Peru’s prospects have worsened significantly in recent months, due to a deteriorating external and internal environment. Despite the darkening outlook, the country remains more appealing than other IG stories, in particular Panama. From a relative value perspective, we recommend selling Panama and buying Peru, as the spread difference between the two credits is projected to narrow, due to our expectation of more pronounced policy slippage in the Central American country. Decelerating Peruvian economic growth caused some concerns for the rating agency Fitch, after putting a “negative” outlook on its “BBB” note for the credit. However, these worries seem somewhat overstated. Economic authorities have adopted a set of policy measures aimed at fostering economic growth (Impulse Peru Plan), that will partially compensate for the lower dynamism of domestic demand. Meanwhile, a pause in the ongoing tightening cycle of the central bank is likely, as authorities assess the impact of past monetary policy actions and confirm a continuation of moderating inflation and inflation expectations. Note that the planned fiscal stimulus will translate into a slower convergence to long-term fiscal goals. However, Peru’s repayment capacity remains strong due to one of the highest international reserves ratios and lowest indebtedness levels in Latin America.
Peru: A fading star
While growth deceleration causes concerns, Peru remains more appealing than other IG stories (i.e., Panama)
Authorities seek to boost activity in a convoluted backdrop where political noise is hurting long-term growth
Repayment capacity is still strong, but we expect slower convergence to long-run fiscal goals