April 3, 2008 / 5:35 PM / 11 years ago

Economy not overheating: Peru finance minister

LIMA (Reuters) - Peru’s fast-growing economy is not in danger of overheating but the government could further tighten spending if inflationary expectations deteriorate, its finance minister said on Thursday.

Peru's Finance Minister Luis Carranza speaks during an interview as part of the Reuters Latin America Investment Summit in Lima April 3, 2008. REUTERS/Mariana Bazo (PERU)

Peru, which grew 9 percent last year and is expected to grow 7 percent this year, has taken a series of measures recently to curb inflation as demand surges. It has cut tariffs, taxes and public spending while raising interest rates and reserve requirements for banks.

“We don’t think we are in the process of having the Peruvian economy overheat,” Finance Minister Luis Carranza said. “We want to make sure that domestic demand doesn’t grow excessively and that inflation expectations stay in check.”

Carranza, who spoke at the Reuters Latin America Investment Summit a day after Fitch Ratings lifted its credit rating for the Andean country to investment grade, said surging public and private investments are creating new capacity that will ensure long-term growth and price stability.

But he said Peru could raise its fiscal surplus target for this year above 2 percent of gross domestic product if an uptick in prices causes inflationary expectations to worsen.

“If we observe inflationary factors and expectations change or cause contagion of food prices, we will react with a bigger fiscal restriction,” Carranza said.

Peruvian food prices have been rising at an annual pace of around 9 percent as higher prices for imported commodities like wheat drive up consumer costs.

The inflation index the central bank uses rose nearly 4 percent last year, above its target of 2 percent plus or minus a one percentage point tolerance band.

This year, inflation of about 4 percent is expected after prices rose more than 2.18 percent in the first three months of this year. Inflation was more than 1 percent in March and is expected to peak in May and then start to slow.

Surging growth and sound fiscal policies allowed Peru to reach investment grade before neighboring Brazil and Colombia, while moving closer to higher-rated Latin American credits like Mexico and Chile.

INVESTMENT GRADE, DEBT

Fitch on Wednesday raised its foreign currency sovereign credit rating to “BBB-“ from “BB+” with a stable outlook.

Standard & Poor’s rates Peru at “BB+”, one notch below investment grade, while Moody’s Investors Service rates Peru two notches below at “Ba2”.

“The economic performance we’ve been having is very positive and at some point the two other agencies will feel more comfortable about giving us investment grade,” he said.

Further upgrades would give Peru wider access to cheaper, longer-term debt and lure more investments from abroad.

Carranza plans to pay down about $1.1 billion in debt to the World Bank and the Inter-American Development Bank this year, mainly using money from the national treasury.

He said Peru may also prepay other outstanding bonds or sell new ones this year to improve its debt profile if market conditions are favorable.

“We aren’t ruling out the possibility of doing other operations to re-profile the debt,” he said.

Peru’s long-dated global bond due 2037 PERGLB37=RR was up 1.5 points to 105.250 bid on the country’s positive credit outlook and commitment to policies favored by investors.

Peruvian President Alan Garcia, a former leftist, now embraces mainstream economic policies and says they will help the poor.

Rapid growth and improving economic fundamentals have allowed Peru to lower its poverty rate since 2000 from about 50 percent to some 42 percent.

Peru's Finance Minister Luis Carranza speaks during an interview as part of the Reuters Latin America Investment Summit in Lima April 3, 2008. REUTERS/Mariana Bazo

“The fundamental objective of the president is to reduce this number to 30 percent by 2011,” Carranza said.

($1=2.73 Peru soles)

(For the summit blog: summitnotebook.reuters.com/)

Reporting by Marco Aquino and Terry Wade; editing by Gary Crosse

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