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D&B Country Insight Snapshot: Peru January 2015

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Overview

Overall Country Risk Rating :

DB4a

Moderate risk: Significant uncertainty over expected returns. Risk-averse customers are advised to protect against potential losses.

Rating Outlook: Stable

Core Outlook

+ The upward trend in Peruvian per capita income is likely to continue over the next decade. + Peru has made noted progress in trade liberalisation in recent years, progressively reducing tariff barriers and other trade-distorting measures.

- Poor education quality, infrastructure constraints, weak institutions and capacity issues are the main challenges Peru faces.

- Pollution from extractive industries, unsustainable practices and intensive agriculture are threatening already precious freshwater resources.

Key Development

In a surprise move, the central bank reduces its benchmark interest rate following alarmingly weak economic growth data in November, with fishing, manufacturing and mining all underperforming.

Credit Environment Outlook

Key Development has had a positive impact on the outlook.

Supply Environment Outlook

Key Development has had a neutral impact on the outlook.

Market Environment Outlook

Key Development has had a neutral impact on the outlook.

Political Environment Outlook

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Key Indicators

Rating History and Comparison

Source : D&B

Note: 1 = Low Risk, 7 = High Risk

Regional Comparisons

Source : D&B

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Economic Indicators

Indicator 2011 2012 2013 2014f 2015f 2016f 2017f 2018f

C/A balance % GDP -1.9 -3.4 -4.3 -5.0 -4.7 -4.2 -3.8 -3.5

External Debt, % GDP 25.5 28.1 26.7 25.6 24.9 23.9 23.4 22.9

Govt balance, % GDP 1.0 1.3 0.5 -0.1 -0.1 -0.2 -0.3 -0.1

Inflation, annual avge % 3.4 3.7 2.8 3.3 2.6 2.8 2.9 2.7

Real GDP Growth, % -10.3 6.3 5.0 3.4 5.3 5.5 5.6 5.5

Source : Haver Analytics/D&B

Trade and Commercial Environment

Net international reserves stood at USD61.1bn at end-December 2014, down from USD64.4bn in the corresponding period in 2013. Even if additional downward pressure on the currency results in a further erosion of FX stocks, we expect FX reserves to remain reasonably robust in 2015, supporting a positive credit risk environment; import cover will exceed 12.0 months’ worth of goods and services. Meanwhile, the government is keen to protect investor confidence and has so far maintained a pro-investment agenda. However, the risk of a shift to a more populist stance persists, particularly given calls for the government to impose tighter controls on the mining sector and pressure from poor voters to address the country’s social inequalities.

Trade Terms and Transfer Situation

Minimum Terms: SD

The minimum form of documentation or trading method that D&B advises its customers to consider when pursuing export trade with the stated country.

Recommended Terms: LC

D&B's recommended means of payment. The use of recommended terms, which are generally more stringent than minimum terms, is appropriate when a customer's payment performance cannot be easily assessed or when an exporter may wish to limit the risk associated with a transaction made on minimum terms.

Usual Terms: 30-60 days

Normal period of credit associated with transactions with companies in the stated country.

Local Delays: 0-1 month

The time taken beyond agreed terms for a customer to deposit money in their local bank as payment for imports.

FX/Bank Delays: 0-1 month

The average time between the placement of payment by the importer in the local banking system and the receipt of funds by the exporter. Such delays may be dependent on FX controls, FX availability and the efficiency of the local banking system.

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Exchange Rate

Source : IMF International Financial Statistics, National Statistical Offices

LCU = Local Currency Unit

Credit Conditions

Source : Haver

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Risks and Opportunities

Short-Term Economic Outlook

Benchmark interest rate slashed

In a surprise move, the Central Bank of Peru (BCRP) reduced its benchmark interest rate by 25 basis points (bps) to 3.25% in mid-January following disappointing economic growth data for November 2014; anchored inflation expectations, mixed signs of recovery in the global economy, increased volatility in financial markets and the impact of lower oil prices on the local economy also weighed on the decision to lower interest rates. The National Production Index (a proxy of GDP) recorded annual growth of just 0.3% in November 2014 (and 2.6% during the first 11 months of the year compared with 5.7% in the same period in 2013) the slowest pace of expansion since September 2009, as a sharp drop in fishing, primary manufacturing (mainly fish and metals processing) and mining offset gains in the banking, construction and telecommunications sectors. The monetary authority also trimmed its reserve requirements in soles once again, freeing up more liquidity, in order to stimulate further local-currency lending, while it adopted a loosening bias amid mounting evidence that the domestic economy is still growing well below potential. If inflation starts trending down and downward pressure on the currency eases, a 25-basis point in the benchmark rate is likely by end-Q1.

