Peru a worthy borrower of ultra-long debt

November 11, 2010

Peru is a worthy borrower of very long-term debt. While poorer than Mexico or Goldman Sachs — two others recently in the market with long-dated bond issues — the Andean nation’s economy is more balanced, it has less debt and its growth prospects look better. Global mining companies already take the country seriously; its successful $2.5 billion financing this week suggests debt investors are coming to do so too.

Mexico recently sold 100-year debt at a 6.1 percent yield, while Goldman sold 50-year paper at 6.125 percent. In its fundraising, Peru’s long-term slug had a maturity of “only” 40 years, but it is still notable that the $1 billion issue sold at a lower yield than paid by Mexico or Goldman — 5.875 percent.

At first sight that seems irrational. Peru’s GDP was just $127 billion in 2009 according to the World Bank, only one-eighth of Mexico’s, and it is significantly poorer on a per capita basis too. As a company Goldman isn’t directly comparable, but for illustration its $45 billion of revenue in 2009 translates into an amount per employee that dwarfs either South American economy. The investment bank’s credit ratings also trump those of Mexico and Peru.

But Peru has its attractions. It enjoys rapid growth and a balance of payments surplus, with a broad range of natural resources and agricultural products, all in high demand. Government spending surged to fight the 2009 downturn but remains below 20 percent of GDP. Encouragingly, Finance Minister Ismael Benavides promised greater prudence after taking office in September. With all but one of the candidates for next April’s presidential election generally committed to free markets, the electorate can choose from several plausible alternatives. Peru’s government debt also stands at only around 25 percent of GDP, against nearly 40 percent for Mexico.

Mexico, meanwhile, continues to run current account and budget deficits, while its major natural resource, oil, is controlled by an unreliable public sector fiefdom. It also comes with considerable political risk, with anti-market candidates set to be strong contenders in elections in 2012.

As for Goldman, it’s profitable and committed to free markets. But it has no natural resources and depends on a business model that stresses short-term profits. An investment here, too, carries an element of political risk. Bond buyers are rightly taking notice of Peru’s quiet progress.

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