New York, August 19, 2008 -- Moody's Investors Service has upgraded the foreign-currency bond rating of the government of Peru to Ba1 from Ba2 in light of significant and sustained reductions in foreign-currency related credit vulnerabilities.
The foreign-currency country ceiling for bonds and notes was also upgraded to Baa3 from Ba1, and the country ceiling for foreign-currency bank deposits was raised to Ba2 from Ba3. Also, the short-term foreign-currency bond ceiling was raised to Prime-3 (P-3) from Not Prime (NP). All ratings have a stable outlook.
The upgrade was prompted by steady improvement in Peru's sovereign credit profile driven by a continued and accelerated strengthening in the balance sheet of the government and the local banks," said Moody's Vice President-Senior Credit Officer Mauro Leos. "Dollarization of both government debt and bank deposits continues to trend downwards."
Improvements observed to date, coupled with the expectation that continued favorable trends will reinforce persistent though gradual reductions in Peru's foreign currency exposure, support the narrowing of the gap to one notch between the government's foreign-currency rating (Ba1) and its higher domestic-currency rating (Baa3) with Moody's latest rating action.
He said the reduction in the share of foreign-currency denominated government debt has been a direct result of liability management operations carried out by the authorities. Prepayments of external debt obligations have been funded by long-dated domestic debt placements and by out-of-pocket cash coming from the Peruvian Treasury. "As a result, the currency composition of the government debt has improved markedly in recent years," said Leos.
The degree of financial dollarization in Peru's banking system, measured by the share of dollar-denominated loans and deposits, has trended downwards in recent years. "More important," Leos noted, "the ongoing de-dollarization process accelerated markedly during 2008 in terms of both deposits and loans."
In line with this development, for the first time in more than two decades, dollar deposits account for less than half of the deposit base, a condition that reduces currency mismatches and credit risks associated with contingent liabilities stemming from financial dollarization.
"Peru's foreign-currency ratings incorporate an export profile dominated by traditional, mostly mining, exports, which introduces medium-term vulnerabilities should commodity prices deteriorate seriously," said Leos. "Still, the current ratings adequately capture those credit risks as they take into consideration compensating factors, including a robust international reserve position that leaves Peru on the verge of becoming a net external creditor country," said Leos.
He indicated that, while lower, the degree of dollarization prevailing in Peru remains high in absolute and relative terms. In particular, Leos noted that "although current trends point towards a more balanced currency structure of government debt in the coming years, more than half of the debt will continue to be denominated in foreign currency." "This situation introduces credit vulnerabilities and marks an important difference with respect to other governments where this condition is not present," said Leos.
In spite of recent improvement in social indicators, Peru continues to face significant socio-economic challenges, including the need to more aggressively reduce poverty levels that reflect regional inequalities. Those conditions pose potential political risks to the country's medium-term outlook and, in Moody's opinion, continue to operate as important constraints on the ratings.
Unaffected by today's actions are the governments' local-currency government bond rating (Baa3) and Peru's A3 country ceiling for local currency bonds. Both ratings have a stable outlook. |
