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Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. P-7030-PE
REPORT AND RECOMMENDATION
OF THE
PRESIDENT OF THE
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
TO THE
EXECUTIVE DIRECTORS
ON A
PROPOSED DEBT AND DEBT SERVICE REDUCTION LOAN
IN AN AMOUNT OF US$183 MILLION
TO THE
REPUBLIC OF PERU
AND ON RELATED MEASURES TO SUPPORT THE DEBT REDUCTION
PROGRAM OF THE REPUBLIC OF PERU
November 25, 1996
This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY EQUIVALENTS
Currency Unit - Nuevo Sol (SI.)
EXCHANGE RATE
(as of October 11, 1996)
US$1.00 = S./ 2.54
FISCAL YEAR
Januarv 1 to December 31
ABBREVIATIONS AND ACRONYMS
BAC Bank Advisory CommitteeBEP Buyback Equivalent PriceCAS Country Assistance StrategyDB Discount BondDDSR Debt and Debt Service ReductionDOD Debt Outstanding and DisbursedDRE Debt Reduction EquivalentDS Debt ServiceFLIRB Front-Loaded Interest Reduction BondGDP Gross Domestic ProductIDB Inter-American Development BankIFI International Financial InstitutionIMF International Monetary FundlRR Internal Rate of ReturnJEXIM Export-Import Bank of JapanLIBOR London Interbank Offer RateMLT Medium- and Long-TermMNI Market Value of New InstrumentsMOP Memorandum of the PresidentMYRA Multi-Year Rescheduling AgreementPB Par BondPD Pre-Deal PricePDI Past-Due InterestPDP Post-Deal PricePPG Public and Publicly GuaranteedPRAL Pension Reform Adjustment LoanSAL Structural Adjustment LoanSDR Special Drawing RightXGS Exports of Goods and Services
Vice President Mr. Shahid Javed BurkiDirector Mr. Paul IsenmanDivision Chief Mr. Dan MorrowStaff Mr. Edgardo Favaro
FOR OFFICIAL USE ONLY
PERU
DEBT AND DEBT SERVICE REDUCTION LOAN
TABLE OF CONTENTS
Page
LOAN AND PROGRAM SUMMARY..Ii
I. BACKGROUND..1II. THE DDSR AGREEMENT .. 2
A. Main Provisions. 2Eligible Debt ............................................................ 2Treatment of Principal ............................................................ 3Treatment of Past Due Interest (PDI) ........................................................... 5
B. Responses .............................................. ........ 6C. Costs and Sources of Support ...................................................... 6
III. EVALUATION OF THE DEBT AGREEMENT ............... 7A. The Extent of Debt Reduction ...................................................... 8B. The Cost-Efficiency of the DDSR Agreement ......................... .............................. 10
Comparison with a Market-Based Debt Buyback ..................... ...................................... 10Comparison with a Counterfactual MYRA ........................................................... 12
C. Indirect Economic Benefits ....................................................... 13D. Creditworthiness and Debt Management ....................................................... 16
Reduced Overall Burden ........................................................... 16Debt to Official Creditors ........................................................... 16Reduced Flexibility ........................................................... 16
IV RATIONALE FOR BANK SUPPORT ................................................... 17A. Eligibilityfor DDSR Support ....................................................... 17B. The Proposed Debt and Debt Service Reduction Loan ...................................................... 18C. Conditions for Loan Effectiveness ...................................................... 18D. Disbursement and Other Arrangements ....................................................... 18E. Prepayment Provisions ...................................................... 19F Waiver of Negative Pledge Clauses ...................................................... 19G. Benefits ....................................................... 19H. Risks ...................................................... . 20
V. RECOMMENDATIONS ............................................. 20
Annex: Table IL Key Economic IndicatorsTable II: External Debt IndicatorsTable III: Structure of External Debt
SCHEDULES
SCHEDULE A: DISBURSEMENT AND RETROACTIVE FINANCING .................................................... 24SCHEDULE B: TIMETABLE OF KEY PROJECT PROCESSING EVENTS .................................................... 25SCHEDULE C: STATUS OF BANK GROUP OPERATIONS IN PERU (BANK AND IFC) ................................. 26SCHEDULE D: PERU AT A GLANCE .................................................... 28
Map -- IBRD No. 26572R
This docurent has a restricted distribution and may be used by recipients only in the perfornance of theirofricial duties. Its contents may not othernise be disclosed wiihout World Bankk authorization.
ii
PERU
DEBT AND DEBT SERVICE REDUCTION LOAN
LOAN AND PROGRAM SUMMARY
Borrower: The Republic of Peru
Beneficiary: Not applicable.
Poverty: Not applicable.
Amount: US$183 million
Terms: Repayable in 17 years, on level repayments, including five years of grace,at standard interest rate for LIBOR-based US dollars single currencyloans.
Commitment Fee: 0.75% on undisbursed loan balances, beginning 60 days after signing, lessany waiver.
Financiny Plan: See Schedule A.
Rate of Return: The internal rate of return (IRR) on the financial resources allocated tothe DDSR operation, based on the savings in payments to commercialbanks, would be 27 percent.1 The IRR is calculated with respect to acounterfactual Multi-Year Rescheduling Agreement assuming eight yearsof grace period, 24 years of maturity, and a LIBOR+13/16 interest rate.The IRR is well above both the cost at which Peru could borrow theenhancement funds and the critical level employed in the Bank's projectlending.
Staff Aporaisal Report: Not applicable.
Proiect Identification Number: PE-PA-40123
1 The resulting IRR is largely driven by the considerable amount of the debt-buyback option (US$2,472million or 31 percent of Eligible Debt) and by its high average price discount (62 percent).
I
REPORT AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
TO THE EXECUTIVE DIRECTORSON A PROPOSED DEBT AND DEBT SERVICE REDUCTION LOAN
OF US$183 MILLIONTO THE REPUBLIC OF PERU
1 I submit for your approval the following report and recommendation on a proposed Debtand Debt Service Reduction (DDSR) loan for US$183 million to support implementation of'The 1996 Financing Plan' between the Republic of Peru and its commercial creditors torestructure about US$7,988 million of commercial bank and private suppliers debt. The loanwould be repayable in 17 years, on level repayments, including five years of grace, at standardinterest rate for LIBOR-based US dollars single currency loans. A briefing note on thisoperation (SecM95-1163) was distributed to the Executive Directors on November 14, 1995.The DDSR agreement involves: (i) a debt buyback; (ii) the exchange of eligible principal for par,discount and front-loaded interest reduction (FLIRB) bonds; and (iii) a regularization of pastdue interest (PDI) through partial forgiveness, a down payment, and a PDI bond. ProposedWorld Bank measures in support of the DDSR operation encompass:
* A DDSR loan to the Republic of Peru for US$183 million to help finance the debt-buyback and the principal and interest collateral for the par, discount, and FLIRBbonds; and
* A limited waiver of the negative pledge clauses in loan and guarantee agreementsbetween the Republic of Peru and the Bank to permit a pledge of collateral of aboutUS$20G million for the DDSR instruments.
* A set-aside of US$50 million from the proposed Pension Reform Adjustment Loan(PRAL) for US$100 million presented to the Executive Directors concurrently withthis report.
2. This report analyzes the effects of the proposed DDSR operation on Peru's medium-termgrowth prospects and creditworthiness, and discusses the rationale for Bank involvement.Section I outlines the domestic origins of Peru's debt crisis. Section II describes the DDSRagreement provisions, estimates the up-front cost and financial implications, and describessources of official support. Section III evaluates debt and debt service reduction implications,cost-efficiency, indirect economic benefits, and effects on creditworthiness and debtmanagement. Section IV discusses the rationale for Bank support. Section V presents therecommendation.
l. BACKGROUND
3. During the 1970s, Peru accumulated external debt at a rate faster than the rate of growthof the economy. After the debt crisis of 1982, the Government initiated negotiations with theinternational commercial banks to refinance its external debt and, in early 1983, suspendeddebt-service payments until a rescheduling agreement could be reached. In February 1984, an
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agreement in principle was reached, however, non-compliance with the IMF program targetsmade implementation of the agreement impossible.
4. Peru's arrears grew rapidly after 1983, when Peru adopted a best-effort-to-pay practiceon its foreign debt. Then, in July 1985, the Government announced that total foreign debtpayments would be capped at 10 percent of exports. Not until 1988, however, did actual debtservice fall to the 10 percent limit. Initially only payments from public creditors to privateforeign banks were targeted, but in 1987 Peru extended the moratorium to the IFIs and alsobanned external debt-service payments by private debtors. In August 1986, Peru was declaredineligible for IMF lending, in 1987 it was placed in 'non-accrual' status by the World Bank andin 1989 by the IDB. Threatened with expulsion, the Government resumed current debt-servicing to the IMF at the end of August 1989.
5. The administration that took office in July 1990 implemented the most comprehensivereform program in the history of Peru. Among other sweeping measures, the government tookdecisive steps to resume links with the international financial community. Arrears were clearedwith the IDB in September 1991 and with the IMF and the Bank in March 1993. Reschedulingagreements of official bilateral debt with Paris Club creditors were approved in September 1991,May 1993, and July 1996. In October 1995 the Government of Peru (GOP) and the BankAdvisory Committee (BAC) announced an agreement in principle to repackage Peru's medium-term debt with commercial bank and private supplier creditors. The agreement was a major steptowards reintegrating Peru into the international financial community after more than a decadeof virtual isolation.
II. THE DDSR AGREEMENT
6. The DDSR agreement encompasses about US$7,988 million (US$10,812 million if PDIforgiveness is considered) of public and publicly-guaranteed medium-term debt with commercialbanks and private suppliers. The agreement includes a menu of options to exchange eligibledebt for new instruments, a debt buyback, and substantial PDI forgiveness. The up-front cost ofthe operation is estimated at about US$1,435 million, and about 44 percent of the cost would befinanced using part of the country's own reserves. This section describes the main provisions ofthe agreement, reports the response of creditors, estimates the up-front cost, and identifies thefinancing sources for the operation.
