affirmed its 'BBB+' long-term foreign currency and 'A-' long-term local currency sovereign credit ratings on Peru. Besides, the outlook remains stable.
"We also affirmed our 'A-2' short-term foreign and local currency sovereign credit ratings on Peru. Our transfer and convertibility assessment remains 'A'," it said in a release.
According to the agency, "the stable outlook reflects our view that Peru's low government debt, availability of liquid assets, solid international reserves, and access to different funding sources will mitigate macroeconomic risks stemming from the
COVID-19 pandemic and from
political uncertainty."
"We assume fiscal deficits will gradually decline after expanding in 2020 and return to below 2% of GDP by 2023. We also expect broad continuity in economic and fiscal policies ahead of and following the
April 2021 general elections," it added.
Rationale
"Since the last presidential election in 2016, the political environment has been marked by frictions between the government and the fragmented Congress. So far, political volatility has not materially weakened the country's economic fundamentals, in our opinion," it expressed.
S&P added that "our sovereign credit ratings on Peru reflect policy continuity across administrations that have favored a predictable (and) pragmatic macroeconomic framework. Nevertheless, Congress' extreme fragmentation has eroded political stability in recent years."
"The country has narrow fiscal and external imbalances and a low debt burden that placed its economy on a stronger footing to weather economic disruptions. We weigh these strengths against low GDP per capita and more limited economic diversification than many of the country's more highly developed peers. Following a decade of rapid gains in per capita GDP, Peru's socioeconomic indicators have improved substantially, but infrastructure shortages and informality remain economic and social challenges," it said.
Downside scenario
S&P noted that it could lower its ratings on Peru over the next two years if prolonged political instability reduces predictability, erodes investor confidence, and makes fiscal consolidation following the pandemic harder to tackle.
"We could also lower the ratings if the economic recovery is much weaker than we expect after the COVID-19 shock dissipates, straining the sovereign's budgetary position. The combination of weaker economic growth prospects and larger fiscal deficits in the medium term could lead us to lower the sovereign ratings," it warned.
Upside scenario
"Although unlikely over the next two years, we could raise the ratings if we see stronger policymaking predictability and the government's ability to execute capital spending and implement reforms that would result in a sustained improvement in Peru's growth prospect," S&P concluded.