Fitch Solutions: Higher revenues to help narrow Peru's fiscal deficit

"We estimate that in 2018, Peru saw a 13.8% y-o-y increase in government intakes as GDP growth, mining sector activity, and tax collection all saw improvements," it expressed.

"These trends will continue in 2019 as our forecast of 3.9% economic growth remains in line with 2018's 4.0% print, providing tailwinds to sales, income, and corporate tax receipts," it added. 

In addition, higher copper prices will stoke greater production in Peru's mining sector, which will drive royalties.

Likewise, President Martin Vizcarra's government has prioritized improving tax collection by cracking down on tax evasion and bringing more employees and companies into the formal economy, offering additional gains for government coffers.

According to Fitch, the Vizcarra administration will increase capital spending, limiting the pace of fiscal consolidation. 

Upon taking office in March 2018, Vizcarra pledged to hasten the reconstruction of areas affected by Coastal El Niño phenomenon floods in 2017.

He has also vowed to improve transparency within Peru's construction industry after the Odebrecht scandal while allocating funds to help restart many public works projects implicated in the scandal. 

"We forecast government capital expenditures will grow by an average of 6.8% y-o-y in the next five years," Fitch Solutions said. 

However, there is a broad commitment to fiscal consolidation in the years ahead. 

The country's 'fiscal rule' sets a deficit reduction program that aims to narrow the deficit to 1.0% of GDP by 2021. 

"To that end, we expect current expenditure growth will lag behind revenue growth as the government institutes caps on public sector hiring and salary increases," it indicated. 

Despite the political upheaval of 2018, Peru's political leadership and major political parties share a commitment to maintaining prudent fiscal policies. Therefore, it is unlikely that policymakers will alter the country's path of fiscal consolidation.

Furthermore, Peru will maintain a manageable debt load. Its total public debt load is modest compared to several of its neighbors. 

Over the longer-term, this will keep interest payments low, averaging 5.5% of total expenditures in the next five years. Should Peru need to tap international capital markets to finance its deficits, the country's commitment to business-friendly economic policies, investment-grade credit rating, and strong growth outlook would likely keep borrowing costs low.

(END) NDP/DTK/MVB