A. Main Provisions
Eligible Debt
7. The DDSR operation encompasses all medium- and long-term, public and publicly-guaranteed debt, currently in arrears, with commercial banks and private supplier creditors. Theagreement is comprehensive, reducing the debt and debt service obligations through a menu ofoptions for buying back or exchanging eligible principal--US$4,183 million, including principal
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arrears--, and past-due interest (PDI)--US$3,805 million.4 The total amount covered,US$7,988 mnillion, corresponds to about 25 percent of the total external debt of Peru and about40 percent of the public and publicly-guaranteed debt.
Treatment of Principal
8. The agreement offers creditors a menu of three types of new exchange instruments, adebt-buyback for the exchange of principal claims, and a separate treatment of PDI5 (see Table1). Holders of eligible debt would exchange their claims to principal for one of the followingoptions:
* Par Bonds (registered) at below market interest rates, commencing at 3 percent inyear one, rising to 4 percent in years sixteen through twenty-five, and 5 percent inyears twenty-sixth through thirty, with a bullet payment upon maturity (30 years);
* Discount Bonds (registered) with face value 45 percent below that of the eligibledebt, at interest rate of LIBOR plus 13/16 percent, with a bullet payment uponmaturity (30 years);
* Front-Loaded Interest Reduction Bonds (registered), at below market interest ratesduring years one through ten, commencing at 3.25 percent in year one and graduallyrising to 5 percent in year ten, and to the six-month LIBOR plus 13/16 percentthereafter, with a maturity of 20 years and a grace period of 8 years; and
* A tender offer for a debt-buyback conducted through a 'Dutch' auction withseparate bids for principal and past due interest (PDI). (See para. 12 below).
9. The principal of the Discount Bond (DB) and Par Bond (PB) will be collateralized in fullby the pledge of US Treasury zero-coupon bonds delivered on the closing date and held in anescrow account. Payment of six months of interest would be secured on a rolling basis by thepledge of cash or permitted investments delivered on the closing date and held by the collateralagent (a correspondent bank) in a separate account. Collateral of interest would be based on areference rate of: (i) 7 percent per annum (for the DB), and (ii) 3 percent in year one to fifteen,rising to 4 percent in years sixteen through twenty-five, and 5 percent in years twenty-sixththrough thirty (for the PB). The principal of the FL1RB is not collateralized. Until the tenthanniversary after closing, payment of six months of interest would be secured on a rolling basisby the pledge of cash or permitted investments delivered on the closing date. Collateral ofinterest on the FLIRB would be based on a reference rate of 3.25 percent per annum. Earningson all of the collateral accounts would accrue to Peru once the collateral requirements aresatisfied. The agreement allows the repurchase of bonds at any price and time provided certain
4 This agreed PDI is the result of substantial forgiveness, estimated by the Government at about US$2,823million. This Govermnent estimate will not be included in the following sections in the evaluation of thequality of the DDSR agreement.
5 A debt-equity conversion (debt for privatization program) has already occurred, redeeming US$318 millionin principal arrears and US$254 million in interest arrears. This swap, however, is not included in theDDSR financing pool.
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conditions are filly met by the GOP. 6 The bonds will be issued in two simultaneous offerings,one in the United States to US persons and the other outside the US to Non-US persons.
Table 1: Summary Terms of Debt Agreement
Instruments Maturity Interest Collateral Form
Menu of ODtions1. Par Bonds (with 30 yr. bullet Yrs. 1-15: 3.00 % Principal secured by thirty-year Registeredbelow-market interest Yrs. 16-25: 4.00 % zero coupon U.S. Treasuryrates) Yrs. 26-30: 5.00 % securities. Six-month rolling
interest guarantee at a rate of3.00 percent per annum,secured by cash or permittedinvestments. The reference rateincreases to 4.00 percent and to5.00 percent on the 15th and25th anniversaries of theClosing Date, respectively.
2. Discount Bonds 30 yr. bullet six-month LIBOR + Principal secured by thirty-year Registered(45% on face value) 13/16% zero coupon U.S. Treasury
securities. Six-month rollinginterest guarantee at a rate of7.00 percent per annum,secured by cash or permittedinvestments.
3. Front-Loaded 20 yr. with 8 yrs. grace Yrs. 1-2: 3.25 % Six month rolling interest RegisteredInterest Reduction and 25 semi-annual Yrs. 3-4: 3.75 % guarantee, until the 10thBonds (par exchange) installments as Yrs. 5-6: 4.00 % anniversary of the Closing
follows: 1-4: 1% of Yrs. 7-8: 4.50 % Date, at a rate of 3.25% perprincipal; Yrs. 9-10: 5.00 % annum, secured by cash or5-9: 2%; 10-12: 3%; Yrs. 11-20: six- permitted investments.13-15: 4%; 16-19: month5%; 20-21: 6%; LIBOR + 13/16 %22-23: 7.5%;24-25: 9%
4. Debt Buy-Back("Dutch" auction)Past Due Interest1. US$315 million cashdownpayment . ll2. PDI Bonds 20 yr. with 5 yrs. grace Yrs. 1-2: 4.00% None Registered(par exchange) and 31 semi-annual Yrs. 3-6: 4.50%
installments as Yrs. 7-10: 5.00%follows: 1-2: 1% of Yrs. 11-20: six-principal; month3-4: 2%; 5-18: 3%; LIBOR + 13/16 %19-31:-4%
3. Forgiveness(US$2,672 million) ___ .
6 For a complete coverage of the conditions governing the repurchase of bonds, refer to page III-10 of the"Republic of Peru - Term Sheet for the 1996 Financing Plan". A description of Security Matters can befound in Annex F of the same document.
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Treatment of Past Due Interest (PDI)
10. The agreement restructures PDI by means of: (i) PDI forgiveness; (ii) partial PDIpayments prior to closing; (iii) a downpayment on PDI at closing; and (iv) a PDI bond. PDIforgiveness, estimated by the Government to reduce PDI obligations by about US$2.8 billion,results from the recalculation of PDI at lower-than-contractual interest rates.7' 8 During 1996Peru made partial payments on PDI totaling US$90 million. At closing, Peru will make aUS$225 million downpayment on PDI. Remaining PDI (US$3.8 billion) would be exchangedfor PDI bonds (registered), having twenty year final maturity and a five years grace period, atbelow market interest rates, commencing at 4 percent in the first two years, rising to 4.5 percentin years three to six, 5 percent in years seven to ten, and LIBOR plus 13/16 percent from yeareleven through twenty.
11. Because of the prolonged period with little or no debt service, the share of PDI in Peru'sDDSR agreement is unusually high. At 61 percent the share of PDI in total debt exceeds that ofPanama (50 percent), Ecuador (42 percent) and is well above the sample average (14 percent)--see Table 2.
Table 2: PDI and Eligible Debt(US$ billion)
PDI Eligible PDIDebt Share (%)
(a) (b) (c)=(a)/(b)
PERU 3.8 8.0 47.6anama 2.0 3.9 50.0cuador 3.3 7.8 41.9
Mexico 0.0 48.1 lhilippines 0.0 5.8osta Rica 0.3 1.0 34.0
Venezuela 0.0 19.6 lruguay 0.0 1.3 ligeria 0.4 5.4 8.2
Argentina 8.5 27.0 31.5ordan 0.1 0.9 16.7razil 6.0 46.6 12.9ulgaria 1.9 8.1 23.5ominican Republic 0.4 1.2 35.9oland 4.3 14.4 29.7
Weighted Average 14.3
7 See footnote 4.
The basis for the recalculation of PDI is set forth in Annex D of the Financing Plan. It determines eligibleinterest by using PDI factors which express amounts of eligible interest as percentage of eligible principal.PDI factors, in turn, depend on two elements, the interest on principal (IOP) and the interest on past-dueinterest (101). The former assumes that accrual for each item begins at the mid-point of the month ofInterest Accrual Date and continues to Closing. It is based on monthly LIBOR plus 13/16 percent p.a. Thelatter assumes accrual beginning on the first day of calendar quarter after IOP first became due andcontinues to Closing. The interest basis is the lesser of 2.5 percent p.a. or LIBOR plus 13/16 percent p.a.
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B. Responses
12. Creditors responded to the 1996 Financing Plan with commitments for 97 percent of theeligible debt by mid-September 1996: 42.5 percent of these commitments was allocated to theFLIRBs; 22.7 percent to DBs; 4.6 percent to PBs; and 30.2 percent of the eligible principal tothe debt-buyback. The buyback reduced US$1,265 million of principal and US$1,180 millionof PDI--the average price of the debt-buyback was about 38 cents on the dollar9 . While theallocation results in less debt and debt service reduction than a balanced one, it also results inconsiderably lower up-front costs. The impact of the debt- buyback in total debt and debtservice reduction outweighs all other aspects of the final allocation of commitments.
C. Costs and Sources of Support
13. The total costs of closing the DDSR agreement is estimated to be about US$1,435million (see Table 3). Of the total cost US$315 million corresponds to payments on PDI andUS$939 million to the debt buyback. The remainder includes the estimated cost of the collateralfor the DBs (US$114 million), the PBs (US$38 million), and the FLIRBs (US$29 million).
Table 3: Debt Service and Debt Reduction Operation(US$ Millions)
Allocation of Elifible DebtPrincipal Past Due Interest Total
Total $4,183 100.0% Total $3,805 100.0% $7,988
Par Bond $191 4.6% Partial Paymnents $90 2.4%
Discount Bond $948 22.7% Downpayment $225 5.9%
FLIRB $1,779 42.5% PDI Bond $2,310 60.7%Buyback $1,265 30.2% Buyback $1,180 31.0%
Summaar of DDSROld Debt (including PDI and Forgiveness) $10,811 Uses of FundsNew Debt $4,801 Total Funds $1,435 100.0%
RequiredForgiveness (from PDI) $2,823 for cash payments on PDI $315 22.0%
for Buyback payments $939 65.4%Face Value of Debt Reduction $3,187 for enhancements $18.1 12.6%o/w Discount Bond $427 Par Bond $38 2.6%o/w cash payments on PDI $315 Discount Bond $114 7.9%
olw Principal & Interest Retired in Buyback $2,445 FLIRB $29 2.0%
NPV of Interest Payment Reduction $576 Sources of Funds $1,435 100.0%Multilateral $700 48.8%
Commercial Bank DRE (% of Eligible Debt) 55.75% World Bank $233 16.3%Secondary Market Price of Debt * $37.90 IDB $233 16.3%Buyback Equivalent Price (BEP)* $31.30 IMF $233 16.3%BEP - IMF Methodology * $30.86 JEXIM $100 7.0,
Local Funds $635 44.3%
* Cents on the dollar
The final prices for the debt-buyback bids were as follows (in cents on the dollar): * Maximum PrincipalBid Price: 37.00; . Maximum Interest Bid Price: 42.00; * Weighted Average Principal Bid Price: 35.99;.Weighted Average Interest Bid Price: 40.97. The actual buyback will take place by Closing date.
