Sulliden Gold Corporation Ltd T.SUE.WT

Garcia May Win Peru Investment-Grade Rating

[hopskipjump]

https://www.bloomberg.com/apps/news?pid=20601109&sid=a0Yw.2qxaKVI&refer=home Garcia May Win Peru an Investment-Grade Rating (Update1) By Lester Pimentel and Andrea Jaramillo April 4 (Bloomberg) -- Peruvian President Alan Garcia has cut government workers' pay in half and sold state assets, winning the confidence of ratings companies two decades after he led the Andean country to default. Garcia helped Peru last year post its biggest budget surplus since at least 1970, a reversal of the wage increases and nationalizations that stoked hyperinflation during his first term. Standard & Poor's and Fitch Ratings responded by raising the country's rating to one step below investment grade after Garcia took office in July. ``He was the Antichrist in Peru, where he was associated with inflation and scarcity,'' said Alvaro Vargas Llosa, a senior fellow in Washington at the Independent Institute. His father, novelist Mario Vargas Llosa, led protests against Garcia in the 1980s. ``There is now a strong base of support for the free market and economic openness. Garcia realizes this.'' Garcia studied Chile's economic expansion as he planned a comeback from exile in Paris and Bogota, said Arturo Porzecanski, an international finance professor at American University in Washington. Chile's budget surpluses have buoyed investor confidence, sparking growth that has led to a two-fold increase in the country's GDP per capita since 1990. Chile is one of only two Latin American countries with investment-grade ratings. Mexico is the other. ``He was determined that if he was given a second chance by the Peruvian electorate, he would do right this time,'' said Porzecanski, who met with Garcia last year. Garcia, 57, declined a request for an interview. Bond Rally S&P and Fitch increased the rating on Peru's $22 billion of foreign debt to BB+ last year. Fitch raised Peru's outlook to positive on March 6. Peruvian dollar-bonds rallied after the Fitch move, pushing down their average yield spread, or premium, over U.S. Treasuries by 15 basis points, or 0.15 percentage point, to 1.28 percentage points, according to JPMorgan Chase & Co. data. The gap is 25 basis points less than the premium Colombia, which is also rated BB+ by S&P, pays on its bonds. An investment-grade rating would allow more pension funds and insurers to buy Peru's debt, driving its spread down to a record low of about 1.05 percentage points, said Bertrand Delgado, an economist with IdeaGlobal Inc. in New York. Peru's benchmark 8 3/8 percent dollar bonds due in 2016 traded at 118.75 cents on the dollar and yielded 5.7 percent today. Budget Surplus Peru's economy expanded 8 percent in 2006, the fastest pace in 12 years, as exports of products such as zinc, copper and fishmeal jumped to a record $23.4 billion. The country's 0.3 percent annual inflation rate is the lowest in the region and is less than all the countries in the Group of Seven except Japan. ``Everything is in place right now for Peru,'' said Roberto Sanchez-Dahl, who manages $500 million of emerging-market bonds, including Peruvian debt, for Federated Investment Management in Pittsburgh. Three days after being sworn in, Garcia cut the salaries of more than 17,000 civil servants, including his own. A month later, he sold concessions to operate nine regional airports. The salary reductions helped trim government spending to 18 percent of gross domestic product in 2006 from 18.9 percent the year before, according to the central bank. The government had a budget surplus of 6.3 billion soles ($2 billion), equal to 2.1 percent of GDP. `Crazy Horse' ``Peru is on the right track,'' said Sebastian Briozzo, an analyst at S&P in New York. The government has to reduce the ``social conflict'' between rich and poor ``to take that next step to investment grade,'' he said. About half of Peru's 27 million people live on less than $1 a day, according to the government. Moody's Investors Service rates Peru's debt Ba3, two levels lower than the S&P and Fitch ratings. Moody's gave the rating a positive outlook on March 8. Garcia's austerity contrasts with the spending that undid his first administration. He nationalized banks, doled out credit to small farmers, boosted workers' wages and defaulted on debt owed to the International Monetary Fund and commercial banks including Citigroup Inc. His policies earned him the moniker ``Crazy Horse.'' Peru's budget deficit ballooned, reaching 12 percent of GDP by 1988, his third year in office. Annual inflation peaked at 11,090 percent after his term ended in 1990. The economy shrank an average of 9.3 percent a year from 1988 to 1990. The recession fanned support among the poor for a Maoist guerrilla group known as Shining Path. Fighting claimed about 10 lives a day during Garcia's term as the guerrillas began attacking the capital of Lima from their mountain footholds. `Hyperinflation, Terrorism, Corruption' ``The images I associate with Garcia are hyperinflation, terrorism and corruption,'' Vargas Llosa said. ``Prices could change in a couple of hours. The amount of insecurity that creates if you haven't lived through it is hard to describe.'' Garcia fled into exile in 1992 when President Alberto Fujimori, who tamed inflation and crushed the guerrilla uprising, tried to arrest him on corruption charges. Garcia returned in 2001 to mount a failed presidential bid. In 2006, he defeated Ollanta Humala, a nationalist who pledged to increase government control of the mining industry and boost spending. ``Peruvians were scared Garcia hadn't learned his lesson,'' said Jorge Gonzalez, a labor minister under Fujimori who now heads the economics department at Pacifico University in Lima. ``But he's shown he has.'' To contact the reporter on this story: Lester Pimentel in New York at [e-mail] Andrea Jaramillo in Bogota at [e-mail]