Peru's Long-Term Foreign-Currency Issuer Default Rating (IDR) stands at 'BBB+' with a Stable Outlook, Fitch Ratings affirmed on Thursday.
According to Fitch, Peru's ratings reflect its strong public and external balance sheets and its credible and consistent macro policies, which have entrenched macroeconomic and financial stability.
"These strengths balance vulnerabilities from high commodity dependence, financial dollarization, and a low government revenue base, as well as lower income per capita, and governance indicators (including government effectiveness) than the 'BBB' median," it expressed.
Furthermore, economic growth is expected to rise to 3.8% in 2018 and average 4% in 2019-2020 in line with the current 'BBB' median, supported by rising investment in
copper mines and public
infrastructure as well as firming consumption.
Growth slowed to 2.5% in 2017 due to
Coastal El Niño flooding, delays to large infrastructure projects and political headwinds that dampened business confidence in the fourth quarter. The cyclical mining upswing supports near-term growth prospects.
However, structurally, the Peruvian economy is
becoming more dependent on copper and thereby exposed to the copper production cycle and Chinese demand conditions, which brings policy challenges.
Likewise, Peru has a credible monetary policy regime.
Inflation expectations are well-anchored within the central bank's 2%+/-1pp target range, and inflation volatility is well-below the current 'BBB' median. Inflation was 1.1% YoY in August and is expected to rise above 2% toward year-end.
Fitch expects the Central Reserve Bank to tighten its currently accommodative monetary policy as the negative output gap closes.
Financial dollarization has fallen over the last decade to 29% of credit and 32% of deposits at July 2018 from 51% and 46%, respectively, at December 2008, supporting monetary policy transmission mechanisms and allowing for greater exchange-rate flexibility.
"The Vizcarra administration started fiscal consolidation sooner than expected, reducing the non-financial public sector (NFPS) budget deficit targets for 2018 and 2019 in the medium-term macroeconomic framework published in August," it said.
Fitch expects that the general government deficit, which excludes
Petroperu's Talara refinery upgrade and other NFPS operations, will be 2.8% and 2.5% of GDP in 2018 and 2019, respectively.
It projects the government to narrow the deficit to 1% of GDP (yielding a primary balance) by 2021, supporting fiscal policy credibility. General government debt/GDP is forecast to peak at 25% in 2019, below the current 'BBB' median. Fitch excludes the national oil company's external debt, which the government consolidates in its headline NPFS debt figures.
Public finance metrics, although still strong, are less robust relative to the 'BBB' category, due to counter-cyclical fiscal policy and post-flooding reconstruction. The use of financial assets (including the fiscal stabilization fund, now at 2.8% of GDP) to partially finance the wider deficits has reduced the government's fiscal financing flexibility.
This, in conjunction with debt issuance, has increased Peru's net general government debt/GDP to a projected 12.9% of GDP in 2018 from 4.3% in 2013. Interest expense, 7.2% of revenues, has grown and is now in line with the current median.
The government's strategy of shifting new issuance to Peruvian-sol-denominated debt since 2017 is a supportive trend, lowering the share of foreign-currency-denominated general government debt excluding Petroperu to 33% at December 2017 from 43% at December 2016.
Note: Based on information provided by Fitch Ratings.
(END) NDP/DTK/MVB