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While the final cost of principal collateral will depend on changes in the yield of the zero-couponbonds before the final purchase, the cost of interest collateral is predetermined by the agreedreference rates. 10
14. The Government has requested support from the World Bank, the IMF, the IDB and theExport-Import Bank of Japan (JEXIM) to help finance the up-front costs of the DDSRAgreement (see Table 3). Bank support would include the proposed US$183 million DDSRLoan and US$50 million of set-aside funds from the US$100 million Pension ReformAdjustment Loan (PRAL) simultaneously presented for approval to the Executive Directors.IMF support would include set-aside funds from the previous and current Extended FundFacility (EFF) program in an amount of SDR105.5 million (US$153 million equivalent) andSDR55 million (US$80 million equivalent) from an Augmentation of the EFF. IDB will providea self-standing DDSR Loan of US$233 million equivalent approved by the Board in November6, 1996. JEXIM Bank support would include US$100 million equivalent in co-financing of theproposed Bank's PRAL and the IMF's EFF. The Government would finance the remaining up-front costs of the DDSR agreement (about US$635 million) from its own resources. TheGovernment would carry the burden of higher-than-estimated collateral costs to the extent thatsome additional lending does not materialize.
III. EVALUATION OF THE DEBT AGREEMENT
15. This section studies the: (i) extent of debt reduction; (ii) cost-efficiency of the DDSRagreement; (iii) indirect economic benefits; and (iv) impact of the DDSR agreement on debtmanagement and creditworthiness. Implementation of the DDSR operation would:
o restructure about 40 percent of Peru's total public and publicly-guaranteed externaldebt and reduce its the face value by about US$3,187 million (excluding forgivenessof about US$2,823 million);
* result in a debt reduction equivalent (DRE) of about US$4,453 million, or 55.8percent of the eligible debt and 11.4 percent of the total public and publicly-guaranteed debt;
* result in cash flow savings in 1996-2026 with net present value of US$2,045 million(3.3 percent of GDP) and an IRR of 27 percent--compared to counter-factual debtservice;
* reduce interest rate risk, by exchanging 85 percent of the eligible debt (afterbuyback) into fixed-rate instruments for the next ten years;
* augment the relative exposure of the IFIs, from 18 to 23 percent of Peru's publicand publicly-guaranteed debt, and
10 The estimated acquisition cost of the collateral is about US$200 million. Because the collateral is in theform of zero-coupon bonds its value will increase over time as the bonds approach maturity.
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* reduce Peru's flexibility to adjust future debt service obligations to shocks, inasmuchas 22.9 percent of Peru's public and publicly guaranteed external debt heretoforesubject to rescheduling would be transformed into bonds.
A. The Extent of Debt Reduction
16. This part studies the debt reduction impact of the DDSR agreement: (i) it estimates thedebt reduction equivalent (DRE) and compares the results with those of previous DDSRs, (ii)identifies the importance of the debt-buyback in total debt reduction, and (iii) discusses thesensitivity of the results to changes in market interest rates.
17. The DDSR agreement results in a DRE of US$4,454 million or 55.8 percent of theeligible debt (see Table 4 below)." This DRE is higher than that secured in 10 out of the 14previous DDSR agreements by other countries and is well above the average (35 percent). Evenso, because the restructuring encompasses only 25 percent of Peru's external debt, debtreduction as a percentage of total public and publicly guaranteed debt (11.4 percent), is belowthe average in previous DDSRs (16 percent).
18. The DRE is the result of: (i) a decrease in the face value of commercial debt of aboutUS$3,187 million, stemming from: (a) the buyback of US$1,265 million of principal and thecorresponding US$1,180 million of PDI; (b) the exchange of 22.7 percent of principal at adiscount of 45 percent (US$427 million), and (c) the downpayment at closing of PDI (US$315million); (ii) the net present value of interest savings reduction through PB and FLIRBexchanges and the PDI bond (US$1,086 million); and (iii) the principal prepayment equivalent ofcollateral placed beyond Peru's reach (US$181 million). Thus, the debt-buyback is responsiblefor fifty-five percent of the debt reduction and 77 percent of the total reduction in the face valueof commercial debt.
19. The DRE estimate is not sensitive to the assumption used to forecast future marketinterest rates. For instance, estimating the DRE using a fixed LIBOR rate'2 instead of theTreasury bill yield curve, used in Table 4, would result in a DRE 5 percent lower (US$208million) than in the benchmark case; likewise, lowering the yield curve by 25 basis points wouldresult in a DRE 1.2 percent lower (US$53 million) than in the benchmark case.
Had savings from PDI forgiveness been included in the estimate, DRE would have increased to 67 percentof eligible debt.
12 World Bank's projections released in April 1996.
Table 4: Debt Reduction Equivalent(USS Millions)
IFacm Valul otiChauges Adkistmen Debt Reduction Fquivalent (DRF)
Face Face New Net Facc Face Prescnt Prepy'l Net Comm. Aditional Tol4^ Totl Total DRE DREValut Value Moutey Value of Value or Value of Equivalent Adjust. Debt Officidl Debt External " % of a ". of
Eligible Debt Comm. New Interest of Reduction Leading Reduclion Deb Total GDP
Debt Reducliout Debt Com. Service Collateral Equivalent Equivalant DebtReduction Debt Reduction (DRE)
I1) (2) I2) (4) (5) (6) (7) (8) (9) (10) (I1) (12) (13) (14) (IS)_[(2)-Ml)) 1(1(4)l 1(6)+(7)) 1(4)f(3)l ((9( IM) 1(10)ill)) (t2Y(l3))
* Pert. 7,988 3,187 0 3,1t7 4,S01 1,086 11 1,267 4,453 55.8% *00 3054 321,061 11.4% 6.2%
P5Sein at 44.12 1.692 0 1.692 2,491 576 8lt 757 2.449 51.5%D.lcounBulnd 948 427 0 427 521 0 114 114 541 570%P Bllund 191 0 0 0 191 102 38 140 140 71 1%FLIRt3 tlund 1,779 0 0 0 1.779 475 29 504 504 28 3%floyback 1.265 1.265 0 1,265 0 0 0 0 1.265 1000%
Past Dnue lultst 3.)05 1.495 0 1,495 2,310 S10 0 510 2.005 52.¶n/PDI Bond 2.310 0 0 0 2,310 510 0 510 510 22.1%P0IDo.nPayment 315 315 0 315 0 0 0 0 315 100.0%PDI Retued iu Buyback 1,180 1,1S0 0 1.180 0 0 0 0 1.10 100.0%
PI'all.na 3.906 730 0 730 3,176 383 96 479 1.209 310/% 90 1.119 5.806 191% IS 1. v.D
Lcuador ' 7142') 1,315 0 1,l15 6.114 1.031 511 1,559 2.74 3WM1'. 305 2.569 12.522 205% Is 5%
hltxico 47.170 7,061 1.027 6,034 41.136 7,090 7.166 14,256 20.290 4300% 3,732 1655 8 1.205 204% 8l0%Phlippines 6.600 2.603 82S 1.775 4.25 1,107 472 1.579 3.354 50S% 465 2,889 26.004 11 1% 66%6(Vsa Rii.a 1,60 1.029 0 1,029 579 115 37 152 1.111 71.4% 177 1,004 3.979 252% 192%Venezuela 19.011 1.921 1,166 755 I,256 1,491 1,719 4,220 4,975 26 2% 687 4,2U8 26.170 164% 9S/.Urmmaay 1,610 62t *9 539 1.071 15S III 269 8o0 50.2% 140 66i 4,625 144% 84%N.getta 5.339 3,310 0 3,310 2,029 612 357 969 4.279 t0.1% 0 4,279 34.625 114% 12 S%A,0 ut,aa 29.335 3,26S 0 3,265 26,070 5.159 3.032 8,191 11,456 39.1% 2.117 9,339 58,426 160% 4 1%Iwdan 095 142 0 142 753 114 120 234 376 42.0% 0 376 7.1W4 52% 791.ala,rt 57.600 3,.94 350 3.644 53.956 3,196 3.783 6,979 10,623 ISI4% 0 10.623 93,573 11 4% 2 1%
hulgarta 8.174 3,1Jb 0 3,146 5.021 202 389 691 3.137 469% 231 3.606 1i,2.1 295% 34t%
Dominican Repubirc 1.16 o67 0 687 500 0 SS 58 745 628% 0 745 4.234 174% 7 Y.
I'land 14.333 6.7S0 135 6,645 7.68S 1.425 599 2.024 S.669 60.5% 380 1,219 43.623 190% 97%
IVeighled Aserage I3I_ _ 16 6% 16 0% 5.59.
