Moody s A3 / S&P BBB+ / Fitch BBB+ 1 Economy: Agriculture 7%, Industry 35%, Services 58%

Transcription

1 Peru Summary Moody s A3 / S&P BBB+ / Fitch BBB+ 1 Economy: Agriculture 7%, Industry 35%, Services 58% Peru is among the strongest of the emerging markets economies, registering average growth of nearly 6%, moderate fiscal deficits, and consistently low inflation over the last decade. This macroeconomic performance was made possible by structural reforms that opened the economy and put in place clear and transparent rules to reduce volatility related to dependence on the mining sector. In 2014, Peruvian authorities adopted countercyclical fiscal and monetary policies. These measures cushioned the impact of the deterioration in global credit conditions, but growth has slowed, inflation has picked up, fiscal accounts have weakened, and debt levels have risen. President Pedro Pablo Kuczynski, who has been in office since mid-2016, is pursuing a reform agenda aimed a decreasing informality, streamlining the tax system, and promoting foreign investment. However, Kuczynski s agenda is at the mercy of the opposition-controlled legislature, which has slowed reforms and undermined governability. Despite these obstacles, Kuczynski s political opponents share his market-friendly orientation. Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) 6,492 6,588 6,174 6,199 6,616 7,129 Nominal GDP (USD Billions) Real GDP (%) CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (# of imports) Foreign Reserves (% of GDP) As of November Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Lazard, Central Bank of Peru, Haver Analytics, IMF, Ministry of Economy and Finance, NSI 423

2 Lazard Emerging Markets Debt Rating History Below is a history of the country s foreign and local currency ratings by the major agencies dating back to We have also included a chart of the country s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency Local Currency A A A- BBB+ BBB A- BBB+ BBB- BBB BB+ BB BB- BBB- BB+ B BB Moody s S&P Fitch Moody s S&P Fitch As of December Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s Bond Spreads Local Yield Peru 2012 EMBIGD Peru 2012 GBI-EM Global Div As of December Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 424

3 Peru Strengths Strong Economic Fundamentals Over the past two decades, Peru has adopted a new market-friendly constitution, implemented a series of micro- and macroeconomic reforms, and defeated the Shining Path and Tupac Amaru Revolutionary Movement rebel groups, whose terrorist activities had rendered large swaths of the country inaccessible to foreign investors. These measures contributed to an economic boom, with Peru registering some of the highest GDP growth rates in the world in the mid-1990s. Over the past decade, foreign direct investment (FDI) has surged; investment has risen from 18% to 22% of GDP; public debt declined from 49% to 25% of GDP; and poverty levels more than halved, from 59% to less than 21%. 2 Peru also profited from the commodity boom from 2000 to 2014, thanks to the country s abundant natural resources in the mining, agricultural, fishing, and energy sectors. In recent years, Peru has experienced a terms-of-trade shock associated with the end of the commodity boom, which has led to a deceleration in economic activity. The slowdown was more rapid and forceful than expected in 2014, particularly early in the year, and the government responded with countercyclical fiscal and monetary policies aimed at stimulating activity. Although growth is gradually recovering, the underlying fundamental strength of the economy has allowed the government to cushion the impact of the deteriorating global environment. Growth in the coming years will be driven by ongoing fiscal stimulus, the inauguration of new mining projects, and a slow recovery of domestic demand. Robust Government Balance Sheet Peru has had an enviable fiscal track record over the past decade, registering budget surpluses or only minor deficits until 2015, when the fiscal account deteriorated more sharply as a result of the terms-of-trade shock resulting from declining global commodity prices. Fiscal policy operates under clear structural rules that impose a ceiling on real current expenditure growth and limits the structural nonfinancial public sector deficit to 1% of GDP. 3 During the boom years, the government tended to outperform its fiscal targets, allowing it to generate accumulated savings equal to 9.2% of GDP and funding a fiscal stabilization fund amounting to US$8.3 billion, or more than 4% of GDP. 4 This prudent fiscal management has allowed the government to maintain the stock of public debt at about 25% of GDP. In recent years, the credibility of fiscal guidelines has been undermined by multiple changes or suspensions of the spending rules in response to adverse economic developments. Moreover, compliance with these fiscal rules at the subnational level was often poor. However, a new fiscal responsibility and transparency law went into effect in January 2015 that imposed spending rules for each level of government based on the government s structural deficit target. The new law also formalized the rules surrounding the use of the fiscal stabilization fund, which allowed some of these resources to finance a larger fiscal deficit in 2014 and 2015 to respond to the commodity price shock. The fiscal stimulus program was scheduled to be gradually phased out in 2016, but the newly elected government has opted to slow the pace of fiscal consolidation in order to stimulate economic activity. External Position Peru tends to register current account deficits due to the import of machinery related to the development of the country s mining sector. The external deficit is also magnified by the repatriation of profits by foreign mining firms operating in Peru, although about half the profits generated from FDI over the past decade were reinvested in the country

