Fitch revises outlook for Peru at BBB+

Credit Ratings Agency Fitch has revised the   Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) ratings for South American nation of Peru at BBB+. According to Fitch, he Negative Outlook reflects Peru’s weakened government balance sheet, deterioration of policy predictability as a result of congressional passage of populist measures in recent months, and Fitch’s expectation of continuing challenges to reduce fiscal deficits to levels consistent with debt stabilization. The weakening of political cohesiveness and institutions since 2016 could undermine the capacity of the next government to implement wide-ranging fiscal, political, and productivity-enhancing economic reforms. In addition, periodic executive-legislative tensions and political instability cannot be ruled out in the coming years. 

Peru’s strong macro institutions and external finances continue to support the ratings. Peru’s lower income per capita, social and governance indicators below the current ‘BBB’ medians, and vulnerabilities from a high commodity export dependence, financial dollarization, and low government revenue base are rating constraints. 

According to Fitch, Peru’s deficit-reduction strategy faces downside risks. Fitch expects a cyclical economic recovery to reduce the general government deficit to 5.9% of GDP in 2021, slightly less than the budget, on our expectation that public investment will be under-executed. However, Fitch forecasts a 5.2% of GDP deficit in 2022 (above the 3.3% of GDP indicated in the medium-term budget) given the 1.5% of GDP in permanent revenue gap the government has projected, a 0.2% of GDP impact of the increased transfers to regional governments, and expected social pressure that may slow withdrawal of economic stimulus.  

General government debt is projected at 33.1% of GDP at end-2020, well below the current ‘BBB’ median of 52.7%, reflecting a history of fiscal prudence. However, interest/revenues of 8.7% and government debt/revenues of 181% this year exceed the current ‘BBB’ medians of 7.4% and 139%, respectively.  

Fitch expects Peru’s government debt will reach 37.6% of GDP in 2022, higher than the authorities’ revised projection of 36.8% of GDP as of mid-December. Fitch’s fiscal forecasts differ as a result of the revenue gap, congressional spending measures, and guarantees called related to the Reactiva business credit program (maturing 2021-2023, which are not estimated in the budget). The government waived its fiscal rules for 2020-2021 to address the pandemic as many sovereigns did globally.  

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