I) Inelaes. USS1 IS amOlion of dnwnpayn and .partial payments toward PDI2) IOrnssauu of 45 percen apphed ru Uo value ofu d,caum boods3) New niKcy was ot ncludcLd as paul uf Ire &_emcn.t6) NPV f Oumal savings rltive to msarket rages as of Sepleriber 12. 1996 tIlAOR 13116)
7) F... vale of peim rpal and interest colliaeals9) Figuecs tal. into accautI the expected prletm value of intrlt service under recaptrre clauses. whser applicable.13) Al die bqpannag of ths year in whlch ihe DDSR operaion wua coclded. Include. Lony-Term and Mtdium-Term Publie Debt.
intret a reas an ibis debt and ne use of IIMF tesouices15) GOP figrare for 1995.* gtls.ble debt des not islude US$182 nrilli.o of Pl) fo givenrss
Flu Te Philippners opteation v s conclkdel in Iwo pIras
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B. The Cost-Efficiency of the DDSR Agreement
20. To evaluate the cost-efficiency of the DDSR this part compares: (i) the debt reductionattained by investing funds in purchasing the enhancements with that resulting from using thesefunds in a market-based debt-buyback; and (ii) the cash flows resulting from the DDSRAgreement with those that would accrue under a counterfactual Multi-Year ReschedulingAgreement (MYRA).
Comparison with a Market-Based Debt Buyback
21. The debt reduction attained by investing funds in purchasing the enhancements can becompared to that resulting from using these funds in a market-based debt buyback. This is doneby comparing the buyback equivalent price (BEP) of the deal with the post deal price (PDP) ofthe uncollateralized portion of the remaining debt. The BEP is calculated as the market value ofnew instruments minus the market value of enhancements divided by the debt reductionequivalent; this indicates the theoretical market price at which Peru would be indifferent (securethe same debt reduction) between financing the enhancements or financing a market buyback.The PDP is approximated by the price of the non-collateralized portion of the creditor's newportfolio. This stripped price is calculated as the market value of the new instruments minus theprincipal prepayment equivalent of the collateral, divided by the face value of the newinstruments minus the DRE. It indicates the market price at which a buyback could beimplemented.
22. The DDSR operation achieved debt relief at a substantially lower financial cost to Peruthan a market-based debt reduction would have entailed. At 31 cents on the dollar the BEP is 56percent lower than the PDP, which is above the discount in all previous DDSRs with theexception of Panama's and Poland's. An alternative indicator of the efficiency of the DDSRagreement results from comparing the break-even price-- calculated as the market value of newinstruments divided by the nominal value of the eligible debt--with the PDP. At 49 cents on thedollar the break-even price is 31 percent lower than the PDP, which is above the averagediscount (23.1 percent) in previous DDSR operations--see Table 5. The savings resulting fromthe DDSR compared to a market-based debt reduction are about US$1,763 million, or 3 percentof GDP. At the same time, Peru obtained 67 percent of the overall benefits generated by theoperation, compared to an average of 59 percent for previous DDSR operations. The DDSRagreement is also cost effective, as measured by the vIMF. 13
13 The result would be obtained by comparing the BEP defined as total cost/debt reduction to the secondarymarket price on or before the Agreement in principle was announced (in this case as of October 27, 1995).Because the secondary market price (37.9 cents on the dollar) is higher than the calculated BEP (30.9 centson the dollar), Peru has benefited from allocating resources to the DDSR rather than to a market-basedbuyback type of operation.
'I'able 5: Equivalent lluyback Prices, Blrcak-c%'cn Prices, and Post-deal Prices
5l,akcr Im.kW Break-Ecen Buybauk Equisal(er Post-Deal Savings. la6.Iso P,n-Deal Distribution
Value of Value of Price (BE) Pice (BEP) PICe (PDP) mawkel byback Price (PD) of Gans
Elihancemseims (tIE) New I,sI rus,emIs (MNIN) ceiits per dollar cenis per dollar cenis pcr dollir' (PDP-BEY PDP cens per dollar IPDPP-BEY
I (JSS mlloulill (USS ridhon) (PDP-PD)
(1) (2) (3) (4) (S) (6)=[(5-3Y5j (7) (8)-[(5-3y(5-7Ij
JULYl 1,394 3,900 4883 31 30 7092 31.15% 3790 6690%/.
Panama 167 2,249 5969 1383 79.96 25.4% 5478 805%
Ecuador 528 2,759 317 14 23 06 48 97 24.2% -
hsic,co 5.252 20,206 41.00 2588 5200 21 2% 36.00 688%
Philippines 670 3,749 4600 - 5200 It 5% 4000 500%
CoslaRica 210 383 2400 17.78 3900 385% 1200 556%
Vesnauela 1,819 10,678 5000 3656 6100 180-% 37.00 458S.
Uro0ugy 423 1,048 6000 5235 7400 189-% 5600 778%.
Nigeria 1.623 2,131 4000 317.93 45.00 1i 1% 2100 20.8%
Phdiippines' 986 2,504 5200 49.37 7600 31 6% 5200 (000%s"
AMgemuina 3,086 13,425 4600 26.94 5600 179Y% Iis00 26.3%
Bulganua 623 1,978 2400 1637 3000 200%4 2000 600'%
P.Iu-d 1.951 5,381 5100 22 51 8400 393% 30i00 61(1%
A\sctage 1,445 5,541 4424 2933 58.16 21.1% 34.25 58al
81 lE 'rcppynieli olrcllarcral (interesl collateral salued at I minus Ilc aitcagc price of "h1en-arml-ifissued' oitruomelIs as of July 1996), plus downpaymicl on PD) and cash for buyback I
k ?dN) Far ('Peu based ouu ae,ra0 c quotallonis of U hen-anid-if issued' insirumelns as of July 1996.EE - 81NI/ED lhu EE nseasurosIke asora8 e price u sliwich use DDSR occurred.
lilP HIT- MIAMRE
PIDP -- sNI-)IE)I(Fligible D)ebl-DRE)
I/PrI'e as of Ocliobe 27, I993j
/ I'hase 2
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Comparison with a Counterfactual Multi- Year Rescheduling Agreement
23. Evaluating the cash flow implications of the DDSR operation requires a counter-factualscenario. A return to arrears financing would be inconsistent with the Government's objectivesof reestablishing creditworthiness, regaining access to long-term resources from internationalfinancial markets, creating an inviting environment for new investment, and strengthening themarket economy. While generating a temporary cash flow benefit over a DDSR arrangement,accumulation of arrears would postpone recovery of full creditworthiness, disruptimplementation of the ongoing reform program, and damage the consolidation of a dynamicmarket economy. Thus, it lacks plausibility and must be rejected. Resuming debt service underthe original contractual terms is also an implausible scenario; it would impose, on theGovernment's finances, the unbearable burden of paying up-front most of the principal and PDI.Thus, it must also be rejected.
24. In light of these considerations, and following the approach adopted in other DDSRloans supported by the Bank since 1992, the cash flow savings of the DDSR are evaluated withrespect to a counterfactual consisting on (i) the same treatment with regard to PDI and a (ii)Multi-Year Rescheduling Agreement (MYRA) covering the principal at interest rate of LIBORplus 13/16 percent, with a maturity of 24 years, grace period of 8 years and annual amortizationpayments of 5 percent of the principal from 2004 through to 2009 and 7 percent of the principalfrom 2010 through 2019.
25. The cash flow savings and the interest rate relief provided by the DDSR agreementcompared to the counterfactual, are presented in Table 6. Gross benefits consist of the: (i) flowof debt service relief under the counterfactual; (ii) interest earnings on interest collateralaccounts; and (iii) funds to be released from the FLIRB collateral account in 2006, and the PBand DB accounts in 2026. Gross costs include the: (i) US$939 million for the debt-buyback; (ii)US$315 million of up-front PDI payment; (iii) US$181 million to purchase principal and interestcollateral; and (iv) debt service on the new instruments. In the initial year, when the up-frontcosts of DDSR are incurred, the liquidity impact of DDSR as compared to the counterfactual, ishighly negative (US$320 million). However, from 1997 through 2026 the DDSR would provideaverage annual debt service relief of about US$177 million compared to the counterfactual. Theinternal rate of return (IRR) of this cash flow is about 27 percent, which is above the cost atwhich Peru could borrow the enhancement funds and above the critical level employed in theBank's project lending. The net present value of the cash flow savings is US$2,045 million, orabout 3.3 percent of GDP.
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Table 6: Debt Service Relief(US$ Million)
1996 1997 1998 1999 2000 2001-16 2017-26
DDSR Agreement(1) CashforBuyback 939 0 0 0 0 0 0(2)DownpaymentonPDI 315 0 0 0 0 0 0(3) Collateral Purchases 180 0 0 0 0 0 0(4) Interest Payments 0 193 195 217 217 231 50(5) Amortization 0 0 0 0 0 256 71(6) Interest Earnings on collateral 0 6 7 7 7 5 3
Additional Official Lending b/
(7) Loan Amount 800 0 0 0 0 0 0(8) Interest Payments 0 49 55 55 57 32 0(9) Amortization 0 0 0 0 0 50 0
Counterfactual C/
(10) Downpayment on PDI 315 0 0 0 0 0 0(11) Amortization 0 0 0 0 0 416 102(12) Interest Payments 0 434 456 486 486 401 18
Uv-front Liquidity Impact of DDSR(13)= [(10)+(7)-(3)-(2)-(1)] -320
DDSR Debt Service Relief(14) Interest Relief of DDSRI(12)-(8)+(6)-(4)I 0 199 213 221 218 143 -29(15) Amortization Relief1(11)-(9)-(5)] 0 0 0 0 0 110 31(16) Total Debt Service Relief[(15)+(14)+(13)] -320 199 213 221 218 253 2
a/ Annual averages.b/ From IDRB, IDB, IMF, and JEXIM Bank.c/ Counterfactual consists of a MYRA plus PDI.The MYRA has 8 years of grace period, a 24-year maturity, and bears interest rate of LIBOR+13/16 percent.PDI is the same as in Brady.
C. Indirect Economic Benefits
26. Peru's economic recovery since 1990 has been the result of structural reform,pacification and decisive steps towards reintegrating the country into the international financialmarket. These bold steps resulted in rapid restoration of domestic and international investorconfidence in the country--as evidenced by the dramatic turnaround in capital flows (seeparagraphs 21 to 23 of the PRAL MOP). While Peru's formal reintegration into theinternational capital market has taken several years, investor confidence was secured on the basisof the quality of domestic policies and the expectation that Peru would fully restorerelationships with its creditors in the medium-term. Had this not been the case, the economicrecovery would have been a slower and more painful process.