4 Lazard Emerging Markets Debt The external balance has deteriorated in recent years, owing to the terms-of-trade shock resulting from declining global metals prices. Offsetting these current account imbalances, Peru has benefited for many years from long-term capital inflows, with FDI accounting for the bulk of these flows, averaging nearly 5% of GDP per year over the past decade. 6 During most years, FDI finances the current account shortfalls by a wide margin (with the exception of 2014 and 2015, when FDI fell short of fully financing the current account deficit). These large inflows have contributed to a surge in foreign reserves, which have risen nearly fivefold from US$12.6 billion in December 2012 to US$64.4 billion currently. 7 Reserves amount to 31% of GDP, are more than eight times the amount of short-term external obligations, and are equal to more than 80% of Peru s total external debt. 8 Weaknesses Commodity Dependence The terms-of-trade shock Peru recently experienced represents the downside to the commodity boom the country has enjoyed for years. Peru is among the top global producers of gold and copper, with the mining sector accounting for 12% of GDP. Income from natural resources has accounted for 13% of total government revenue and 40% of local government revenue over the last decade. 9 Traditional goods represent more than two-thirds of Peru s exports, and earnings from all categories of these products, which include fishing, agricultural, mining, and petroleum and natural gas products, fell by double-digit levels in 2015 before recovering in The country is working to diversify the economy, but Peru will continue to be a commodity-driven story in the medium term. High Dollarization Rates Peru s banking system is profitable, liquid, and well-capitalized, with deposits accounting for the bulk of banks funding. Moreover, the banking sector s direct exposure to the commodity sector is relatively low, with only about 10% of banks credit going to the agriculture and mining sectors. 11 However, the Peruvian economy is highly dollarized, a vestige of the country s hyperinflationary past in the 1980s, and this dollarization leaves the financial system vulnerable to sharp exchange-rate depreciation. Credit dollarization has fallen from 70% in 2005 to 28.3% in February ; dollar deposits fell to 43.3% during the same period from more than 50% a year earlier. 12 The government has periodically taken steps to reduce dollarization by introducing higher reserve requirements for foreign-currency deposits, as well as repurchase operations in nuevo soles (PEN) to encourage the substitution of foreign-currency loans with local-currency obligations. Although credit dollarization remains high, regulatory authorities estimate that only 13% of total credit (equal to about 5% of GDP) is exposed to foreign-exchange credit risk. 13 Income Disparity Has Fueled Social Conflicts Although poverty levels in Peru fell from 59% in 2004 to 21% in 2016, there remains a wide disparity between urban and rural areas, with rural areas registering a poverty rate of more than 46%, compared to 15% in urban areas. 14 This inequality has contributed to a tense relationship between the poorer rural population of the highlands and the wealthier population living on the coast, with the rural highland population especially in northern Peru chafing at the concentration of political and economic power in the coastal capital of Lima. The government attempted to address these imbalances by strengthening regional autonomy in 2002, but tensions have flared in recent years, particularly over mining projects located on or near lands owned by indigenous communities. The number of conflicts nearly tripled from 426

