Fitch Affirms Peru's FC IDR at 'BBB+'; Outlook Stable

Fitch Ratings has affirmed Peru's Long-term foreign- and local-currency Issuer Default Ratings (IDRs) at 'BBB+' and 'A-', respectively. The issue ratings on Peru's senior unsecured foreign- and local-currency bonds are also affirmed at 'BBB+' and 'A-'. The Rating Outlook on the Long-term IDRs is Stable. The Country Ceiling is affirmed at 'A-' and the Short-term foreign currency IDR at 'F2'.

KEY RATING DRIVERS

Peru's IDRs reflect the following key factors:

Peru's ratings are supported by the country's established track record of policy coherence and credibility which has delivered high growth and entrenched macroeconomic and financial stability. In addition, the sovereign's strong balance sheet and its fiscal and external financing flexibility underpin its strong shock absorption capacity. These credit strengths balance Peru's high commodity dependence, low revenue base and structural constraints in terms of low GDP per capita, and weak institutional quality and Human Development Indicators.

Peru's sovereign balance sheet is among the strongest in the 'BBB' category supported by robust external buffers and low debt. Peru's international reserves, at 31% of GDP, continue to provide the country with the capacity to adjust to a lower commodity price environment, tightening global financial conditions and relatively high financial dollarization. Moreover, Peru's robust external buffers have allowed the central bank to smooth increased FX market volatility and the reduction in the participation of non-residents in the local market.

Fitch expects Peru to record its fourth consecutive fiscal surplus, 0.2% of GDP, in 2014. With the implementation of the Strengthened Fiscal Responsibility Law, the general government is required to remain in structural surplus in 2014 and record a maximum 1% of GDP structural deficit in 2015-2016. As a result, government debt, 19.4% of GDP in 2014 according to Fitch forecasts, will remain on a downward trajectory.

While the share of foreign currency debt stands at 45%, which is above similarly rated peers, the strengthened net FX position of the central government partly mitigates this vulnerability. Peru's fiscal stabilization fund at 4.4% of GDP and general government deposits provide the sovereign with cushions to adjust to negative shocks.

Although growth could decline to 3.7% in 2014, it will remain above the 'BBB' median in 2014. Fitch expects the economy to regain growth momentum averaging 5.6% in 2015-16 through monetary and fiscal stimulus, the doubling of copper production and increased public investment. Moreover, the government has moved forward with a concession program for infrastructure (9.1% of GDP) and taken measures to remove bureaucratic obstacles to investment. Nevertheless, downside risks to the growth outlook remain in terms of normalization of U.S. monetary policy, a greater-than-expected slowdown in China and delays in the execution of investment projects. In spite of continued inflationary pressures due to supply shocks and currency depreciation, inflation is likely to average 3.2% in 2014 and 2.8% in 2015-2016.

In addition to high commodity dependence, the current account deficit has widened, approaching 5% of GDP and is forecast to remain above 'BBB' peers over the rating outlook. Strong foreign direct investment (FDI) flows, relatively manageable external financing requirements (at around 20% of international reserves in 2014-2016) and Peru's position as the third-strongest net sovereign external creditor in the 'BBB' category mitigate these vulnerabilities.

The Humala administration maintains prudent policy-making and a pragmatic approach in order to attract private investment. Increased political turmoil and ministerial changes do not represent a challenge to the direction of economic policy, but, if prolonged, could weigh on the government's reform agenda and investor confidence.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's view that upside and downside risks to the rating are evenly balanced. The main risk factors that, individually or collectively, could trigger a rating action are:

Positive:

--Sustained growth that reduces Peru's income gap versus higher-rated sovereigns, further progress in social and governance indicators, and institutional capacity build-up.;

--Significant improvements in Peru's fiscal and external balance sheets and a build-up of a track record of enforcing the institutional enhancements to the fiscal policy framework.

Negative:

--Sustained decline in the price of Peru's main commodity exports;

--Sustained deterioration of external and fiscal credit metrics;

--Policy choices that increase macroeconomic volatility, and reduce investment and growth prospects.

KEY ASSUMPTIONS

The ratings and Outlooks are sensitive to a number of assumptions:

--Fitch assumes that growth in China will weaken from 7.2% to 6.5% between 2014 and 2016. However, Fitch assumes no sustained deep decline in Peru's main commodity prices.

--In spite of initial delays, Fitch assumes mining projects intended to double copper production by 2016-17 remain broadly on track.

--Fitch assumes that the potential for localized social conflict will not threaten governability and broad political stability.

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Sovereign Rating Criteria' (August, 2014);

--'Country Ceilings' (August, 2014).

Applicable Criteria and Related Research:

Country Ceilings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752194

Sovereign Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754428

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=885934

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.