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27. The favorable impact of the DDSR operation in the economy will be increased by thequality of the ongoing reform program-- described in detail in the PRAL MOP. 14 This programsuccessfully addresses the causes of economic mismanagement that led to the debt overhang andestablishes the basis to consolidate a dynamic market economy. At the same time, the DDSRagreement will, substantially enhance the effectiveness of the reform program in acceleratinggrowth and reducing poverty. Indeed, without DDSR the ongoing reform program would bemuch more difficult to implement in the years ahead. The DDSR operation would achieve thisresult by: (i) substantially reducing market uncertainty over Peru's ability and willingness to fullyservice its external debt, and the sizable distortions and costs this uncertainty entails; and (ii)reducing the debt overhang and the associated "tax" on future output, which also acts as adisincentive to reform efforts and private investment.
28. The DDSR operation would alleviate market uncertainty over Peru's capacity andwillingness to service its debt by: (i) eliminating Peru's arrears and normalizing its relations withcommercial creditors; (ii) reducing the present value of debt service payments by 3.5 percent ofGDP; (iii) shielding 85 percent of commercial interest obligations15 from interest rate risk; and(iv) transforming commercial loans into bonds, thereby allaying concerns about futurerescheduling and rendering actual payments more predictable. Official support for DDSRshould further curtail market uncertainty, by ensuring a credible financing plan, both for the up-front costs of the operation and future financing requirements, and by signaling that theGovernment is undertaking the reforms needed to sustain economic growth and maintaincreditworthiness. Finally, market uncertainty should decline because the cost of debt servicedefault in a post-DDSR world would rise dramatically, providing a strong incentive for Peru tomeet the debt service obligations assumed under the DDSR operation.
29. Substantially reduced market uncertainty would translate into appreciable benefits toPeru by reducing the sovereign risk premium and real domestic interest rates, and by broadeningaccess to international capital markets on competitive terms and maturities for both public andprivate sector borrowers. While sovereign-risk commercial bank lending to Peru may not resumefor some time, renewed commercial lending for project finance and growing direct foreigninvestment will play a key role in upgrading Peru's endowment of physical capital. Themacroeconomic impact of the DDSR operation against a counterfactual, which incorporates theMulti-Year Rescheduling Agreement explained in the previous section, is presented in Table 7.16(the full projection period is shown in Annex Table I)
14 A short- and medium-term macroeconomic outlook is presented in the PRAL MOP.
5 These obligations stem from the exchange of principal eligible debt for new instruments bearing fixedinterest rates for, at least, the first ten years.
16 The counterfactual scenario maintains the same policy framework except for the debt agreement. However,it contemplates a less favorable macroeconomic outcome driven by the indirect effects that a moredemanding debt agreement would have over the economy. Given the extra debt service burden imposed bythe MYRA, investors confidence would sustain a lower level of private investment which, in turn, wouldgenerate less economic growth. Finally, the consequent spill over effects would be felt on the public sectoraccounts as well as on the balance of payments.
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Table 7: Illustrative Economic Impact of DDSR
Average Estimated DDSR Counterfactual1991-95 1996 Average '97- Average '97-
.___________ 2006 2006
Annual Real Growth RatesGDP (constant market prices) 5.5 2.0 5.7 5.3GDP Per Capita 3.5 0.2 3.9 3.6Private Consumption Per Capita 0.7 -5.7 3.4 3.1Inflation (eop CPI) 46.1 11.7 5.1 5.1
National Accounts (% of current GDP)Total Investment 19.6 25.2 24.6 23.0
Private 'X 16.1 20.8 20.3 18.7Public 3.4 4.4 4.3 4.3
Gross National Saving 14.5 19.5 20.8 18.8Foreign Saving 5.0 5.7 3.8 4.2Gross Domestic Saving 17.8 20.9 21.9 20.8
Public Sector (% of current GDP)Total Revenues 16.1 17.3 18.0 17.7Current Expenditures 16.0 13.2 13.8 14.6Interest Payments 3.3 2.2 2.1 2.9Capital Expenditures 4.4 5.5 4.3 4.3
Overall Balance -2.5 -1.4 -0.1 -1.2External Sector (% of current GDP)
Resource Balance -2.9 -4.3 -2.8 -2.2Exports GNFS 10.9 11.4 12.1 12.3Imports GNFS 13.8 15.7 14.8 14.5
Current Account Balance -5.0 -5.7 -3.8 -4.2Change in Reserves of the Mon. Auth. -1,251 -2,515 -534.8 -318.3
(US$ million)
I/ Includes change in stocks.
30. The recent evolution of forward-looking market-based indicators is suggestive of theindirect benefits of DDSR, inasmuch as these financial variables tend to adjust quickly to newinformation regarding the future. Especially relevant are secondary market debt prices, andstock market prices because they tend to adjust immediately to new information. Remarkably,the price of Peru's debt on the secondary market has climbed 20 percent since theannouncement of the DDSR Agreement in Principle in October, 1995, from 69 cents to 83cents, in May 1996 (and to 115 cents in October 1996). This is a clear-cut indication that themarket expects the DDSR agreement to generate substantial indirect benefits for Peru. Also,since July, 1996, when the when-and-if issued Peru Brady instruments began to trade, the spreadof the FLIRB over the equivalent maturity US Treasury stripped bond (stripped spread) hassystematically declined, from more than 700 to less than 480 basis points (between June andNovember 1996). This further indicates that the market's perception of Peru's sovereign riskhas improved as a result of DDSR. Domestically, the stock exchange also has registered gains(about 10 percent in dollar terms since October 1995), but this market is very thin.
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D. Creditworthiness and Debt Management
Reduced Overall Burden
31. DDSR would facilitate debt management and substantially enhance Peru'screditworthiness by increasing its capacity and willingness to service its debt, both directly(through debt reduction) and indirectly (through enhanced economic performance). In 1996, theDDSR operation would reduce total public and publicly-guaranteed external debt by 4percentage points of GDP, to about 33 percent, and diminish public debt service payments as ashare of exports of goods and nonfactor services by 7 percentage points (Annex Table II). Overthe longer run, total public and publicly-guaranteed debt is projected to decline steadily to about23 percent of GDP by the year 2000 and about 12 percent by 2006. Similarly, the public debtservice ratio would decrease to 21 percent by the year 2000, 'averaging 17.4 percent a yearthrough 2006. Furthermore, the maintenance of sound economic policies would be encouragedby the up-front cost that Peru has paid in order to regain creditworthiness, and debt managementstrengthened as creditworthiness improves and the cost of mismanagement increases.
32. The more favorable outlook of the debt service brought about by the agreement,however, should be faced with some caution. The reduction in accrued debt service paymentsshould, truly, improve the performance of both the external and the fiscal accounts.Nonetheless, that is not, necessarily, the result on a cash basis, in light of the fact that thecountry has been in arrears for twelve years. The Government should, therefore, pursue a wellmanaged macroeconomic policy in order to guarantee that the necessary foreign exchange andfiscal resources to fulfill debt service payments will be available.
Debt to Official Creditors
33. The reduction of commercial bank debt, coupled with additional lending by IFIs to helpfinance DDSR (and disbursements under ongoing operations), would raise the share of officialcreditors in the present value of Peru's remaining obligations, from 45 percent to 49 percentbetween 1995 and 1996. In particular, it would raise the relative burden of the IFIs, from 12 to15 percent. By the same token, the share of private creditors would decline, from 29 percent to21 percent. (the structure of Peru's external debt is shown in Annex Table III)
Reduced Flexibility
34. While the DDSR agreement would greatly improve Peru's capacity to service its debt, itwould potentially constrain the country's ability to adjust its debt service to adverse externalshocks or domestic policy shocks. More particularly, it would raise the transactions costs of aneventual debt restructuring relative to one in which loans were simply rescheduled, as in aMYRA. In effect, DDSR raises the relative share of debt held in bonds by about 16 percent.The conversion of bank loans to bonds and additional lending by IFIs for DDSR would raise theshare of relatively inflexible debt by about 19 percent. While this result is an inevitable outcomeof a Brady deal, the extent of this increase is low relative to that resulting from previous DDSRoperations because of the moderate share of commercial bank debt in Peru's total external debt
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(around 30 percent). While increasing over time, the share of preferred creditors in public debtservice will stay below the Bank's guideline of 35 percent over the next decade.
IV. RATIONALE FOR BANK SUPPORT
35. The Government of Peru has requested support for the DDSR operation from the WorldBank, the IDB, the IMF and the JEXIM, as described in Section II. The settlement of the debtagreement -- i.e., the exchange of bonds for old debt -- is expected to occur on December 20,1996. The Government has also requested a limited waiver of the negative pledge clauses in itsloan and guarantee agreements with the Bank and other creditors. This chapter discusses theconditions of eligibility for such support, the proposed Bank measures to support the DDSRAgreement, the request for waiver of the negative pledge clause, and the benefits and risks ofthe operation.
A. Eligibility for DDSR Support
36. Peru meets the eligibility criteria for Bank DDSR support. First, since August 1990, theBank has assisted the Government in preparing and, successfully, implementing its stabilizationand structural reform program as discussed in detail in the PRAL MOP. Second, theGovernment has been unable to pay contractual interest and amortization on external debt withcommercial creditors. Had the Government resumed payments on its commercial debt atcontractual terms, it would have had to sacrifice provision of key services such as security,primary health and education, and targeted social programs. This would have had a devastatingcost for re-establishment of public order and for poverty alleviation. Third, the Government'sfinancing plan for the DDSR operation is consistent with both external and fiscal balance. Itbrings debt service within the Government's financing possibilities and will help achieve asustained growth path with real GDP growth rates in the range of 6 percent per year. Fourth,the Bank's use of resources to support DDSR is efficient, as the Government's investment in theDDSR deal achieves a satisfactory rate of return with respect to alternative means ofregularizing arrears. Fifth, Bank support for the DDSR would help implementation of theongoing reform program by way of broadening Peru's access to long-term external financing.Thus, the resources devoted to DDSR will make a positive contribution to the country's growthand development prospects.
