TEXT-Fitch affirms Peru at 'BBB'; stable outlook

Fri Nov 9, 2012 11:19am EST

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Nov 9 - Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) and
Country Ceiling for Peru as follows:

--Foreign currency IDR at 'BBB';
--Local currency IDR at 'BBB+';
--Foreign currency short-term IDR at 'F2';
--Country ceiling at 'BBB+'.

The Rating Outlook is Stable.

Peru's ratings are underpinned by its solid macroeconomic performance, the
strength of its economic policy framework and the sovereign's robust external
and fiscal balance sheets. These credit strengths are balanced against high
commodity dependence, still significant levels of financial dollarization, a
narrow government revenue base, large foreign currency exposure of government
debt, and weaker structural factors such as income per capita and institutional
quality.

In spite of softer commodity prices and the sluggish pace of the global economy,
Peru's GDP growth, expected to reach a five-year average of 6.5% in 2012,
continues to outperform the 'BBB' median. Fitch expects Peru's growth to remain
at 6% over the forecast period supported by domestic demand, especially
investment.

Inflation has risen above the central bank's target range in 2011 and 2012.
Peru's monetary policy credibility and inflation record, though, continue to
compare favorably to investment grade (IG) peers, and given recent readings,
inflation could converge to the target range by the end of the year. Fitch notes
that sustained rapid credit growth to private sector, if unchecked, could create
risks to macroeconomic and financial stability. Authorities have reacted by
increasing reserve requirements to curb credit growth, especially in USD.

Despite the changes to the fiscal contribution of the mining sector introduced
by the Humala administration, Peru could receive significant investments in the
mining sector and double its copper production by 2014. Nevertheless, social
conflicts and potential bottlenecks in the energy and regulatory structure could
pose some delays in the implementation of the project pipeline.

Consistent fiscal surpluses and strong growth has led to a decline in the
general government debt to 20% in 2012 (compared with 40% for the 'BBB' median)
and this trend is expected to continue during the forecast period. Fitch
estimates that net government debt to GDP could fall to 8.7% of GDP in 2012,
quite low compared to the peer median. Nevertheless, government debt is subject
to exchange rate risk, as 51% of government debt is foreign currency
denominated. The government has increased its fiscal buffers with resources in
fiscal stabilization fund reaching USD7.2 billion (3.6% of GDP).

The CAD could widen to near 4% of GDP over the next two years driven by
increased import growth and a large deficit in the income account. Nevertheless,
Fitch expects this to be fully financed by net FDI. The sovereign's already
robust net external creditor position has strengthened further, as gross
international reserves have increased YTD to USD62 billion (31% of estimated
2012 GDP), partly made possible by increased external borrowing by the private
sector. External liquidity is likely to continue strengthening, and mitigate
risks related to still high, albeit declining, financial dollarization,
increased private borrowing and high commodity dependence.

Structural factors continue to weigh on Peru's credit profile. Income per capita
and human development indicators lag the 'BBB' median and economic base of the
country is relatively narrow. Moreover, Peruvian institutions are weaker then
those of other IG sovereigns. As exemplified by protests against mining
operations, lack of trust in public institutions and their limited presence in
certain areas create risks for the country's investment prospects and policy
effectiveness.

Further strengthening of the sovereign's external and fiscal balance sheets,
out-performance of growth with respect to peers and continued improvements in
the government's debt composition and financial dollarization would be positive
for Peru's creditworthiness. Over the medium term, progress on social indicators
as well as deepening of political institutions would further increase the
durability of the current economic model and benefit Peru's creditworthiness.
Conversely, policy choices that result in increased macroeconomic volatility,
reduced growth prospects, and sustained deterioration in public and external
credit metrics in the context of adverse term of trade would weigh on Peru's
credit trajectory.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Sovereign Rating Methodology' (Aug. 13, 2012).

Applicable Criteria and Related Research:
Sovereign Rating Methodology
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