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Fitch Affirms Peru's FC IDR at 'BBB+'; Outlook Stable
March 24, 2017 / 4:26 PM / in 8 months

Fitch Affirms Peru's FC IDR at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, March 24 (Fitch) Fitch Ratings has affirmed Peru's sovereign ratings as follows: --Long-Term Foreign Currency IDR at 'BBB+', Outlook Stable; --Long-Term Local Currency IDR at 'A-', Outlook Stable; --Senior unsecured Foreign- and Local-Currency bonds at 'BBB+' and 'A-', respectively; --Short-Term Foreign and Local Currency IDRs at 'F2' and 'F1', respectively; --Country Ceiling at 'A-'. KEY RATING DRIVERS Peru's creditworthiness is underpinned by its track record of macro policy credibility, consistency, and flexibility, which has delivered macroeconomic and financial stability. Strong fiscal and external balance sheets balance the country's high commodity dependence, low government revenue base, financial dollarization and structural constraints in terms of income per capita, social indicators and institutional quality. The external finances have adjusted more quickly than expected. The current account deficit narrowed to 2.8% of GDP in 2016 from the 4.7% of GDP average in 2013 to 2015, and it was fully financed by net FDI. Rising copper export volumes and recovering prices have supported exports while Sol depreciation in 2015-2016 compressed imports. Fitch expects the current account balance to reach a similar 2.3% of GDP deficit in 2017, again financed by FDI. Peru maintains a strong external balance sheet, reducing risks from external vulnerabilities including its high commodity dependence, high participation of non-resident investors in the local government debt market (equivalent to 11% of net international reserves and treated by Fitch as an external liability), and financial dollarization. The country's moderate external debt and strong external liquidity buffer support its net external creditor position, equivalent to 7% of current external receipts, stronger than the 'BBB' median. Net international reserves of USD62.5 billion cover nearly 14 months of current external payments, double the 'BBB' median. Public finances have continued to be prudently managed under Peru's fiscal framework by the Kuczynski administration, which entered office in July 2016. The government posted a 2.3% of GDP deficit in 2016, offsetting a 1.5pp fall in current revenues with extraordinary revenue and expenditure cuts in 2H16. Fitch expects the general government deficit to remain within the 2.5% of GDP target for the non-financial public sector (NFPS) deficit in 2017. Higher corporate income tax revenues and one-off gains from a tax amnesty on foreign assets will compensate for higher expenditure, including public infrastructure investment and natural-disaster relief. The central government expects to meet its 2017 financing needs mainly with local market issuance and borrowing from multilateral development banks. The Kuczynski administration has adopted changes to Peru's fiscal rule by instituting a nominal fiscal target in lieu of the structural balance target and current-expenditure growth limits. The underpinnings of Peru's fiscal framework remain unchanged including medium-term budgeting, a deficit ceiling at 1% of GDP in normal years (to which the government expects to converge by 2021), a NFPS debt ceiling at 30% of GDP, and oversight by a fiscal council. Peru's general government (NFPS) debt, 23.8% of GDP in 2016, is well below the 'BBB' median, 41.1% of GDP. The debt burden is vulnerable to exchange rate depreciation as 46% of government debt is denominated in foreign currency. The government implemented a liability management operation in September 2016 to reduce the share of U.S. dollar-denominated debt. Plans to establish Euroclear trading for its Sol-denominated bonds would enhance their liquidity and aid the central government's strategy to maximize Sol-denominated financing. The modest fiscal stabilization fund of 4.2% of GDP and deposits of more than 10% of GDP provide the government financing flexibility. Peru's macro performance remains firm with 3.9% real GDP growth in 2016. Its growth performance in the context of macroeconomic stability surpasses the 'BBB' median and is one of the strongest in South America. Inflation, which averaged 3.6% in 2016, reduced to 3.25% in February with one- and two-year expectations anchored within the central bank's 2%+/-1% target band. However, Fitch expects Peru's economy to decelerate to 3.5% in 2017, less than forecast at the previous rating review in September 2016. The structural shock from declining mining investment has lowered Peru's economic growth potential over the past three years. Two additional shocks have affected 2017 growth prospects, with further downside risk to growth this year. Investigations into corruption under previous administrations linked to the Odebrecht construction company have delayed some government infrastructure investments. El Nino-related coastal flooding and damage to transportation infrastructure, housing and crops is expected to lower growth. In March, the government announced new economic stimulus and disaster recovery spending measures (funded within its 2017 budget parameters) to complement the red-tape reduction, small-business facilitation, and infrastructure investment measures undertaken in 2H16. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Peru a score equivalent to a rating of 'BBB-' on the Long-term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: --Macro: +1 notch: Peru's policy framework has developed a track record of policy coherence and credibility leading to entrenched macroeconomic and financial stability, and generated counter-cyclical fiscal policy space. ---Public finances: +1 notch: Peru's rules-based fiscal stabilization fund and substantial government deposits augment the government's financing flexibility. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The main risk factors that, individually or collectively, could trigger a negative rating action are: --Failure to consolidate public finances resulting in a faster-than-expected rise in the general government debt burden or the erosion of fiscal buffers; --Weakening investment and growth prospects; or --A negative external shock - such as a sharp decline in the price of Peru's main commodity exports - resulting in weaker macroeconomic performance and deterioration in fiscal and external balance sheets. Conversely, the main factors that could lead to a positive rating action are: --Higher growth that reduces Peru's income gap and improves social indicators relative to higher-rated sovereigns; --Strengthened institutional capacity that improves the effectiveness of economic and social policy implementation; --Significant improvements in Peru's fiscal and external balance sheets and material reduction of financial dollarization. KEY ASSUMPTIONS Fitch expects China's economy, a major mining export partner, to grow 6.3% in 2017 and 5.7% in 2018. Fitch assumes mining production, which expanded in 2016, will begin to plateau in 2017 to 2018. Fitch assumes copper prices will stabilize at current levels through the end of 2017 and moderately improve in 2018. Contact: Primary Analyst Kelli Bissett-Tom Associate Director +1-212-908-0564 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Richard Francis Director +1-212-908-0858 Committee Chairperson Charles Seville Senior Director +1-212-908-0277 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Related Research: Fitch: Peru Growth Depends on Streamlining Public Administration (February 2017) Additional information is available on Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021076 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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