37. Balance of payments support is necessary in spite of Peru's strong foreign exchangereserve position. First, because the economy is highly dollarized and the capital account iscompletely open, high foreign exchange reserves reduce exposure to short term capital outflowsand are a critical ingredient for the stability of the financial system. Secondly, about 44 percentof the direct financial requirements for the DDSR agreement will be met with Peru's foreignreserves. Financing a higher percentage of the up-front cost of the DDSR agreement, while, atthe same time, allocating US$1 billion of the international reserves to the pension trust fund,would jeopardize the stability of the external financing program.
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B. The Proposed Debt and Debt Service Reduction Loan
38. The proposed DDSR Loan of US$183 million would be used to help finance the up-frontcost of the DDSR Agreement. Consistent with existing guidelines the proposed loan amounts to14 percent of the overall FY97-99 lending program (US$1,317 million) which is consistent withthe lending levels presented in the CAS discussed by the Board of Executive Directors onNovember 22, 1994. The proposed amount complements the other sources of funding,including Peru's own contribution of about US$635 million. The proposed amount for theBank's contribution is consistent with the financial support from the IMF, the IDB, and theJEXIM. (see para. 14)
C. Conditions for Loan Effectiveness
39. Conditions of loan effectiveness would be: (i) consistency of the Government'smacroeconomic framework with the adjustment program; (ii) availability of adequate resourcesto implement the financing plan; (iii) the effectiveness of the Implementation Agreement for theset-aside from the PRAL; 17 and (iv) confirmation that Peru has entered into debt exchangeagreements covering 95 percent of eligible debt (approximately 22.7 percent of eligible debt tobe exchanged for Discount Bonds, 4.6 percent for Par Bonds, and 42.5 percent for FLIRBs).Subject to fulfillment of these conditions, it is proposed that the full amount of the DDSR Loanbe made available when needed for the purchase of collateral and/or to meet eligible buybackpayment requirements and subject to the concurrent disbursement of the PRAL set-aside and tothe disbursement arrangements described below.
D. Disbursement and Other Arrangements
40. Disbursement arrangements for this DDSR loan and the set-aside would be set forthrespectively in the DDSR Loan Agreement and in the Implementation Agreement of the set-aside from the concurrent proposed PRAL. The proceeds of this DDSR loan and the set-asidewould be disbursed for payments covering eligible up-front cost items, namely principal andinterest collateral for the new debt instruments and the buyback.
41. No withdrawals would be made from the set-aside of the PRAL and the DDSR loanunless the Bank shall have approved the procedures for withdrawal and is satisfied with thearrangement for collateral holding. The Bank will disburse (on account of the Borrower) eitherdirectly to the collateral agent to provide funds for the acquisition of collateral or to theBorrower to reimburse it for the cost of already acquired collateral and eligible debt-buybackexpenses.'8 Conditions for disbursement: (i) the set-asides will be disbursed concurrently withthe DDSR; and (ii) the Bank is provided with a certificate showing that the specific buyback
17 The Implementation Agreement will become effective only if: (i) an opinion is furnished to the Bank thatthe Implementation Agreement is valid and binding on the Borrower; (ii) Peru has entered into debtexchange agreements covering 95 percent of eligible debt, with approximately 22.7 percent of eligible debtto be exchanged for Discount Bonds, 4.6 percent for Par Bonds, and 42.5 percent for FLIRBs; (iii) adequateresources will be available to finance the purchase of the collateral instruments and to cover the direct costof the debt buyback.
Is The Bank for International Settlements will be the collateral agent.
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remains in full force and effect. The Bank will provide (under the DDSR loan) up to 100percent retroactive financing, if needed, on the basis of eligible expenditures incurred afterSeptember 1, 1996. For the purpose of establishing and maintaining the collateral accounts, theGovernment will appoint a collateral agent.
42. The Government would be required to have the records and accounts of the paymentsfinanced out of the proceeds of the loan audited by independent auditors acceptable to the Bank,and to furnish to the Bank the audit reports and other information regarding those records andaccounts and the audit thereof The Closing Date of the Loan would be March 31, 1997.
E. Prepayment Provisions
43. Under the 'Financing Plan', the Government is entitled to repurchase any of the DDSRinstruments at any time and price, provided it is not in default on any of the new instruments.The Implementation Agreement and the DDSR Loan Agreement each includes provisionsentitling the Bank to request prepayment of funds in certain circumstances to the extent that thecollateral they finance is released to Peru following a repurchase of Par, Discount, or FLIRBbonds .
F. Waiver of Negative Pledge Clauses
44. The Government has formally requested, pursuant to the terms of the negative pledgeclauses in the loan and guarantee agreements between the Bank and the Government, that theBank consent to the pledge of collateral in the amounts required for the par bonds, discountbonds, and FLIRBs to be issued by Peru. It is estimated that a waiver of up to US$200 millionwould be required for this purpose. The pledge of collateral will be for the 30-year life of thepar and discount bonds. The Bank has received a letter from the Government formallyrequesting the waiver of the negative pledge clause and reaffirming its obligation to continue tomake timely payments on its loans from the Bank. The Government also states itsunderstanding that such loans would not be subject to rescheduling. Likewise, the Governmentalso stated its understanding that the consent of the World Bank to a waiver of the negativepledge clause would be limited to the transactions included in the DDSR operation as describedin this report and would be without prejudice to the Bank's position on the negative pledgeclause under its loan and guarantee agreements in general. The GOP is also requesting thenecessary waivers of negative pledge clauses in agreements with the IDB.
45. Given that the Agreement satisfies the criteria for DDSR programs which can besupported by the Bank within its established guidelines, granting the above waiver would be inaccordance with the Bank's policy.
G. Benefits
46. The expected benefits of the operation to Peru have already been discussed above.Clearing arrears, resuming normal relations with the international financial community, andrecouping full creditworthiness are means to pave the way to attract more foreign investment.Furthermore, the commitment of the Government to stay the course of the reform program, in
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light of its impressive track record, lends an extra element of confidence to potential investors.Consequently, the positive effects of the proposed DDSR agreement will be felt not only interms of financial relief for the country but also through higher investment, increasing thelikelihood of sustained economic growth coupled with higher stability in the country's externalaccounts.
H. Risks
47. The DDSR Agreement increases the Bank's share of Peru's external debt and debtservice, but these shares remain within acceptable levels. Debt service to the Bank as proportionof public debt service is projected to increase from about 8 percent in 1995 to around 16 percentin 1999, declining to about 15 percent, on average, thereafter. And debt service to the Bank asa fraction of exports of goods and non-factor services is projected to average about 3 percentbetween 1996 and 2006 (see Annex Table II). Reduced flexibility in Peru's external debttranslates into greater risk to the Bank in the event of adverse external shocks or domesticpolicy shocks because it would be more difficult for Peru to service senior obligations.However, the DDSR agreement also mitigates the vulnerability of the economy to externalshocks. First, it diminishes the debt service burden and enhances creditworthiness. Second, itreduces the exposure of the economy to both interest rate risk--by exchanging 85 percent ofeligible debt into fixed-rate instruments. In addition, risk is mitigated by the positive impact ofthe DDSR Agreement and of the ongoing reform program on economic growth and inimproving external balances.
V. RECOMMENDATIONS
48. I am satisfied that the proposed loan would comply with the Articles of Agreement ofthe Bank and would be consistent with the approved guidelines for Bank support of DDSRprograms. I therefore recommend that the Executive Directors approve the Debt and DebtService Reduction Loan on the terms and conditions proposed.
49. Furthermore, to make possible the provision of collateral required by the Financing Plan,I also recommend that the Executive Directors consent to the request of the Government ofPeru for a waiver of the negative pledge restrictions in the Bank's loan and guaranteeagreements with the Republic of Peru, to the extent and based on the conditions proposed, suchconsent to become effective upon receipt by the Government of all similar consents requiredfrom other creditors.
