In Peru, the production of copper is driving export growth. “Peru is a commodity producer that’s not an oil producer,” said Kieran Curtis, investment director, Emerging Markets Debt at Standard Life.
“The story of Peru is really about the volume of production. There’s been enormous investment into Peruvian mines in recent years, and they started to come online last year,” said Curtis.
These recent developments have resulted in a near doubling of the country’s copper production, the lion’s share of which gets exported. “So even with a fall in copper prices from here, we still think that the nominal value of Peruvian exports is going to grow. And that nominal value of export growth is one of the best indicators we have for the performance of emerging market currencies,” explained Curtis.
The Peruvian sol is actually quite cheap, as are most other commodity currencies, noted Curtis, and as Peru is actually a single A-rated country, you can get ten year bonds on yields close to 8%.
Moreover, Peru is a partially-dollarized economy; the corporate sector and the personal sector have borrowed a lot in dollars in the past and is also a big holder of dollars as deposits in the banking system.
“If you look at what has happened to dollar-nominated credit for the last couple of years, it’s actually been driven back and repaid, and companies have been borrowing the Peruvian sol,” commented Curtis.
Meanwhile, the deposits are the opposite of that. The economy has gone very long on dollars and very short on local currency. Therefore, in Curtis’s view, there will be some structural pressure in the next couple of years as sol credit needs to be repaid using US dollar assets. “That should be something that supports the currency as well,” he said.
“So Peru is somewhere that we’re very confident in and one of the best stories around for bond investment in emerging markets.”
There are tailwinds on the political arena too. “We believe both potential election outcomes of [Peru’s] 5 June presidential runoff are a positive for the economy,” said Rob Drijkoningen, co-head of the Emerging Market Debt team at Neuberger Berman, who expects continued support for local bonds from domestic investors.
“The government displays strong commitment to prudent macroeconomic policies and we do not expect this to change over the next few years,” he said.
Drijkoningen continued: “Peru has significantly low government debt levels of about 23% and has navigated the slowdown in global growth and commodity prices with just a modest deterioration in fiscal deficits of about 4% of GDP.” This is primarily due to prudent fiscal policy during the commodity boom years, in his view.
“Inflation in Peru, which is just below 4%, has most likely peaked due to the fading effects of El Nino – which will help the central bank maintain interest rates at the current level going forward,” said Drijkoningen.
