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;
--Short-term foreign-currency IDR at 'F2';
--Senior unsecured foreign-currency bonds at 'BBB+';
--Senior unsecured local-currency bonds at 'A-';
--Country ceiling at 'A-'.

KEY RATING DRIVERS
Peru's creditworthiness is underpinned by its established track record of macro policy credibility, consistency, and flexibility, which has delivered macroeconomic and financial stability. Strong fiscal and external balance sheets balance the country's high commodity dependence, low government revenue base, financial dollarization and structural constrains in terms of income per capita, social indicators and institutional quality.

Peru's competitive copper mining industry continues expanding despite the terms-of-trade shock from weakened global demand for base metals. Rising copper export volumes are expected to be a key driver of gradual narrowing of the current account deficit and recovery of economic growth toward 4% by 2017.

A robust external liquidity ratio of 353%, and the sovereign's net external creditor position, equivalent to 22% of GDP, mitigate risks from high commodity dependence, financial dollarization, private net external debt, and non-resident participation, 36%, in the central government PEN securities market. Peru's strong sovereign balance sheet - with low government debt and 4%-of-GDP fiscal stabilization fund - have given the government the space to adjust to the external shock.

Successive Peruvian administrations have maintained credible economic policies despite lacking strong congressional majorities, and against the backdrop of the weak political party system. The adoption of a new electoral law close to the national elections on April 10 has introduced uncertainty to the presidential election. The disqualification of leading presidential candidates could undermine the mandate of the next presidential administration.

On balance, Fitch expects that Peru will maintain economic policy continuity, given the popular consensus in favour of macroeconomic stability.

The government is using fiscal space to smooth the economic adjustment with an infrastructure programme and step-wise reduction of the corporate income tax. For 2016, the improved growth prospects and moderate El Nino impact have reduced the need to use fiscal space. The government narrowed its deficit target to 2% of GDP. This follows a smaller-than-expected deficit result in 2015. Lower mining revenue and income tax drove the 7.5% real contraction of current revenue while the administrative transition of subnational government contributed to a fall in annual general government infrastructure spending despite pick-up in H2-2015. The government plans to reduce the deficit by 0.5%-of-GDP per year in 2017 and 2018, gradually converging to the 1% of GDP deficit limit permitted by the fiscal rule.

Pre-financing of the 2016 budget deficit and 2017 debt service reduces the government's near-term sensitivity to U.S. interest rate rises and election-related uncertainty. Fitch expects general government debt to peak at 25% of GDP in 2016 and the interest burden to remain low at 5% of revenue. International issuance and PEN depreciation raised the external share of government debt. Nearly half of general government debt is exposed to currency risk.

The current account deficit, 4.4% of GDP in 2015, remains larger than the 'BBB' median.

Fitch expects the completion of FDI-funded mining investments and rising copper export volumes during 2016-2017 will narrow the CAD toward 3.8% of GDP in 2017. Capital goods imports for infrastructure projects and the measured pace of foreign exchange adjustment are expected to sustain import demand. Peru's diminishing gross external financing requirement (current accounts deficit plus total external amortizations) is expected to moderate toward 29% of international reserves in 2017. Public and private external borrowing for infrastructure is projected to rise.

Economic growth recovered to 3.3% in 2015. Although its growth potential has diminished, Fitch expects Peru's growth to reach 3.3% in 2016 and 4% in 2017, outperforming the 'BBB' median and most Latin American peers.

Rising copper production and infrastructure investment are expected to propel growth, with downside risks from sharper-than-expected deceleration of the Chinese economy and upside potential if the incoming administration is able to negotiate the resumption of pending mining investments.

The central bank has tightened monetary policy to curtail inflation, which is above-target at 4.5% yoy, and to anchor inflation expectations within the 2%+/-1% target band. It paused in March after three consecutive rate increases during December-February to 4.25%. Sol depreciation of 14% during 2015, utility price appreciation due to USD-indexed contracts, and food supply shocks have lifted CPI inflation.

The central bank has taken macroprudential steps to reduce Peru's still high level of credit dollarization, a risk for financial stability and a historical constraint to exchange-rate policy flexibility. Foreign currency-denominated credit declined to 30% at year-end 2015 from 38% in 2014.

RATING SENSITIVITIES
The main risk factors that, individually or collectively, could trigger a negative rating action are:
--A negative external shock - such as a sharp decline in the price of Peru's main commodity exports - resulting in weaker macroeconomic performance and deterioration in the sovereign's balance sheet;
--Erosion of policy credibility that results in diminished investment and growth prospects;
--Sharp decline in external liquidity.

Conversely, the main factors that could lead to a positive rating action are:
--Sustained growth 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 China's economy to grow 6.2% and 6% in 2016 and 2017, respectively.

Fitch assumes copper production continues to increase over 2016-2017 as expanded and new mines come online. Fitch assumes copper prices will stabilize at current levels in 2016 and moderately improve in 2017.