Despite recent political turmoil, Peru successfully issued USD 4 billion of notes in November, USD 1 billion with maturity in 100 years, USD 2 billion at 40 years and a further USD 1 billion at 12 years.
The 100-year note marks the lowest yielding century bond ever sold by an emerging market government. A fixed income analyst in Peru summarises, “Despite five Presidents in four years, the market continues to bet on Peru.”
“Despite five Presidents in four years, the market continues to bet on Peru.”
Fixed income analyst, Peru
Media and politicians have been quick to jump on the issue of a century bond as a sign of Peru’s economic strength. According to the Ministry of Finance, investors have confidence in the Peru’s financial institutions and they see Peru’s bonds as “risk-free assets”.
A Peruvian asset manager explains, “Peru’s fundamentals are good. GDP has quadrupled in 20 years and excluding Chile, the country has the lowest debt to GBP ratio and lowest interest rate in the region.”
A regional economist believes the medium term outlook for Peru remains attractive, “The copper (30% of Peru’s exports) price is high and production is increasing, the Minister of Economy is expecting a return to growth in Q4.”
Such praise and optimism is justified but there are many other external factors at play including low global interest rates, a weakening dollar, proposed stimulus packages, a potential vaccine-driven recovery in the global economy, etc.
Furthermore, Peru is not alone in issuing such long-dated debt in Latin America. Argentina and Mexico have both issued 100 year bonds with weaker fundamentals – Argentina’s 2017 century bond had to be restructured earlier this year.
So, while century bonds are not common, it is a stretch to believe political risk is being completed overlooked. One US-based investor is concerned about the impact of the 2021 elections, “The fundamental issue is that any President without a majority in Congress can be vacated, even if they haven’t done anything. Investors are assuming that the political landscape will stabilise following the elections in April, but if the new President doesn’t have a majority in Congress, then uncertainty will return.”
“Investors are assuming that the political landscape will stabilise following the elections in April.”
Fixed income investor, US
The fixed income analyst responds, “Political volatility can be costly, with the recent problems, we saw the exchange rate move strongly, although it recovered quickly. Liquid sovereign assets were also hit, but when the political situation stabilised, prices normalised.”