country's external finances deteriorate significantly, or if political
noise increases significantly and the perception of increased corruption
leads to political instability that negatively impacts economic performance
and the government's balance sheet.
COUNTRY CEILINGS
Concurrent with today's rating action, Moody's has changed
Peru's local currency country risk ceiling to A1 from A2,
its long-term foreign-currency bond ceiling to A1 from A3,
and its long-term foreign-currency bank deposit ceiling
to A3 from Baa2, respectively. These ceilings changes reflect
Peru's lower susceptibility to political event risk and the improved
creditworthiness of the sovereign, but remain constrained by moderate
dollarization and a low World Bank rule of law governance indicator.
Peru's short-term foreign-currency bond ceilings have been
raised to P-1 from P-2. The short-term foreign-currency
deposit ceiling remains P-2.
These ceilings reflect a range of undiversifiable risks to which issuers
in any jurisdiction are exposed, including economic, legal
and political risks. These ceilings act as a cap on ratings that
can be assigned to the foreign and local-currency obligations of
entities domiciled in the country.
GDP per capita (PPP basis, US$): 11,124 (2013
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 5.8% (2013 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.9%
(2013 Actual)
Gen. Gov. Financial Balance/GDP: 0.7%
(2013 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.5% (2013 Actual)
(also known as External Balance)
External debt/GDP: 30.1% (2013 Actual)
Level of economic development: Moderate level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 01 July 2014, a rating committee was called to discuss the rating
of the Peru, Government of. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have materially increased. The issuer's
governance and/or management, have materially increased.
The issuer's fiscal or financial strength, including its debt profile,
has materially increased. An analysis of this issuer, relative
to its peers, indicates that a repositioning of its rating would
be appropriate.
The principal methodology used in this rating was Sovereign Bond Ratings
published in September 2013. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Jaime C. Reusche
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's upgrades Peru's rating to A3 from Baa2; outlook stable