The poor growth performance has also prompted President Ollanta Humala’s administration to propose a new package of measures, which will complement previous stimulus initiatives and aim to boost private sector investment and jump-start the economy. The government also recently introduced a series of new mining regulations designed to speed up and simplify the permitting process for mining exploration and mine development projects, with a view to spurring investment in the sector after output for most metals declined for a third year in 2014. These new measures, combined with looser monetary conditions and the launch of investment projects in the infrastructure sector worth over USD6.9bn, should help rev up the domestic economy in the coming quarters. That said, the new annual official growth target of 5.0% may still prove difficult to achieve as external and domestic downside risks continue to loom large.

FX Risk

Steps taken to reduce high levels of dollarisation

The BCRP has recently adopted several measures aimed at reducing the persistently high levels of financial dollarisation and the exposure of agents to exchange rate risks. In particular, the rules for currency derivatives have been tightened and reserve requirements on dollar deposits increased, while incentives have been created for financial institutions to reduce their dollar loan portfolios by at least 10.0% by end-2015, although these do not affect long-term financing of large projects nor loans to finance import and export operations. Given the prospect of rising dollar yields and higher international financing costs, the central bank’s intervention is a good step forward as it will help reduce risks to macroeconomic and financial stability.

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Country Profile and Statistics

Overview

Peru is situated on the western coast of South America, and shares land borders with Brazil, Chile, Colombia and Ecuador. Its terrain is varied, with an arid coastal plain, a mountainous interior and tropical deep interior.

Peru has abundant mineral resources, the exploitation of which has been a vital factor in recent strong GDP growth. However, poverty levels remain high and income distribution is uneven. As a result, there has been increasing resentment among the poor majority towards international investors (many of whom took advantage of economic liberalisation in the 1990s by moving in to develop the country’s natural resources), with resource nationalism having significant potential for socio-political instability.

Peru’s modern political history has been turbulent: the widespread violent insurgency of the late 1980s was quelled in the 1990s, but tough government measures resulted in human rights abuses; key political figures continue to become embroiled in human rights abuses investigations.

Key Facts

Key Fact Detail

Head of state President Ollanta HUMALA

Capital Lima

Timezone GMT -05-00

Official languages Spanish, Quechua, Aymara

Population (millions) 30.7

GDP (USD billions) 219

GDP per capita (USD) 7,131

Life expectancy (years) 74

Literacy (% of adult pop.) 87.7

Surface area (sq km) 1,285,220

Source : UN / Haver Analytics / D&B

Historical Data

Metric 2010 2011 2012 2013 2014 Real GDP growth (%) 29.56 -10.29 6.28 5.02 3.4 Nominal GDP in USDbn 153.81 176.55 199.59 211.75 219.01 Nominal GDP in local currency (bn) 435 486 526 572 624

GDP per Capita in USD 5,256 5,961 6,656 6,971 7,131

Population (year-end, m) 29.26 29.62 29.99 30.38 30.71

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Forecasts

Metric 2015 2016 2017 2018 2019 Real GDP growth (%) 5.3 5.5 5.6 5.5 5.4 Nominal GDP in USDbn 230.8 260.7 290.8 313.3 334.6 Nominal GDP in local currency (bn) 685.35 745.66 811.27 883.48 960.34

GDP per Capita in USD 7,432 8,306 9,163 9,765 10,316

Population (year-end, m) 31 31.4 31.7 32.1 32.4

Exchange rate (yr avge, USD-LCU)

3 2.9 2.8 2.8 2.9

Current Account in USDbn -10.8 -10.9 -11 -11 -10.9

Current Account (% of GDP) -4.69 -4.16 -3.78 -3.51 -3.26 FX reserves (year-end, USDbn) 66.5 69.1 71.2 73.3 75.5

Import Cover (months) 14.88 14.05 14.01 14.43 14.86

Inflation (annual avge, %) 2.6 2.8 2.9 2.7 2.2

Govt Balance (% GDP) -0.1 -0.2 -0.3 -0.1 -0.1

Source : D&B

Comparative Market Indicators

Indicator Peru Argentina Bolivia Brazil Uruguay

Income per Capita (USD) 7,432 6,619 2,980 9,199 19,512

Country Population (m) 31 42.2 11 205.2 3.4

Internet users (% of population)

39.2 59.9 39.5 51.6 58.1

Real GDP Growth (% p.a., 2014 - 2023)

5.5 - 6 2.8 - 4.5 5 - 5.5 2.5 - 4.5 4 - 4.5 Source : D&B

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