James D. WolfensohnPresident
By Caio Koch-Weser
Washington, D.C.November 25, 1996Attachments
Annex Tablc 1: Key Econonmic Indicators
.Actual Estimated E[ostcd1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Annual Reail Crowtl, RatesGDP (constant market priccs) 69 20 4 0 5 0 6.0 6 0 6.0 6.0 6.0 6.0 6.0 6.0
GDl.3PcrrCapita 50 0.2 22 31 4.1 41 4.1 4.3 4.3 4.3 43 43
PlrivateConsumptionPerCapita 55 -2.9 1.8 3.2 3.7 3.0 3.9 4.3 4.0 3.9 45 4.1
Inflation (op CPI) 10.2 11 7 6 0 5 0 5 0 50 5.0 5.0 5 0 5.0 5.0 5 0
National Accounts t% or current GDP)1 otal Investment 24 2 25.2 25 0 24.6 24.6 24 6 24 6 24 6 24 6 24.6 24.6 24.6
Ilrivatc 20 1 20.8 20 6 20 3 20.3 20 3 20.3 20.3 20.3 20.3 20.3 20.3
Public 4.1 4.4 4.4 4 3 4 3 4 3 4.3 4.3 4.3 4.3 4 3 4.3
Gross National Saving 17.0 19.5 19.8 19.9 20.2 209 21.0 21.1 21.1 21 5 214 21 5
Foreign Saving 7 2 5 7 5.2 4.7 4.4 3 7 3.6 3.5 3.5 3.1 3.2 3.1
Gross Domestic Saving 193 20 9 21.0 21 1 21.3 21 9 22.0 22 0 22.2 22.5 22.4 22.5
Public Scctor (% o! current CI)P)TotalRevenues 173 17.3 17.1 17.2 175 17.7 17.9 18.0 18.4 18.7 18.9 19.0
Current Expcnditures 14.9 13.2 13.3 13.0 13.3 13.3 13.7 13.7 14.1 14.4 146 147
Intercst Payments 2.9 22 2.4 26 2.5 2.3 2.2 2.1 2.0 1.9 1.8 1.7
Capital Expenditures 5.1 55 4.4 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 43
Ovefall Blalance .2.6 -1.4 -0.7 .0.2 *0.1 0 0 -0.1 0.0 0.0 -0.1 0.0 0 0
'xternal Scetor (% or current GDP)Resource Balance 49 -4.3 -4.0 -3.5 .3.3 -2.7 -2.6 -2.6 -2.4 .2.1 -22 -2.1
ExportsGNFS 11.6 11.4 11.3 11.2 11.6 12.4 126 12.5 12.6 12.3 12.2 120
Imports GNFS 16.5 15.7 15.3 14.7 149 15.1 15.3 15.1 15.0 14.5 144 141
Current Account Balancc -7 2 -5.7 -5.2 -4.7 44 .3 7 -3.6 .3.5 -3.5 -3.1 .3.2 -3.1
Capl;al Aecounit (1JSS nilliion)Multilateral 4290 7910 3500 36.0 -50.0 -208.0 -221.0 -249.0 -274.0 -2720 .218.0 -2180
o/wli31R1) 1160 4450 2370 890 390 -780 -650 -810 .92.0 -990 -1020 -102.0
13ilatcral -572 0 468.0 413.0 -328 0 -344.0 428 0 .502.0 -499 0 -645.0 -668.0 -692 0 -692 0
Plrivate Creditors -71 0 -51.0 -38 2 -139'4 -196.4 -238.3 -280 5 -163.7 -218.3 -200.2 .206.1 -235 7
Dlrct F-orcigninvcstmcnt 1,8950 2,361.0 2,448.0 2,6760 3,0010 2.5000 2,414.0 2,7280 3,037.0 3,44980 3,8330 3,8000
Change in KcservcboftheMuni Auth -t66oO -2,5150 -2,287.0 -1,1540 -7590 -16 -1230 -1390 .1980 -1820 -23110 -2100
it Includes chang in stc(ks
AnULex TaWbe 11: External Debt Inldicatrs
Achl EmlIticd jorctd£995 1996 1997 1993 1999 2000 2001 2002 2003 2004 2005 206
T£a112kbl 31,659 30,119 31.095 30.497 31,117 31,53S 32,163 32,604 33,152 33,056 33,014 34,403TIA.1 M- 14,biG11 5S.7 41.7 474 433 41.0 38.1 ]5.9 33.6 31.5 29.0 26.7 21.7TotalPbh. Sec£l Deb 21.477 20,112 20,114 19,U2 19,675 19,054 18,314 17,688 16,810 16.094 15,352 15.799Total I'Psbic tWGDP 364 32.5 30.6 21.1 258. 110 20.4 101 16.0 14.1 12.4 11.TOW IPui cDcbltcriccjGD£P 43 3.5 3.2 3.0 2.7 2.6 2.4 2.3 2.3 2.1 1.9 1.3rTowFiheDelbSeuvicedE,posGlNFS" 37.1 30.4 28.6 26.4 23.3 20.6 19.0 117 13.5 17.3 15.9 148IBRDDd4 ScrvcdTrotal Deb4tSerse 5.3 9.0 h.5 10.9 12.5 12.2 11.5 10.5 9.4 90 3.4 7.8IBR£3DDebiScnvicdExporsGNFS 30 3.3 3.2 4.1 44 4.0 3.8 3.6 3.3 3.1 28 2.6lBRD Dbl Service/PPO Debt Seice 8.1 100 10.5 13.9 16.1 16.3 15.9 13.6 14.7 14.3 149 15.1Multi£aleralDebiSe SiccTolaDeblSMMerve 11.6 20.5 21.6 246 26.3 25.3 23.9 21.7 19.9 19.1 17.0 15.1Mud craIrnD ebScrice/PPGcbiSrt evc 17.7 22.8 26.9 31.3 33.3 336 33.0 32.3 31.0 31.4 30,1 30.5
I/ A=%mua bus.
_ S l _ A ._ _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~%
Aniex Table III: Structure of Exterual Debt
Actual LI EsLirnaled Projecled
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 20006
TolM xtcmAl Dbt 31,659 30.119 31.095 30,492 31,317 31.538 32,163 32,684 33,152 33,056 33.014 34,403
Public & Pubicly Guaraloeed 23,259 21,010 20,886 20,472 20,044 19,170 18,166 17,254 16,119 14,962 13,799 13.781
IOficial Cdiat..rs 11.173 14,653 14,617 14,343 14,111 13,474 12,750 12,001 11,084 10,128 9,171 9,171
lMultsli.slc 3.718 4.427 4,778 4.814 4.764 .,556 4,334 4,085 3,813 3.525 3,258 3,2358
Concessioajl 177 172 171 166 160 150 139 127 113 99 85 83
.twsolrh IDA 0 0 0 0 0 0 0 0 0 0 0 0
Non-Conre-ssonal 3,541 4,255 4.607 4.648 4.604 4,406 4,195 3,958 3,700 3,426 3,173 3.173
ofwlucli IBRD 1,729 2.174 2,410 2,499 2.537 2,459 2,395 2,313 2.222 2,123 2,011 2,021
b Bdateral 10,455 10,226 9,839 9.529 9,347 8,918 8,416 7,916 7,271 6.603 5,913 5.913
Concessi.nal 4.373 4,341 4.270 4,193 4,101 3,932 3.675 3,374 2,989 2.608 2.204 2,204
Non-Concessional 6,082 5,885 5,569 5,336 5,246 4.986 4,741 4,542 4,282 3.995 3,709 3.709
2 Pn-aln credtors 9,086 6,357 6.269 6,129 5,933 5.696 5,416 5,253 5,035 4.834 4.628 4.616
.Bonds 0 o 2.952 2.952 2.952 2,952 2,952 2,952 2.864 2,729 2.590 2,4S0 2.450
b Comt-rciall 7.280 1.972 1,911 1,794 1,621 1.415 1.180 1,156 1,121 1.108 1,090 1.078
cOler Private 1.806 1,433 1,406 1,383 1,360 1,329 1,284 1,233 1,185 1.136 1,088 1,088
Pnv,se NoniGuararnleed 1,377 1,170 3,084 3,787 5,200 6,454 8,230 9,857 11,558 12,631 13.769 15,170
T.at fromLong-Tem)lLoans 24,636 22,180 23,970 24,259 25,244 25,624 26.416 27,112 27,677 27.593 27,568 28,957
Useo IMF Crdit 955 1.188 1,109 950 790 631 464 289 194 179 163 163
Nd Shun-Tern Capital 6,068 6,751 6,016 5.283 5,283 3.283 5,283 5,283 5,281 5,284 5,283 5.283
I/ Source IFlF (for Total Stock, Pnvate Creditors, ard Pnvate Non-Guaranteed)
2/ Includes lhc newly issued Brady bosids wlli lolal valuc of USS4,8 0
I milhon.
V SoLirCe of fiunds Io cover Inaiscing gap in tire projclbon peniod.
24
Schedule A
DISBURSEMENT AND RETROACTIVE FINANCING
Dibursements: The proposed loan of US$183 million would be disbursed tofinance the debt buyback and/or to acquire principal and/or interestcollateral required for the par, the discount, and the FLIR bonds.The Government would purchase the collateral instruments aheadof the Closing Date of the Financing Plan, expected by end-1996,as soon as the reconciliation process is completed. The proposedloan and the set aside funds from the PRAL would be disbursed inFY97 against eligible expenditures included in the upfront cost ofthe Financing Plan.
RetroactiveFinancing: Retroactive financing of US$183 million will be allowed on the
basis of eligible expenditures incurred after September 1, 1996, inview of the measures already undertaken and the need toregularized he country's external obligations with the internationalfinancial community.
25
SCHEDULE B
TIME TABLE OF KEY PROJECT PROCESSING EVENTS
(a) Time taken to prepare the project: 9 months
(b) Prepared by: GOP and IBRD staff
(c) First IBRD mission: March 1995
(d) Appraisal mission: September 1996
(e) Negotiations: November 1996
(f) Scheduled Board Date: December 19, 1996
(g) Planned Date of Effectiveness: December 20, 1996
Generated: November 12,1996
Status of Bank Group Operations in PeruIBRD Loans and IDA Credits in the Operations Portfolio
Differenceoriginal Amount in USS Millions Between actual
Loan or Fiscal and expectedProject ID Credit No. Year Borrower Purpose IBRD IDA Cancellations Undisbursed Disbursements a/
Number of Closed Loans/credits: 65
PE-PA-8047 L35950 1993 GOVERNMENT PRITZA. ADJ. 250.00 0.00 0.00 100.00 100.00PE-PA-8058 L35400 1993 GOVERNMENT PRIVTZTN T.A. 30.00 0.00 0.00 12.08 12.08PE-PA-8059 L36100 1993 GOP ENERGY/MINING T.A. 11.80 0.00 0.00 4.69 1.59PE-PA-8045 L37170 1994 GOVERNMENT TRANSP.RHB 150.00 0.00 0.00 113.78 44.78PE-PA-8048 L37010 1994 GOVERNMENT BASIC HLTH/NUTRITION 34.00 0.00 0.00 26.13 9.03
PE-PA-8062 L36840 1994 GOVT OF PERU SOC DEV FUND 100.00 0.00 0.00 12.00 -4.25PE-PA-8040 L38100 1995 REPUBLIC OF PERU ELECTR.PRIVZN ADJ 150.00 0.00 0.00 50.00 50.00PE-PA-0051 L38110 1995 SEDAPAL LIMA WAT.PRIVZN 150.00 0.00 0.00 140.19 66.59PE-PA-8055 L38260 1995 GOVERNMENT PRIM.EDUC 146.40 0.00 0.00 142.40 56.20PE-PA-37047 L39620 1996 REPUBLIC OF PERU RURAL RDS. REHAB & M 90.00 0.00 0.00 81.54 12.44PE-PA-40125 L40680 1997 GOVERNMENT OF PERU FONCODES II 150.00 0.00 0.00 150.00 0.00PE-PA-8037 L40760 1997 GOVERNMENT OF PERU IRRIG. REHAB 85.00 0.00 0.00 85.00 0.00
Total 1,347.20 0.00 0.00 917.81
Active Loans Closed Loans TotalTotal Disbursed (IBRD and IDA): 429.39 2,201.69 2,631.08
of which has been repaid: 0.00 1,084.59 1,084.59Total now held by IBRD and IDA: 1,347.20 1,117.10 2,464.30Amount sold 0.00 18.31 18.31
Of which repaid 0.00 18.31 18.31Total Undisbursed : 917.81 0.00 917.81
a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.
b. Rating of 1-4: see OD 13.05. Annex D2. Preparation of Implementation Summary (Form 590). Following the FY94 Annual Review of Portfolio performance (ARPP),a letter based system will be used (HS = highly Satisfactory, S = satisfactory, U - unsatisfactory, HU = highly unsatisfactory): see proposed Improvementsin Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994.
c. Following the FY94 ARPP, "Implementation Progress" will be reported here.
