CHALLENGES FACING PERU S NEW GOVERNMENT ADMINISTRATION Ambassador Felipe Ortiz de Zevallos
Alan Garcia s inaugural speech One of the goals of this administration is to set the conditions for Peru to achieve investment grade, the set of financial conditions that allows a country the access to less expensive capital (July 28, 2006)
Agenda Investment grade Set of conditions Peru s situation Further steps
Investment grade is a financial concept Quality of a company's or country s credit The company or country must be rated at "BBB" or higher by main international rating organizations to be considered an investment grade issue Investment grade D DD DDD C CC CCC B BB BBB A AA AAA - + - + - + - + - +
Peru s has been improving its risk classification since 2001 but still hasn t reached investment grade Date 31 Aug 2006 Foreign currency BB+ 18 Nov 2004 BB 18 Apr 2001 BB- 14 Oct 1999 BB Source: Fitch Ratings
Latin America sovereign bonds Classification of Risk Rating Organizations Moody's S&P Fitch 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 Colombia Ba2 Ba2 Ba2 Ba2 Ba2 BB BB BB BB BB BB BB BB BB BB Venezuela B3 Caa1 B2 Caa1 Caa1 CCC+ B- B B B+ B B- B+ B- BB- Argentina Ca Caa1 Caa1 Caa1 B3 SD SD SD B- B DDD DDD DDD DDD B Brasil B1 B1 B1 Ba3 Ba2 B+ BB- BB- BB- BB B BB- BB- BB- BB Chile Baa1 Baa1 Baa1 Baa1 A2 A- A A A A A- A- A- A- A México Baa2 Baa1 Baa2 Baa2 Baa2 BBB- BBB BBB- BBB BBB BBB- BBB- BBB- BBB BBB Perú Ba3 Ba3 Ba3 Ba3 Ba3 BB- BB BB BB BB BB- BB BB BB BB+ Uruguay B3 B3 B3 B3 B3 B- B- B B B B- B- B B B+ Source : Latin Focus, Moody's, Standard & Poor's, Fitch Ratings, Bancóldex, Deutsche Bank Chart taken from Liliana Rojas presentation (Center for Global Development) for the Grupo APOYO annual meeting, September 2006
Set of conditions for a country to achieve investment grade Economic conditions Social environment Politics and institutions
Peru has been improving its macroeconomic performance 2003 2004 2005 2006 Real GDP growth (%) 3.9 5.2 6.5 6.6 Inflation (%) 2.3 3.7 1.6 2.1 Gov debt (% of GDP) 47.3 43.3 39.8 34.4 Net external debt/ Current external receipts 146.3 107.0 60.1 40.1 Source: BCRP, Fitch Ratings
Growth, investment rates and terms of trade has grown in the last years -10-20 Growth Drivers (% change) 30 20 10 0 1995 1996 Source: BCRP, Fitch Ratings 1997 1998 1999 2000 2001 2002 2003 2004 2005 Investment GDP Terms of Trade
Peru has started showing surplus on public budget and on external transactions PUBLIC BUDGET BALANCE (% GDP) BALANCE OF PAYMENTS (% GDP) 8,0 6,0 4,0 2,0 0,0-2,0-4,0-6,0-8,0 I III I III I III I III I III I 2001 2002 2003 2004 2005 2006 3,0 2,0 1,0 0,0-1,0-2,0-3,0-4,0-5,0 I III I III I III I III I III I 2001 2002 2003 2004 2005 2006 Source: BCRP, APOYO Consultoria
Peru s debt ratios has been decreasing and even surpassing BBB median 250 Net External Debt (% of Current External Receipts) 60 General Government Debt (% of GDP) 200 55 50 150 45 40 100 35 50 30 25 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Peru BB median BBB median 20 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Peru BB median BBB median Source: Fitch Ratings Sovereign Comparator
Peru s current social environment High approval level of short-term decisions People s credibility on President Garcia s keeping promises adequate Social conflicts and violent demonstrations still a concern. Conflict at local, not at national level
Confidence and Employment APOYO S CONFIDENCE CONSUMER INDEX INDICCA URBAN EMPLOYEMENT RATE IN COMPANIES OF 10 OR MORE EMPLOYEES 65.0 10.0 60.0 55.0 5.0 50.0 45.0 0.0 40.0 35.0-5.0 30.0 F A J A O D F A J A O D F A J A O D F A J A O 2003 2004 2005 2006-10.0 E A J O E A J O E A J O E A J O E A J O E A J 2001 2002 2003 2004 2005 2006 Source: APOYO Consultoria Source: MTPE Lima Metropolitana Provincias
Political environment Good start of new administration without political disturbance High expectations across socio economic levels (57% approval; 24% disapproval) Diversity in cabinet appointments pointing toward a continuity of the macroeconomic policies Congress has shown adequate performance, but could become a threat on future economic policies
In the coming years Peru has to strengthen its institutions March 19, 2006 October 16, 2006 90 80 70 60 90 80 70 60 50 50 40 40 30 30 20 20 10 0 President A. Garcia Executive Branch Legislative Branch Judicial Branch 10 0 President Alan Garcia Executive Branch Legislative Branch Judicial Branch Approve (%) Disapprove (%) Indifferent (%) Approve (%) Disapprove (%) Indifferent(%) Source: APOYO Opinion y Mercado
Specific efforts on institutions Decentralization process Focus on Judicial Branch (94% of Peruvians think that a reform is necessary). High level of corruption threats business stability.
According to Fitch, next steps for Peru for improving its rating scale Reduction in net public external debt Maintenance of prudent macroeconomic settings Deepening of fiscal reforms Continuation of export and economic diversification Strengthening of political institutions Progress on improving social development conditions