Monday, July 21, 2008

Peru gets investment grade rating

Peru's foreign currency debt rating was lifted to investment grade by Standard & Poor's on 14 july. The agency, which raised the ratings to BBB- from BB+, cited the significant decline in Peru´s fiscal and external vulnerabilities as reasons for the upgrade. The move by S&P follows Fitch Ratings upgrade in March of Peru's long-term foreign currency issuer default rating to investment grade.

Peru's low level of inflation and strengthening macroeconomic fundamentals are trends that S&P expects "will remain in place over the medium term despite an increasingly riskier international environment and the continuation of challenging local politics." The upgrade is supported by the significant decline in Peru's fiscal and external vulnerabilities,'' S&P' said in a statement. ``Economic growth has diversified over the last three years evolving from a path mostly driven by external demand into a more complex structure with more reliance on dynamic domestic demand.''

Strong domestic demand and exports of minerals have helped push the Andean country's economy up 9% in 2007. The economy has grown at an average rate of 5% over the last five year and is expected to grow at 8% in 2008.

Peru this year could pay ahead of schedule $1.1 billion to the World Bank and Inter-American Development Bank, the government has said. The nation plans to reduce its foreign debt to the equivalent of 13 percent of gross domestic product this year, from 18.4 percent at the end of 2007.

Meanwhile, inflation is running at 5.7% so far this year, above the central bank's inflation target of 1% to 3%. The central bank in July raised its benchmark interest rate to 6% in a bid to slow the impact of rising prices for commodities.

Peru is the fourth country in Latin America to receive investment grade. Chile was the first country to get investment grade in 1992, followed by Mexico in 2000 and Brazil in May 2008. Colombia is the likely next candidate for this status.

A common denominator of policymakers in the four countries was a sustained effort to diversify their national debt structure and convert a greater portion of it into national currencies as opposed to U.S. dollars. According to a study by the IDB Research Department, the foreign currency composition of the public debt of the seven largest economies of Latin America fell from 65 percent in 1998 to 38 percent in 2007. More than 80 percent of Mexico’s debt is in local currency.In Brazil, local currency accounted for about 92 percent of the country’s sovereign debt in 2008 compared with 60 percent in 2000.Peru’s debt composition moved from 6.3 percent in local currency in 2000 to more than 36 percent in 2008.

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