Peru's gross nonfinancial public sector debt has increased steadily, albeit slowly, since reaching a trough of 19.5% of GDP in 2013, coinciding with exchange rate depreciation and a weakening of the fiscal position due to countercyclical stimulus enacted since 2014, Moody's Investors Service affirmed in its latest report.
"Our initial estimates, based on the fiscal trajectory
and the use of fiscal reserves to finance part of the widening of the fiscal deficit
, suggested that gross NFPS debt would peak at slightly over 29% of GDP, below the limit set by the fiscal responsibility law of 30% of GDP," the credit rating agency indicated.
However, recent fiscal outperformance points to peak debt levels of around 28% in 2019-20 barring any major shocks. At the general government level (excluding SOEs), debt ratios will peak at around 25% of GDP, while at the central government level debt will reach 23% of GDP.
Debt ratios will begin trending downward as the government reaches its medium-term deficit objective of 1% of GDP in 2021 and beyond. Despite absorbing shocks including the commodity price crash, a marked slowdown in domestic demand, the Odebrecht scandal
and the Coastal El Niño floods
, the deterioration to the government's balance sheet will have been limited and debt levels will continue to be lower than 'A' category medians.
Nevertheless, the fiscal space
given up to absorb these shocks is unlikely to be recovered within the next five years.
Government debt structure remains favorable
According to Moody's, the structure of government debt remains highly favorable, anchoring the sovereign's very high fiscal strength
. Anchored by the sovereign's robust and responsible asset/liability management framework that prioritizes the sustainability of public finances, minimizing the cost of liabilities and the prudent use of the sovereign's fiscal assets, refinancing risk remains minimal.
Moreover, the sovereign's fiscal reserves (made up of liquid assets and the fiscal stabilization fund) reached 15.3% of GDP in 2017, providing an ample buffer against market turbulence and refinancing risk.
As of year-end 2017, the Peruvian sovereign had one of the longest average maturity debt profiles among emerging markets at 12.7 years, with 87% of gross public debt at fixed interest rates (mitigating re-fixing risk) and 63.3% of the total debt portfolio denominated in local currency (partially mitigating exchange rate risk).
Furthermore, the affordability of government debt as measured by the interest payment-to-revenue ratio remains well in line with peer medians despite the relatively limited revenue base for the Peruvian sovereign, which highlights the authorities' deft liability management practices.
"We expect our assessment of fiscal strength to remain broadly stable through 2020, supporting creditworthiness," it added.
Rebuilding fiscal strength over the longer term, such that the sovereign is able to absorb future shocks including possible natural disasters (Peru is located in a very seismically active geographic area), economic slowdowns, commodity price downturns, and less favorable demographic trends that will increase pension outlays over the longer term will remain the key fiscal challenge.
In this regard, returning to fiscal surpluses that enable the accumulation of larger fiscal reserves during favorable economic cycles will be key to supporting fiscal health, it concluded.