Country In Focus: PERU

19 March 2012

Firstline is launching a new series today: Countries in Focus which looks at the economy of a country and investments in its sovereign and corporate bonds available through Firstline Securities. In this first instalment, we focus on PERU which has grown tremendously in the last ten years due to increased political and economic stability, high commodity prices (Peru is the world’s third largest copper producer and second largest zinc producer), and increased domestic consumption and international investment.

The Republic of Peru has a long history, being the seat of the ancient Incan Empire and a major source of wealth for the Spanish Empire due to its rich resources. Today, commodities continue to play a central role in Peru’s economy — in particular, copper. Demand from China and other emerging markets has driven copper prices up by 422% in the last ten years, and current prices are still 29% higher than 5 years ago, despite the global financial crisis and persistent economic uncertainty. Peru is currently rated Baa3 with a Positive outlook by Moody’s, and BBB with a Stable outlook by Standard and Poor’s.

Copper 10 year price chart, % change

Copper 5 year price chart, % change

The global boom in copper has had a significant effect in Peru, where extractive industries account for 15% of GDP but earn a very large share of exports (60%) and foreign currency earnings (30%). External debt as a % of Gross Domestic Product decreased from 55% in 2000 to around 24.3% in 2010, according to

In other words: for every dollar made in the country, 24 cents more goes into the pocket of the government, investors and citizens of Peru. Another important debt metric is external debt service as a percentage of exports, which shows the proportion of interest on international debt to the value of a country’s export earnings. In 2010, this number was 16.7% for Peru, down from 26.7% in 2007. These debt metrics are especially impactful given the pace of economic expansion:

Peru GDP Growth

Peru Debt to GDP

Peru’s economy has grown by an average of 7.2% every year in the last five years and during the peak of the crisis still squeaked out a 0.8% growth rate. Government reserves have also increased substantially, going from 27.8 billion USD in 2007 to 44.2 billion USD in 2010. This may be a function of sustained high foreign direct investment, which has never been below 5 billion USD in the last 5 years, and was over 7 billion USD in 2010. The bulk of the investment is going to mining, and increasingly, energy projects, as natural gas reserves continue to be identified across the country.

However, despite these favourable numbers, Peru ran a current account deficit of 2.3 billion USD in 2010, and a cash deficit of -1.5% of GDP in that year. This number is likely to have increased since 2010, as the country’s current President, Ollanta Humala, is a left-leaning former guerrilla who plans to use Peru’s reserves and revenues to address the crushing poverty found throughout the country — more than 31% of the country’s citizens fall below the domestic poverty line standard. President Humala was elected in 2011 and will be serving a 5 year term.

Politics play a crucial role in Peru’s bond performance, which is also true of many emerging markets — and increasingly, developed ones as well (witness the Euro sovereign crisis, and the U.S. debt ceiling scare in 2011).

The 2011 election of a former leftist guerrilla who seemed to be aligned with Venezuela’s Hugo Chavez initially caused a scare, as many global investors assumed that he would follow the Venezuelan leader’s ideology and practices. However, President Humala is proving to be more along the lines of Brazil’s Lula da Silva, who implemented pro-growth and pro-business policies while simultaneously investing heavily in social infrastructure. Nevertheless the impact is still apparent on bond yields, which spiked 100 basis points in early 2011:

Yield on Peruvian 10 year government bonds

Interestingly enough, despite initial uncertainty regarding Humala’s politics, Standard and Poor’s upgraded Peru’s credit rating to BBB in August 2011. This upgrade was based on Humala’s retention of key cabinet members and policymakers from the previous government, as well as strong economic fundamentals.

S&P recently estimated that Peru’s GDP growth rate will be above 5% for the next 3 years, providing a sound economic base, and increasing the probability that another upgrade may be on the cards going forward. However, yields have continued to be high, due to perceived political risk as well as global uncertainty.

China’s apparent slowdown in economic activity will also affect Peru’s copper exports, which in turn would have an effect on the economy. This more recent development has continued to keep yields high, as falling copper prices due to decreased consumption from China would additionally affect the Peruvian economy and government revenue.

Peru presents a very compelling investment opportunity, but the risks outlined above (particularly China) are substantial. FSL would recommend investing in Peru for those with a moderate risk tolerance.

There are several securities that may be of interest to Trinidadian and Caribbean investors:

NB: Yield information current as of 13/03/2012

Scotiabank, which many in the region would be familiar with, also has a strong Latin American franchise. Scotia’s presence in Peru is due to the high levels of investment from Canadian miners and related firms, as well as strategic expansion across the LatAm region. Like its Canadian and Trinidadian counterparts, Scotiabank Peru is very conservatively managed, but given economic growth in Peru and increased mining and energy activity, it can be expected to grow. We therefore categorize it as a low risk investment.

Southern Copper is one of the world’s largest miners and processors of Copper, with the majority of its assets in Peru. Copper is a vital metal with many industrial applications, and copper prices are generally considered an indicator of economic vitality (much like energy prices). While copper prices are still high relative to the historical average, decreased consumption in China will affect copper prices, and by extension company and country producers. However, lower or volatile copper prices are unlikely to materially impact Southern Copper, as it is very conservatively managed. For this reason, we categorize it as a moderate risk investment—the commodity risk is offset by the company fundamentals.

Banco de Credito del Peru (BCP) is the leading commercial and investment bank in the country, and one of the largest firms of its kind in Latin America. BCP has a very strong franchise, and has been in business since 1889. BCP is intimately familiar with the economy and risks in Peru, given its longevity and the crucial historical role it has played in the country’s growth. Despite that, we still categorize BCP as a moderate risk investment due to relatively high leverage, and recent declines in profitability.

IFH Peru is also a major financial institution in Peru. It is classified as a moderate/high risk given its franchise position and financial health relative to BCP—it is not as large or strong as BCP. However, it is growing rapidly, and is more profitable than BCP which helps moderate risk to a degree.

Lastly, the sovereign bond that we would recommend for investors is the 2019 Peru bond. It has the best yield of any of the sovereign issues outstanding, and price is likely to improve if S&P or Moody’s upgrade the sovereign credit rating.

Firstline is on call to assist you with any interest in investing in these bonds, or other Peru-related instruments. You may call us at 628-1175, or email us at You can contact me directly at and continue to follow our Countries In Focus series here at our blog:

Michael J. Cooper
Trading & Strategy Consultant

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