Peru has attracted a lot of foreign investors to its credit market. Here’s why

After years of political turmoil in Peru, relative calm in recent months has seen international investors increase their appetite for the country’s sovereign bonds.

Foreign investors now hold 39 percent of Peru’s sovereign bond market holdings, the highest of any emerging country. This underscores the increasingly positive sentiment around Peru’s fixed income outlook. Moody’s currently has a moderately stable Baa1 credit rating for Peruvian bonds.

This comes after years of political turmoil made investors wary of the Latin American nation. Earlier this year, MPs demanded the resignation of President Dina Boluarte amid accusations of illicit enrichment. Currently, calls for an impeachment have died down, and Boluarte and Congress are now at an impasse.

But now “Peru is a little ahead of the game,” said Pramol Dhawan, Pimco’s head of emerging markets portfolio management. “It recognized the need to provide positive returns on domestic assets to international investors and for central banks to align with international investors and provide positive returns on domestic assets.”

Fixed income fund

Some of the outstanding features of the Peruvian economy are its low debt-to-GDP ratio, which is among the lowest among its peers in Latin America, and its stable currency, the Sol. According to the International Monetary Fund, Peru’s debt is equivalent to 33% of GDP. This is well below Brazil’s 86.7% and lower than Chile’s 40.5%.

Peru’s Central Reserve Bank also cut interest rates at its September meeting to 5.25%, the lowest level in Latin America. Peru also has the steepest yield curve in global and emerging markets, Dhawan pointed out — a stark contrast to the inverted yield curves in the US and many other countries.

“Real yields are high and the curve is steep; and as the (Fed) rate cut cycle continues, there is still plenty of upside potential for duration in Peruvian local bonds,” said David Austerweil, deputy emerging markets portfolio manager. fixed income strategy at VanEck.

A 2-year Soberano bond, the country’s local currency bond, is currently yielding 4.661%, and the 10-year Soberano was last at 6.428%. Bank of America is long on Soberanos, local currency government bonds.

Ironically, Peru’s political dysfunction—which has left its Congress deadlocked and unable to pass meaningful legislation—has likely strengthened Peru’s fiscal health.

“In some sense, the lack of a strong executive led to better fixed income results,” Austerweil added.

Dhawan also pointed out that Peruvian fixed income is a high-quality market for foreign investors. Dhawan noted that the political turmoil is not affecting the country’s debt market outlook. The fixed income backdrop is aided by the relative stability of the Peruvian central bank.

“Peru has created an ecosystem that is very conducive to international investment,” Dhawan said. “The central bank was seen as the biggest in the room… Now they are validating what we think they should be doing, which is normalizing policy according to their domestic conditions.”

What about the scholarship?

The context of the Peruvian actions is less clear. The MSCI Peru Index up 24.8% in 2024 and 55.8% over the last 12 months. This makes it outperform the MSCI Emerging Markets and World indiceswhich were up just 15.2% and 16.7% each at the start of the year, and around 23% and 30% respectively over the last 12 months.

“While the commodity bonus has helped Peru in the short term, it is hard to see a good long-term story without a functioning political system,” Dhawan said.

Mining companies are among Peru’s largest market capitalization stocks, making the stock market highly exposed to cyclical factors. Peru is one of the world’s largest producers of metals such as copper, silver and zinc.

In particular, copper prices are up 24.5% year-to-date – and commodity prices are expected to rise, with recent stimulus measures from China raising hopes for a recovery in economic activity. However, the commodity sector remains highly volatile and subject to external conditions, complicating the capital environment.

“Absent a big commodity supercycle, which is not our base case, it’s hard to see some sort of sustainable growth, outperforming the trend, without being more favorable,” Dhawan said.