Fitch Places Peru's Sovereign Rtg On Rtg WatchNeg; Rtgs Affd.

Business Editors

NEW YORK--(BUSINESS WIRE)--Nov. 8, 2000

Fitch, the international rating agency, today placed Peru's 'BB' long-term foreign and 'BBB-' local currency ratings on Rating Watch Negative.

This action reflects the recent increase in political uncertainty

surrounding the upcoming national elections called by President Fujimori in mid-September. On Sept. 18, Fitch had said that, on the road to elections which are now expected to occur in April 2001, political uncertainty regarding Peru could result in slower economic growth, pressure on public finances and lower foreign direct investment flows.

In recent weeks, concerns about President Fujimori's ability to manage the transition have increased and uncertainty about the election outcome and economic policy implications has not been reduced. In this dynamic environment, Fitch believes that sovereign creditworthiness could deteriorate in the coming months.

Nevertheless, the ratings were affirmed at 'BB' for foreign currency obligations and 'BBB-' for local currency (Peruvian "nuevo sol") obligations. This reflects Fitch's belief that over the long run, a smooth change of government and a strengthening of democratic institutions could underpin Peru's sovereign creditworthiness. However, such institutional deepening can only be expected to occur over the longer term. Concerning economic policy, since 1991, President Fujimori has pursued a path of economic reform that has underpinned Peru's return to macroeconomic stability and substantial foreign investment inflows.

In the coming months, Fitch will monitor progress toward national elections as well as the government's capacity to govern. A smooth electoral process could warrant a lifting of the Rating Watch Negative status. Fitch will monitor whether or not fair electoral rules are agreed in the Organization of American States (OAS) sponsored talks between the government and the opposition, the question of amnesty for military officials is resolved, social unrest and military involvement in politics is avoided, and agreement is reached on strengthening democratic institutions.

Positive institutional developments in the future could include a more predictable set of rules for government succession, a reliable system of checks and balances, and greater judicial impartiality. On the economic policy front, while Finance Minister Carlos Bolona has continued to pursue fiscal austerity and privatization, it remains unclear if there will be policy continuity in the next government.

Since President Fujimori's call for national elections, Peru has experienced political turmoil. This has included the flight and subsequent return to Peru of the former intelligence chief Vladimiro Montesinos who was accused of involvement in a bribery scandal, the resignation of First Vice President Francisco Tudela, the reshuffling of the military high command and a small military uprising that reportedly occurred in southern Peru.

OAS-brokered negotiations between the government and the opposition remain to be completed, although the parties recently agreed to, and the Constitution was amended to allow, elections on April 8, 2001. Yet Fitch remains concerned about the potential for setbacks on the road to the elections. The extent to which President Fujimori can control events in the near term and pave the way to smooth elections will determine if recent incidents turn out to be limited shocks or a reflection of a sustained threat to social order.

Ongoing political uncertainty could hurt investment and economic performance in the coming year. Economic growth could slow from just above 4% annually in 1999-2000 to 2-3% in 2001 on the back of weaker investment. The general government deficit is expected to widen to almost 3% of GDP in 2000 from 2.8% last year.

In 2001, the government may have difficulty meeting the 1.5% deficit target it agreed to with the IMF. In this environment, Peru's public sector financing needs could amount to approximately US$2 billion in 2001, which they should be able to meet with multilateral borrowing and local issuance.

In spite of a comparatively heavy net public external debt burden, representing approximately 100% of exports, the Peruvian public sector's needs for external market financing should remain small compared to other speculative grade sovereigns.

Based on this sovereign action, the 'BB' long-term foreign currency rating of Banco Continental is also placed on Rating Watch Negative.