Within a context of high and diversifying sources of growth with low inflation
12:08 Standard & Poor's assigns investment grade to Peru on decline in fiscal and external vulnerabilities
  Reflects expectation these trends will remain in place over the medium term

• Panoramic view of Lima's financial center in San Isidro. Photo:ANDINA

• Lima, Jul. 14 (ANDINA). Standard & Poor's Ratings Services said today that it raised its foreign currency long-term credit rating on the Republic of Peru to 'BBB-' from 'BB+' and raised its local currency long-term credit rating on Peru to 'BBB+' from 'BBB-'.
  
  Standard & Poor's also raised its short-term foreign currency sovereign credit rating on Peru to 'A-3' from 'B' and its short-term local currency sovereign credit rating to 'A-2' from 'A-3'. The outlook on the longterm ratings is stable.
  
  In addition, Standard & Poor's raised its transfer and convertibility assessment for Peru to 'BBB+' from 'BBB'. Standard & Poor's withdrew its recovery rating of '3' on the republic; such ratings are only assigned to speculative-grade foreign currency ratings.
  
  "The upgrade is supported by the significant decline in Peru's fiscal and external vulnerabilities within a context of high and diversifying sources of growth with low inflation and strengthening macroeconomic fundamentals," said Standard & Poor's credit analyst Sebastian Briozzo.
   
  It also reflects Standard & Poor's expectation that these trends will remain in place over the medium term despite an increasingly riskier international environment and the continuation of challenging local politics, he added.
   
  Standard & Poor's believes Peru's credit strengths are sufficient to face these mediumterm challenges at a level of risk consistent with the 'BBB-' credit rating.
  
  Sound economic prospects, with Gross Domestic Prodcut (GDP) growth rates estimated at 6.5 percent over the medium term, are a key-supporting factor for the upgrade.
  
  Peru's robust growth prospects are supported by rapidly growing investment levels that are expected to reach 25 percent of GDP in 2008 and to grow further over the medium term.
  
  "More importantly, 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, in particular investment, but also private consumption", Briozzo said.
  
  "This new pattern is critical to achieving progress in terms of distributing more
  evenly the benefits of economic growth to greater sectors of the population, as reflected by improvements in employment and decreases in poverty, therefore contributing to alleviate a still complex social situation in Peru".
  
  The latter declined to a still high 39.3 percent in 2007 from 48.7 percent in 2005. Such advances contribute to alleviating the tensions inherent in Peru's complex social issues.
  
  Despite the upgrade to investment grade, Peru's political and social stability will continue to constitute a credit weakness compared with peers.
  
  Peru's social structure remains fragmented among social, economic, and ethnic lines, contributing to a still a fragile political system, in which political parties and institutions do not enjoy high levels of popular support.
  
  For this reason, the strong support from the political class for sound macroeconomic policies, as seen in the current administration of President Alan Garcia and expected to continue under the new minister of finance, remains a precondition for Peru to maintain its recently obtained investment-grade rating.
  
  Standard & Poor's believes the increasing level of consensus of the Peruvian political class on the importance of a sound macroeconomic framework, characterized by strong fiscal results leading to declining debt levels, operational independence of the central bank and economic growth based on private investment, makes Peru's political structure consistent with the 'BBB-' foreign currency rating.
  
  The stable outlook on Peru balances the macroeconomic strengths of high-growth prospects and declining vulnerabilities with the weaknesses derived from a still developing political institutional framework and an economy that continues to depend  heavily on commodities.
  
  "Additional improvements in the debt trajectory within a stable political context as well as material progress in Peru's social conditions supporting greater political stability could lead to upward movements on the rating over the medium term", noted Briozzo.
  
  "Conversely, increasing levels of political polarization that erodes support for sound macroeconomic policies would add pressure to the rating and could lead to a downgrade to the speculative-grade rating category".
  
  (END) LVT/LVT