Moody's Investors Service has set Peru's fiscal strength score at "Very High (-)," in line with its indicative score —on account of its low and affordable debt burden as well as prudent fiscal policy framework— which has led to the accumulation of substantial fiscal savings over the last decade.
According to Moody's, the sovereign has one of the highest levels of
fiscal strength in Latin America and the Caribbean. It shares this score with countries including China (A1 stable), Latvia (A3 stable), and Lithuania (A3 stable).
In factor score peer comparisons, Peru compares favorably to "A" category medians in terms of its debt burden, while the cost of servicing its debt, as determined by the interest-to-revenue ratio is broadly in line with that of peers.
"Peru's
fiscal strength compares favorably with A-rated peers in terms of overall debt burden and liquidity. Assets and liability operations by the public debt management office have yielded a favorable maturity profile, reducing rollover risk and pushing down interest costs," the credit rating agency expressed.
"Peru's gross public debt-to-GDP ratio, which we expect will peak at approximately 28%, is significantly below the 'A' category median of 40%. Net public debt (gross debt less liquid assets) was 9.5% of GDP in 2017," it added.
Fiscal consolidation beginning earlier than expected due to strong revenue growth
The fiscal trajectory shifted in early 2017 when authorities incorporated the reconstruction expenditure associated with
Coastal El Niño climate shock into the multi-year budget framework.
Initially, fiscal consolidation was set to begin in 2017 with the deficit peaking in 2016 at under 2.5% of GDP.
The trajectory outlined following the Coastal El Niño shock envisaged the deficit peaking at 3.5% of GDP in 2018, with a declining deficit every year thereafter to reach a medium-term objective of 1% of GDP by 2021.
Tax revenue in 2017 contracted 1.4% in real terms due to slower economic activity, lower collection in the areas affected by Coastal El Niño floods, tax deferrals to those that incurred losses due to the floods, and other measures adopted by Congress to stimulate activity.
One such measure allowed businesses to postpone value-added tax (VAT) payments to the tax authority for sales on credit until sales revenue were actually received. These factors combined to more than offset other revenue-raising measures adopted by the authorities to prevent fiscal slippage.
Meanwhile, public investment that was halted in the first half of the year by the Odebrecht corruption scandal began to gather momentum in the second half of the year.
Government gross capital formation contracted 10.1% in real terms in the first half of the year, but expanded 8.7% in the second half.
Although Coastal El Niño reconstruction expenditures ran into significant delays due to execution problems, reconstruction spending began to trickle in the third quarter and increased sharply in the final months of the year.
Current expenditure growth was broadly in line with the budget framework, increasing 3.9% in real terms for the full year.
The overall deficit for the nonfinancial public sector (NFPS) reached 3.1% of GDP, such that for the first time in nearly two decades the government exceeded its deficit target (
which was set at 3.0% of GDP for the NFPS). At the general government level (which excludes state-owned enterprises), the fiscal deficit remained on target at 2.9% of GDP.
Traditionally, the fiscal accounts have outperformed yearly deficit targets because the authorities build buffers into the budget to absorb any fiscal slippage at all levels of government.
However, the various shocks to activity led to greater-than-expected revenue underperformance despite a nascent recovery of government revenue in the fourth quarter of 2017.