O7 m(DIsI
Ot=1Cl
O t7
Generated: November 12, 1996Peru
STATEMENTOF IFC'sCommitted and Disbursed Portfolio
As of 09/30/96In Millions US Dollars
Commnitted DisbursedFC -IIFC
FY Company Loan Equity Quasi Partic Loan Equity Quasi ParticApproval
1979 Buenaventura 0.00 1.10 0.00 0.00 0.00 1.10 0.00 0.00
1982 Sogewiese 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
1983 Buenaventura 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
1984 Minera Regina 2.33 0.00 0.00 0.00 2.33 0.00 0.00 0.00
1990 Buenaventura 0.00 .31 0.00 0.00 0.00 .31 0.00 0.00
1992 Sogewiese 3.00 1.43 0.00 0.00 3.00 1.43 0.00 0.00
1993 Buenaventura 0.00 .41 0.00 0.00 0.00 .41 0.00 0.00
1993 Quellaveco 0.00 0.00 6.22 0.00 0.00 0.00 5.89 0.00
1993 Yanacocha 8.40 .33 0.00 8.00 8.40 .33 0.00 8.00
1994 AFP Horizonte 0.00 1.05 0.00 0.00 0.00 1.05 0.00 0.00
1994 Banco Credito 13.50 0.00 0.00 0.00 13.50 0.00 0.00 0.00
1994 Peru Prvtzn Fund 0.00 20.00 0.00 0.00 0.00 13.89 0.00 0.00
1994 PPF Cayman 0.00 0.00 0.00 0.00 0.00 0.00 0.00 000
1994 Yanacocha 7.14 0.00 0.00 3.57 7.14 0.00 0.00 3.57
1995 Sogewiese 10.00 0.00 0.00 20.00 10.00 0.00 0.00 20.00
1996 AFP Horizonte 0.00 .02 0.00 000 0.00 .02 0.00 0.00
Pending Commitments1996 QUELLAVECO - RI 0.00 5.30 0.00 0.00 t
1995 ^YANACOCHA-RIGHTS 0.00 .12 0.00 0.00 0
SCHEDULE D28 Page 1 of 2
Peru at a glanceLatin Lower-
POVERTY and SOCIAL America middle-Peru & Carib. income Development diamond
Population mid-1995 (mnillions) 237 480 i1154GNP per capita 1995 (US$) 2,320 3,300 1 700 Life expectancyGNP 1995 (billions US$) 550 1.584 1 962
Average annual growth, 1990-96
Populatiorl %) 1.9 1.8 1.4 GNP GrossLabor force (%) 3.0 2.4 1.8 per primary
Most recent estimate (latest year available since 1989) capita enrollment
Poverty: headcount index (% of population) 32Urban population (% of total population) 72 74 56Life expectancy at birth (years) 66 68 67Infant mortality (per 1,000 live births) 47 41 36 Access to safe waterChild malnutrition (% of children under 5) 16Access to safe water (% of popuiation) 58 81 78Illiteracy (% ofpopulation age 15+) 11 13 PeruGross primary enroliment (% of school-age population) 119 110 104
Male 15 Lower-middle-income groupFemale . . 101
KEY ECONOMIC RATIOS and LONG-TERM TRENDS
1975 1985 1994 1995Economic ratios'
GDP (billions US$) 16.4 18.8 50.1 58.9Gross domestic investment/GDP 24.7 21.6 22.0 24.2 Openness of economyExports of goods and non-factor services/GDP 10 .9 20.0 11.4 11.6 PGross domestic savings/GDP 13.6 26.3 19.1 19.3Gross national savings/GDP 12.3 18.7 169 17.0
Current account balance/GDP -9.7 0.3 -5.1 -7.2interest payments/GDP 2.0 1.9 0.9 0.8 Savings InvestmentTotal debt/GDP 37.3 68.4 52.6 52.2Total debt service/exports 49.0 28.0 18.2 |iPresent value of debt/GDP . 40.0Present value of debt/exports - 319.2 Indebtedness
1976-84 1985-95 1994 1995 1996-04(average annual growth) -PeruGDP 1.3 0.4 13.1 7.0 5.5GNP per capita -1 6 -1.1 11.3 5.0 3.6 Lower-middle-icome groupExports of goods and nfs 4.3 1.9 17.5 7.0 8.7
STRUCTURE of the ECONOMY
(% of GDP) 1975 1985 1994 1995 Growth rates of output and investment (%)Agriculture 16.4 9.4 13.5 13.3 30
Industry 31.7 42.5 42.1 42.0 1 5Manufacturing 20.0 24.3 22.4 21.9 0
Services 51.9 48.1 44.4 44.7 9 91 92 93 94 95
Private consumption 74.1 62.4 73.6 72.4 -30
General government consumption 12.4 11.3 7.3 8.3 - GDI -*- GDPImports of goods and non-factor services 21.9 15.3 14.3 16.5
1975-84 1985-95 1994 1995(average annual growth) Growth rates of exports and imports (%)Agriculture (w/o fishing) 0.7 1.6 14.6 5.4 30
Industry 1.8 -0.7 16.1 6.8Manufacturing -0.8 -0.3 15.7 4.5 15
Services 1.1 1.0 10.0 7.7 a
Private consumption -0.5 1.1 96 7.5 / 91 92 93 94 ssGeneral government consumption 1.4 -2.8 9.2 12.8Gross domestic investment 1.6 2.9 30.0 19.5 -30
Imports of goods and non-factor services -0.6 5.8 26.6 26.0 Exports Im portsGross national product 0.9 0.8 13.5 7.0
Note: 1995 data are preliminary estimates.
The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond willbe incomplete.
SCHEDULE D29 Page 2 of 2
Peru
PRICES and GOVERNMENT FINANCE1975 1985 1994 1995
Domestic prices Inflation /%)(% change) 10°000 T
Consumerprices 23.6 163.4 23.7 11.1Implicit GDP deflator 23.2 167.7 18.5 12.6 5.000
Govemment finance , (% of GDP) 0 Current revenue .. 15.0 15.8 16.6 90 91 92 93 94 95
Current budget balance 0.3 1.8 1.7 -GDP def -0-CPIOverall surplus/deficit -2.2 2.0 -1.3
TRADE1975 1985 1994 1995
(millions US$) Export and import levels (mill. USS)Total exports (fob) .. 2,978 4,574 5,576 8,000
Fuel .. 645 165 241
Copper .. 476 824 2,000 69000
Manufactures .. 714 1,191 1,291Total imports (fob) .. 1,835 5,546 7,687 4,000 F- l rI
Food .. 204 523 633 LKr ul111111 iiFuel and energy -. . 325 594 2,000 hIIIII 111lCapital goods . 558 1,677 2,363 0 , .1 l...
Export price index (1987=100) .. 119 145 156 89 90 91 92 93 94 95
Import price index (1987=100) .. 73 139 146 0Exports R ImportsTerms of trade (1987=100) . 163 104 107
BALANCE of PAYMENTS1975 1985 1994 1995
(millions US$) Current account balance to GDP ratio (%)
Exports of goods and non-factor services 1,689 3,792 5,718 6,810 0Imports of goods and non-factor services 3,038 2,790 7,169 9,702 9 9 91 92 93 94 , 95
Resource balance -1,349 1,002 -1,451 -2,892
Net factor income -242 -1,044 -1,693 -1,823Net current transfers 0 97 606 491 -4
Current account balance,before official transfers -1,591 55 -2,539 -4,223 -6
Financing items (net) 1,073 82 5,577 5,161Changes in net reserves 517 -137 -3,038 -938 -8
Memo:Reserves including gold (mill. US$) 566 2,481 8,933 7,854Conversion rate (local/US$) 4.1 E-08 1.2E-05 2.2 2.3
EXTERNAL DEBT and RESOURCE FLOWS1975 1985 1994 1995
(millions US$) Composition of total debt, 1995 (mill. USS)Total debt outstanding and disbursed 6,118 12,884 26,347 31,659
IBRD 138 723 1,554 1,729 AIDA 0 0 1729 00 0 0 955~~~~G
Total debt service 845 1,098 1,142 1,169 9653 2892IBRD 18 89 189 204 /IDA 0 0 0 0
Composition of net resource flowsOfficial grants 13 90 226 230Official creditors 326 178 162 314 EPrivate creditors 907 80 -90 -61 10455Foreign direct investment 316 1 2,326 600 FPortfolio equity 0 0 977 569 5975
World Bank programCommitments 0 110 334 386 A - IBRD E - BilateralDisbursements 15 131 171 202 B - IDA D - Other multilateral F - PrivatePrincipal repayments 9 40 80 86 C - IMF G - Short-termNet flows 7 91 91 116 1 1
Interest payments 10 49 109 118Net transfers -3 43 -18 -2
International Economics Department 8/20/96
MAP SECTION
IBRD 26572R80- 78' . 74 72
ECUADOR COLOMBIA
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The bound. r.e colors d-no-i-nion- aod o-y other in-Wr-o,eon l;e Tofu Mlo u la, tI ho-n en thE, lop da ,o0 imply, on the port of The World 8o0k Group, "' o c I
18' .oy jdg-ent on the legoel stotu of Gny ternnlory, r ony endrseot,,t TA ' 8or -ccep-loce of s-ch bondori-e, EoGC del Rio
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