OREANDA-NEWS. Fitch Ratings has affirmed Peru's sovereign ratings as follows:

--Long-term foreign currency Issuer Default Rating (IDR) at 'BBB+', Outlook Stable;
--Long-term local currency IDR at 'A-', Outlook Stable;
--Senior unsecured foreign-currency bonds at 'BBB+';
--Senior unsecured local-currency bonds at 'A-';
--Country ceiling at 'A-';
--Short-term foreign-currency IDR at 'F2'.

KEY RATING DRIVERS

Peru's creditworthiness is underpinned by its established track record of policy credibility, consistency, and flexibility, which has delivered macroeconomic and financial stability. Low government debt, fiscal financing flexibility, strong external liquidity (with international reserves totalling 32% of GDP) and manageable external financing needs (18% of international reserves in 2015-2017) reduce risks from short-term international capital market volatility. These credit strengths are balanced by the country's high commodity dependence, low government revenue base, financial dollarization, and structural weaknesses such as low per capita income, weak social indicators and institutions.

Robust government external and fiscal balance sheets give authorities the flexibility to deal with the 13% terms-of-trade decline caused by falls in the prices of Peru's principal mining exports during 2011-2014. Strong external liquidity (330% according to Fitch's international liquidity ratio) and the sovereign's net external asset position (18% of GDP) provides it flexibility to mitigate risks from high commodity dependence, financial dollarization, increased private net external debt, and 37.5% non-resident participation in the central government PEN securities market.

Peru's current account deficit (CAD) is at an average of 3% of GDP in 2015-2017, larger than the median for 'BBB' peers. The country's manageable external financing needs are financed by FDI and the sovereign's international capital market access. After peaking in 2012, slowing mining FDI signals a shift toward greater net external borrowing for the government's infrastructure program and private-public partnership (PPP) investments during 2015-2017.

Fitch expects growth to moderate to 2.8% in 2015 and 3.8% in 2016, as rising copper production is weighed down by weak mining prices, weaker domestic confidence and only a slow public investment pick-up. In response, the government has accelerated infrastructure investment plans and PPPs.

In August, the government revised its fiscal projections to extend the period of this consolidation and to reflect lower mining revenues and income tax cuts introduced in 2014 that could reduce general government revenues to 20% of GDP during 2015-2017. Under the revised budget, Fitch expects the general government deficit will widen to 2.4% and 2.9% of GDP in 2015 and 2016 and that it will return to a primary surplus in 2019.

Prudent fiscal policies and high growth reduced general government debt to 19.7% of GDP in 2014, and Fitch expects that Peru's general government debt will rise to 23% of GDP in 2017 well below the 'BBB' median of 43% in 2017.

Peru's financing flexibility is underpinned by government operational deposits (11.6% of GDP) in addition to the well-established fiscal stabilization fund (4.9% of GDP) and a secondary liquidity reserve (0.4% of GDP), international capital market access, multilateral credits, and development of the domestic capital market.

The central bank raised the monetary policy rate 25bps to 3.5% in September in response to rising inflationary pressures and expectations. PEN depreciation, food basket supply shocks, increased electricity tariffs, and incomplete pass-through of lower fuel prices are expected to keep average inflation above target at 3.3% in 2015.

With an ample international reserves buffer and variate FX intervention tools, the central bank maintains a strategy of smoothing currency depreciation in response to the commodity price shock. The PEN has depreciated close to 9% YTD in September and the central bank has intervened in the FX market through spot dollar sales and issuance of FX swaps. BCRP policy efforts have decreased credit dollarization to 33% in August (from 41% in January 2013).

RATING SENSITIVITIES
Negative:
--A further decline in the price of Peru's main commodity exports resulting in weaker macroeconomic performance and deterioration in the sovereign's balance sheet;
--Sharp decline in external liquidity;
--Policy choices that result in macroeconomic and financial instability, and reduce investment and growth prospects.

Positive:
--Sustained growth, especially of the non-mineral sector, that reduces Peru's income gap and improves social indicators relative to higher-rated sovereigns;
--Strengthened institutional capacity that improves the effectiveness of economic and social policy implementation;
--Significant improvements in Peru's fiscal and external balance sheets and material reduction of financial dollarization.

KEY ASSUMPTIONS
Fitch expects Peru to maintain prudent and pragmatic policymaking direction throughout the 2016 electoral cycle given increased consensus over the direction of economic policy and the strengthened macroeconomic and fiscal policy frameworks since 2001. Political fragmentation and political noise are likely to preserve low business confidence through the presidential and congressional elections.

Fitch expects China to manage a slowdown in its economy, growing by 6.8%, 6.3%, and 5.5% in 2015, 2016, and 2017, respectively, thus providing limited upside for commodity prices.

Fitch assumes copper production continues to increase over 2015-2017 as expanded and new mines come online.

Fitch expects the U.S. economy to grow by 2.5% in both 2015 and 2016, slowing to 2.3% in 2017. The Federal Reserve will start to tighten monetary policy by the end of 2015, but will raise its policy rate at a gradual pace compared with previous cycles.