5 Peru 76 in late 2006 to 211 by March 2015, with about half turning violent. More than 65% of these conflicts were related to socio-environmental disputes over mining activity. 15 Protests have interfered with government mining activities, such as the Conga mining project, which had the potential to generate an estimated US$2.7 billion of tax revenue but was suspended in 2011 following violent protests by the local community. 16 Weak Political Institutions Peru s political institutions are not welldeveloped, and traditional political parties were widely discredited during the economic crisis of the 1980s. Traditional parties have been replaced by short-term personality-focused organizations established to support the electoral ambitions of individual politicians. This pattern increases the risk of a strong-willed political leader coming to power and implementing capricious policy shifts without effective checks and balances in place. In addition, the presidency, Congress, and the judiciary are traditionally unpopular, and even presidents elected by a wide margin tend to leave office with low approval ratings, which increases the risk of an incumbent adopting populist measures to boost his approval ratings. Despite these shortcomings, Peru has had free and transparent elections for more than two decades, with candidates elected from both the left and right. However, the country s political characteristics make the electoral process highly unpredictable. Polls show rapid fluctuations in candidates popularity, and presidential elections, particularly in recent years, have had surprising results, with last-minute surges in popularity of previously lagging or unknown candidates. President Kuczynski narrowly emerged as a finalist in the April 2016 first-round election after several other candidates were disqualified at the last minute, and he won the June runoff by a margin of only 0.24%, representing just 41,000 votes. This narrow margin of victory, coupled with the President s control of only 14% of the 130 seats in the unicameral Congress, has slowed the pace of economic reforms due to opposition challenges that resulted in the resignation of four ministers since late The entire cabinet was replaced following a congressional vote of no confidence in September. In December, Kuczynski narrowly averted a congressional attempt to remove him from office over corruption allegations stemming from his time as Prime Minister more than ten years ago. This incident will likely weaken his mandate even further and additional charges could be raised. Congressional opposition is likely to continue, particularly as Peru approaches local elections in October Vulnerability to Natural Disasters Between 1993 and 2012, Peru endured 21 natural disasters, including climate-related phenomena like droughts, floods, and landslides, and geophysical events like earthquakes and volcanic eruptions, which caused an annual estimated direct cost equal to 0.05% of GDP. 17 Like many emerging markets countries, Peru experienced an El Niño weather phenomenon in 2015, early 2016, and again in that were among the strongest on record. However, the government adopted preventative measures to deal with the weather phenomenon, and these efforts helped to mitigate the adverse impact. Since 2011, the government has spent 7.3 billion PEN (about US$2.7 billion) to strengthen the country s ability to respond to El Niño and other natural disasters. 18 Peru s budget includes a contingency reserve to provide for unforeseeable events, including 1% of ordinary revenues for natural disasters. 427

6 Lazard Emerging Markets Debt Monetary and Exchange Rate Policy Inflation/Monetary Policy Peru s central bank, Banco Central de Reserva del Peru (BCRP), is an independent institution, and its primary constitutional role is the preservation of monetary stability. BCRP adopted an inflation-target regime in 2002 to fulfill this goal. In order to keep the interbank overnight rate aligned with BCRP s target rate, the central bank conducts open-market operations aiming to inject liquidity using repurchase agreements (repos) with certificate of deposits or treasury bonds and limit the impact of capital flows on money supply through sterilization using reverse repos. Peru s inflation target had been set at 2.5% with a tolerance range of ±1% from 2002 to Since then, the target has been lowered to 2% ±1%. The reference rate is the key tool for the BCRP to achieve its objectives, but the bank is active on setting reserve requirements, an alternative tool to keep monetary stability. Note that Peru has a dual monetary system; hence, reserve requirements are set for both PEN and USD liabilities. The 12-month headline CPI was 2% in October. Core CPI has been trending lower, but remained at the upper bound of the tolerance range in October at 2.5%. We expect inflation to decelerate further below the mid-point of the target in the 1H18, but by the end of 2018, we expect headline CPI to print close to 2.5%. Demand pressures are mixed: the real minimum wage was growing at 6% annualized (2Q17) but unemployment rate was low at 7%. Credit growth has been subdued. The BCRP cut its policy rate by 100 basis points in (through November) to 3.25%. In real terms (policy rate deflated by the 12-month CPI), the policy rate is 1.2%, versus a 10-year average of 0.6%. As CPI moves towards the mid part of the upper band, BCRP should keep rates on hold in The risk bias is for a final cut in 1Q18 due to a potential fall below 2% headline inflation. Exchange-Rate Policy Peru has adopted a managed float exchange-rate regime since the mid-1990s. In order to provide a monetary anchor for an economy plagued by high inflation, a dual monetary system was introduced. The US dollar is used mostly as a store of value for Peruvians while the nuevo sol is the main medium of payment and unit of account. Accordingly, controlling foreignexchange volatility is a priority for the BCRP as it is seen as a necessary condition for financial stability. The BCRP purchases or sells foreign currency in the exchange market through its front office and carries out these operations with the Treasury to prevent excessive volatility in the exchange rate while providing the Treasury with the funds it requires to meet external debt obligations. Dollarization is pervasive in Peru, with US dollar deposits around 40% in September. Peru s basic balance surplus was 1.4% of GDP (2Q17) versus its 1% deficit in 2Q16. FDI inflows were slightly lower at 2.7% of GDP (vs 3.2% 12 months earlier) while the current account deficit narrowed to 1.3% of GDP versus 4.3% in the 2Q16. The improvements in the trade balance surplus due to stronger exports receipts than the previous year (due to both higher volumes and terms of trade) was mostly responsible for the change. The services balance deficit and income account outflows were slightly lower in the period. Financial account inflows remained balanced and allow for some reserve accumulation. FDI was 2.7% of GDP and portfolio inflows were 0.9%. International reserves were $64 billion in October. 428

