Peru Business Forecast Report Q2 2008

All Set For Investment Grade

With a robust economy and our increasingly upbeat outlook on outstanding external debt obligations, we count Peru among our favourite Latin American countries for a prospective upgrade to investment grade in 2008 by the major ratings agencies. There are several key themes that underpin our view. The deepening and successful re-profiling of Peru's external debt ranks among the top developments. Moreover, we see the country's strong fiscal position and growing willingness to commit both political and fiscal capital to boost Peru's business environment and under-funded infrastructure as vital to joining the likes of Mexico, Chile and Guatemala in Latin America's investment grade elite. That said, in the Peru Business Forecast Report Q208, we also revisit ongoing deteriorations in the country's inflationary and political risk dynamics. While these could potentially undermine Peru's bid for investment grade status, we maintain our generally positive outlook for the country's prospects as an appealing investment destination going forward.

We are growing somewhat concerned about a decline in social stability in Peru, which has prompted us to revisit our baseline short-term political risk scenario for the Andean country. Adjusting our short-term political risk ratings model, Peru's score falls to 74.2 from 78.5, causing it to drop from second to third position in Latin America, behind Mexico (74.8) and Chile (82.1), and just ahead of Argentina (73.9). Moreover, Peru's lead over its Andean peers is also narrowing. Rising inflationary pressures, a growing number of cases of public unrest, and violent clashes with police and government forces have seen Peru's 'social stability' score fall to 70.0 from 77.5. While we are comfortable with our new short-term political risk rating for Peru, we caution that downside risks still exist.

The Peruvian economy appears to be in good shape, posting its fourth year of real GDP growth above 5.0%. Strong domestic demand and rising investment flows into the economy have seen real GDP grow by a robust 9.0% in 2007. Household final consumption grew by 8.3% last year, while government expenditure rose by 3.9%. Meanwhile, gross fixed capital formation saw an increase of 23.3%, bringing the overall domestic demand growth rate to a solid 11.9%. Although we expect a slight moderation in Peru's economic growth rate this year, we are still forecasting real GDP growth of 7.0% for 2008, and expect the economy to continue expanding on average by 5.2% through to 2012.

Peru's business environment continues to make remarkable progress, with the country's legal framework increasingly capable of processing growing outside interest in the economy. Nevertheless, cases of corruption and outside intervention in the judiciary continue to delay dispute settlements and keep investor confidence in Peru's courts subdued. Moreover, Peru's infrastructure is in need of more extensive development projects and regular financial injections, with capacity constraints presenting a growing risk to price stability and a rapidly growing tourism industry.