Peru's Debt Rating Raised to Investment Grade by S&P

(From bloomberg.com)

By Andrea Jaramillo

July 14 (Bloomberg) -- Peru's foreign-currency debt rating was raised to investment grade by Standard & Poor's as the South American country pays down foreign debt and domestic demand buoys economic growth.

S&P raised Peru's credit rating to BBB-, the lowest level of investment grade, from BB+. The rating company also said it increased the nation's local currency long-term credit rating to BBB+ from BBB-.

``The upgrade is supported by the significant decline in Peru's fiscal and external vulnerabilities,'' S&P's credit analyst Sebastian Briozzo said in a statement. ``Economic growth has diversified over the last three years evolving from a path mostly driven by external demand into a more complex structure with more reliance on dynamic domestic demand.''

President Alan Garcia has taken advantage of a jump in revenue from metals exports, surging economic growth and the strongest exchange rate in a decade to buy back $1.3 billion in debt earlier this year and invest in infrastructure. The economy expanded 9 percent last year, its fastest pace since 1994.

``It's great news for the Alan Garcia administration, which has been focusing vastly on improving debt ratios,'' said Claudia Calich, who manages $1 billion in emerging-market debt for Invesco Inc. in New York.

`Positive at the Margin'

Peru this year could pay ahead of schedule $1.1 billion to the World Bank and Inter-American Development Bank, the government has said. The nation plans to reduce its foreign debt to the equivalent of 13 percent of gross domestic product this year, from 18.4 percent at the end of 2007.

Fitch Ratings in April raised the country to investment grade while Moody's Investors Service rates the country Ba2, two levels below investment grade.

``The news is positive at the margin, but we probably won't see a massive rally since part of it was already priced in with the Fitch upgrade,'' said Calich.

The average yield gap between Peru's dollar-denominated bonds and U.S. Treasuries widened 4 basis points, or 0.04 percentage point, to 2.10 percentage points, according to JPMorgan Chase & Co.'s benchmark emerging-market debt index.

The announcement is positive for the sol, Win Thin, a New York-based currency strategist at Brown Brothers Harriman & Co., wrote in a report to clients today.

Peru's sol rose 0.3 percent to 2.8235 per dollar, from 2.8325 on July 11.

``We look for further sol gains, especially after the central bank hiked rates'' this month, Win wrote.

Banco Central de Reserva del Peru last week raised the overnight lending rate a quarter-percentage point to 6 percent to stem inflation. The bank also raised minimum reserve requirements for bank deposits in an effort to slow credit growth.

To contact the reporter on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net

Last Updated: July 14, 2008 15:16 EDT