7 Peru China Represents 23% of Peru Trade; United States 19%; the European Union 13%; Brazil 7%. Following the global financial crisis of 2008, the USD-PEN exchange rate reached a high at 3.53 in February Over a 12-month period through November, USD-PEN has traded in a wide range. The PEN real effective exchange rate (REER) is currently around its 15-year historical average. Adjusted by terms of trade, PEN REER is 3% 5% cheap, in our view. Inflation 10 USD/PEN Inflation Reference Rate As of December Source: Bloomberg REER REER Median since Dec 1999 Median last 10 yrs Median last 5 yrs As of December Source: JP Morgan, Lazard 429

8 Lazard Emerging Markets Debt Country Background Size Capital Population 1,285,216 KM 2 (21st) Lima 31.0 Million Religion Roman Catholic 81.3%, Evangelical 12.5%, Other 6.2% Median Age 28.0 Years Literacy Rate 94.2% Independence 28 July 1821 Political System Government Leadership Next Election 2021 Legislative Brach Presidential Republic President Pedro Pablo Kuczynski Unicameral Congress of the Republic Economy Agriculture 7.6%, Industry 34.7%, Services 57.7% Labor Force Agriculture 25.8%, Industry 17.4%, Services 56.8% Merchandise Exports Copper, Gold, Zinc, Other Metals, Crude Petroleum and Products, Natural Gas, Coffee, Vegetables, Fruit, Apparel, Chemicals Export Partners China 23.5%, United States 17.3%, Switzerland 7.1%, Canada 4.7% Currency Nuevo Sol (PEN) As of November Source: CIA 430

9 Peru Country Timeline 1990 More than 3,000 political murders reported; independent center-right Alberto Fujimori elected president on anti-corruption platform; severe austerity and privatisation programmes launched as inflation reaches 400% Fujimori suspends constitution with army backing; Shining Path leader arrested and sentenced to life imprisonment; new single-chamber legislature elected Fujimori re-elected to second term; people convicted of human rights abuses pardoned Peruvian Congress sacks Fujimori and declares him morally unfit to govern; head of Congress Valentin Paniagua sworn in as interim president Presidential elections: Alan Garcia, a former president, celebrates victory after a second round of voting. His rival, nationalist candidate Ollanta Humala, emerged as the front-runner in the first round Former President Alberto Fujimori is sentenced to 25 years in jail for ordering killings and kidnappings by security forces Ollanta Humala wins presidential elections in the run-off The United Nations highest court defines the maritime boundary between Peru and Chile after an acrimonious dispute between the two neighbors. Judges award Peru parts of the Pacific Ocean but keep rich fishing grounds in Chilean hands Peru withdraws it ambassador from Chile in a row over military espionage. Prime Minister Ana Jara resigns after losing a vote of confidence in Congress over allegations that leading figures in business and politics were spied on Pedro Kuczynski wins presidency, defeating Keiko Fujimori, daughter of jailed former president Alberto Fujimori. Source: BBC 431

10 Lazard Emerging Markets Debt Notes 1 As of November. 2 Peru: Article IV Consultation, International Monetary Fund, IMF Country Report No. 17/166, June, 3 Ibid. 4 As of October. Source: Nota Semanal No. 42, Banco Central de Reserva del Perú, 2 November, 5 Peru: Selected Issues, International Monetary Fund, IMF Country Report No. 15/134, May 2015, Source: Haver Analytics. 7 As of September, Source: Bloomberg. 8 As of October, Source: Banco Central de Reserva del Perú and Lazard Asset Management. 9 Peru: Fiscal Transparency Evaluation, International Monetary Fund, IMF Country Report No. 15/294, October 2015, 10 Nota Semanal No. 42, Banco Central de Reserva del Perú, 2 November, docs/publicaciones/nota-semanal//ns-42-.pdf. 11 Peru: 2016 Article IV Consultation, International Monetary Fund, IMF Country Report No. 16/234, July 2016, 12 Peru: Article IV Consultation, International Monetary Fund, IMF Country Report No. 17/166, June, 13 Peru: 2015 Article IV Consultation, International Monetary Fund, IMF Country Report No. 15/133, May 2015, 14 Ibid. 15 Ibid. 16 Peru: Fiscal Transparency Evaluation, International Monetary Fund, IMF Country Report No. 15/294, October 2015, 17 World Development Report 2014, The World Bank, accessed on December 10, 2015, ces/ / / /wdr-2014_complete_ Report.pdf. 18 Marco Macroeconómico Multianual Revisado, Ministerio de Economía y Finanzas, 29 August 2015, 432

