Moody's Investors Service affirmed Peru tax revenue continued to recover in the first half of 2018, growing 21.4% in real terms, in line with stronger economic activity.
According to Moody's, as base effects dissipate, overall tax revenue growth will slow in the second half of the year,
but will remain positive as the economic recovery continues
The favorable revenue performance has more than offset a 6.8% increase in real terms of government outlays in the first half of the year, such that the 12-month rolling fiscal deficit
to June 2018 has narrowed to approximately 2.2% of gross domestic product (GDP).
Although the multi-year budget framework outlined a peak deficit of 3.5% for the non-financial public sector (NFPS) in 2018, the Finance Ministry has announced that the NFPS deficit will likely reach 3% of GDP by the end of the year.
Accordingly, Moody's now forecasts that the general government deficit will remain flat relative to 2017 at 2.9% of GDP in 2018. The better-than-expected fiscal outcome has provided a significant cushion to continue expanding public investment and still come well within the fiscal target this year
"We expect that revenue growth will moderate in 2019, but tax
measures (specifically the use of electronic certificates) to widen the base should continue to provide support for tax receipts," the credit rating agency expressed.
"As such, we forecast that the general government deficit will narrow to 2.6%, below the 2.9% target under the multi-year budget framework," it added.
In 2019-21, fiscal prospects remain benign, benefiting from the strong link between tax revenue
and the recovery in domestic demand.
The government is very likely to meet its medium-term objective of a 1% of GDP fiscal deficit by 2021 owing to the virtuous economic cycle and tax measures adopted under the government's special decree powers.
Barring any major shocks, output growth is likely to remain near potential, supporting a benign fiscal outlook.
Beyond 2021, fiscal challenges —related to increasing spending efficiency, widening the tax base
to increase structural revenue, and rebuilding fiscal reserves— will likely weigh on credit prospects and the sovereign's fiscal strength
, elevating the importance of holistic tax reform.