Sol Advances as Foreign Direct Investment Increases in Peru

As the President of Peru, Ollanta Humala has decided to embrace the investors, for the first time since 2009, the cost of insuring against a default is falling faster than any other Latin American country for Peru. In the last 6 months, the 5-year credit default swaps of Peru have dropped by around 36.4%. According to the EMBI Global Index, the dollar bonds of Peru yield an average 1.24 percentage points more than the US treasuries.

Humala has already cut the international debit and is building a budget surplus. Hence, according to analysts, the country will attract more investors therefore ensuring a rally in the assets of Peru. In the first 6 months of this year, the foreign direct investment of Peru increased by 100% and is valued at $5.4 billion currently. In the 2nd quarter of 2012, Peru’s economic growth was of 6.1% and this is the best growth for a country in the Latin American region. 

According to Jonathon Lemco, Peru is soon becoming a darling for investors of not only Latin America, but worldwide. He added that Peru has been consistently strong, be it financially, economically or politically. There was a bit uncertainty during the elections, but, that’s a matter of past now.

The cost for insuring Peru bonds against default for a period of 5 years has seen a fall of 70 basis points. Last October, Sol, the major currency of Peru, rose to a 16-year high against USD, that helped the country to boost returns on local currency debt to 22.99% in currency terms of US. The average value of this percentage is 13.4 in the Latin American region.

Today, the changes in Sol were minor and it is valued at 2.5980 per USD. In 2012, Sol has rallied by 3.7% and according to the initial estimates, in 2013; it will gain 1.5% more.

Humala, once a close ally of Venezuelan President of Chavez, has recently shown a shift from his earlier views on foreign companies. Since he took over the office in 2011, Humala has held continuous meetings with different investors in the major cities across the world. He has mainly targeted the transport, energy and metal industries for direct foreign investment.

The Investors Service of Moody raised Peru’s rating by 1 level and it is at Baa2 now. Baa2 incidentally is the 2nd lowest investment grade. This denotes enhanced business confidence in Peru. Peru’s current rating is similar to that of Brazil. According to the Vice President of Citigroup Inc.’s Corporate Finance Group, it is to be seen that how Humala can maintain the support for the mining investments and reduce the 29% poverty rate of the country. He commented that potential bottlenecks and social conflicts may cause delay in investments in the mining sector of Peru.

According to the Central Bank of Peru, with help of the investments of Aluminum Corp of China Ltd. and Xstrata Plc., the copper output of the country can be doubled within the next 5 years. The total investment through 2014 is expected to be of $31.5 billion worth and more than 60% of the same is expected to be invested in the energy and mining sector. According to Humala, the energy and mining sector is full of opportunities and some of the projects such as creating petrochemical complex and residential gas connections look pretty promising.

According to many analysts, the biggest threat to foreign investment in mining sector is the protests frequently done. If the Government can come up with a way to control the same, things will take a better turn.

The gross debt of Peru is $39 billion now and this is 24.6% of its economy. The gross debt is lowest than all other Latin American countries except Chile. Peru will not be issuing bonds overseas in 2013. Instead, it will start tap the savings, as confirmed by the Finance Minister of Peru.