11 Important Information Published on 26 February Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of 24 February and are subject to change. Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Specific to the political, religious and military unrest in Iraq, and as described in this paper, there exists a heightened risk of ongoing armed conflict and subsequent economic, political and social repercussions to all parties involved. Specific to the political and military unrest in Ukraine and Russia, and as described in this paper, there exists a heightened risk of ongoing armed conflict and subsequent economic, political and social repercussions to all parties involved. An investment in bonds carries risk. If interest rates rise, bond prices usually decline. The longer a bond s maturity, the greater the impact a change in interest rates can have on its price. If you do not hold a bond until maturity, you may experience a gain or loss when you sell. Bonds also carry the risk of default, which is the risk that the issuer is unable to make further income and principal payments. Other risks, including inflation risk, call risk, and prepayment risk, also apply. High yield securities (also referred to as junk bonds ) inherently have a higher degree of market risk, default risk, and credit risk. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one s home market. The values of these securities may be affected by changes in currency rates, application of a country s specific tax laws, changes in government administration, and economic and monetary policy. Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in these countries. This document is provided by Lazard Asset Management LLC or its affiliates ( Lazard ) for informational purposes only. Nothing herein constitutes investment advice or a recommendation relating to any security, commodity, derivative, investment management service or investment product. Investments in securities, derivatives and commodities involve risk, will fluctuate in price, and may result in losses. Certain assets held in Lazard s investment portfolios, in particular alternative investment portfolios, can involve high degrees of risk and volatility when compared to other assets. Similarly, certain assets held in Lazard s investment portfolios may trade in less liquid or efficient markets, which can affect investment performance. Past performance does not guarantee future results. This document is intended only for persons residing in jurisdictions where its distribution or availability is consistent with local laws and Lazard s local regulatory authorizations. The Lazard entities that have issued this document are listed below, along with important limitations on their authorized activities. Australia: Issued by Lazard Asset Management Pacific Co., ABN , AFS License , Level 39 Gateway, 1 Macquarie Place, Sydney NSW 2000, which is licensed by the Australian Securities and Investments Commission to carry on a financial services business. This document is intended for wholesale investors only. Canada: Issued by Lazard Asset Management (Canada) Inc., 30 Rockefeller Plaza, New York, NY and 130 King Street West, Suite 1800, Toronto, Ontario M5X 1E3, a registered portfolio manager providing services to non-individual permitted clients. Dubai: Issued and approved by Lazard Gulf Limited, Gate Village 1, Level 2, Dubai International Financial Centre, PO Box , Dubai, United Arab Emirates. Registered in Dubai. International Financial Centre Authorised and regulated by the Dubai Financial Services Authority to deal with Professional Clients only. EU Member States: Issued by Lazard Asset Management (Deutschland) GmbH, Neue Mainzer Strasse 75, D Frankfurt am Main. Hong Kong: Issued by Lazard Asset Management (Hong Kong) Limited (AQZ743), One Harbour View Street, Central, Hong Kong. Lazard Asset Management (Hong Kong) Limited is a corporation licensed by the Hong Kong Securities and Futures Commission to conduct Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities only on behalf of professional investors as defined under the Hong Kong Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) and its subsidiary legislation. Korea: Issued by Lazard Korea Asset Management Co. Ltd., 10F Seoul Finance Center, 136 Sejong-daero, Jung-gu, Seoul, People s Republic of China: Issued by Lazard Asset Management. Lazard Asset Management does not carry out business in the P.R.C and is not a licensed investment adviser with the China Securities Regulatory Commission or the China Banking Regulatory Commission. This document is for reference only and for intended recipients only. The information in this document does not constitute any specific investment advice on China capital markets or an offer of securities or investment, tax, legal or other advice or recommendation or, an offer to sell or an invitation to apply for any product or service of Lazard Asset Management. Singapore: Issued by Lazard Asset Management (Singapore) Pte. Ltd., 1 Raffles Place, #15-02 One Raffles Place Tower 1, Singapore Company Registration Number W, which provides services only to institutional investors or accredited investors as defined under the Securities and Futures Act, Chapter 289 of Singapore. United Kingdom: Issued or approved by Lazard Asset Management Ltd., 50 Stratton Street, London W1J 8LL. Registered in England Number Authorised and regulated by the Financial Conduct Authority (FCA), providing services only to persons classified as eligible counterparties or professional clients under the rules of the FCA. United States: Issued by Lazard Asset Management LLC, 30 Rockefeller Plaza, New York, NY