Fitch predicts that if the economic and investment outlook remains weak in 2023-2024, it could undermine Peru’s macroeconomic and fiscal trajectory.

The risk rating agency Fitch Ratings, through a new report on the waiting for Peru, pointed out that the events of social disorder in the country this year would have a long period of political uncertaintywhich will weaken the growth prospects and you can test the fiscal resilience.

“This year’s fiscal starting point is stronger than expected, but the economic disruption for the political paralysis and the social discontent This is becoming more and more evident,” the US rating agency said.

According to Fitch Ratings, the failure of Congress to approve, in early February, the law Project from President Dina Boluarte to organize elections this year means it’s not yet clear how the last one will be resolved political crisis from Peru.

The agency believes that Congress has yet to fully ratify a proposal to bring forward the elections to April 2024, and the date is still subject to political debate.

There holding of elections this year is a key demand from supporters of Boluarte’s predecessor, Pedro Castillo, who was ousted from his post in December 2022 after trying to dissolve the congress and rule by decree.

Furthermore, Fitch Ratings considered that the governance challenges deeply rooted and the stagnation between the Executive and the Legislative they were obstructing political initiatives before Castillo’s impeachment.

This deterioration will be difficult to reverse over the forecast period to the end of 2024, Fitch said.
This deterioration will be difficult to reverse over the forecast period to the end of 2024, Fitch said.

“A deterioration of the political stability and the government effectiveness and the resulting risks to investment and growth were key factors in our review of the Peru ‘BBB’ rating outlook to Negative from Stable in October 2022”, specifies the report of the firm.

In addition, Fitch Ratings argued that recent events are consistent with its view that this deterioration will be difficult reverse over the forecast period to the end of 2024.

In this sense, the agency clarified that the Boluarte administration faces the same challenge as that of Castillo in the conduct of legislation through a fragmented congress. In addition, he points out that more than 70% of Peruvians want him to resign, according to a recent poll.

“The Attorney General’s Office has announced a protest management research which have periodically disrupted transport infrastructure and affected economic activity,” he said.

The Fitch report noted that the Public debt moderate is a Unity is strength. He budget deficit of Peru in 2022 has been reduced to 1.6% of the PBIi.e. 0.9 percentage point less than in 2021, according to the Ministry of Economya, mainly due to a 12.7% increase in general government current receipts due to high nominal growth and strong commodity prices. Pandemic-related healthcare spending has been cancelled.

“The 2022 deficit was lower than Fitch’s initial 2% expectation, and is consistent with the fact that the public debt/GDP it remained well below the median for the “BBB” category (2022: 55.8%), although it is still higher than before the pandemic.

Peru's economy slowed more than expected in 2022.
Peru’s economy slowed more than expected in 2022.

Fitch also mentioned that the recent rebound in the price of copper would support the tax performance if maintained, and Economy Minister Alex Contreras said existing budget targets would be met. However, the crisis has increased the tax uncertainty.

According to the agency, this situation may hamper the execution of investment expenditure, but could encourage a move towards expansive spending. So far, almost half of the economic stimulus measures have been approved for a total of 1.2% of the PBI (part of the government’s initial response to the protests).

The analysis also indicated that revenue risks will increase as the crisis demands a cheap priceespecially if the mining activity it seems more interrupted.

The data of the HERE show that the economy grew by 2.7% in 2022 (Fitch forecast: 2.5%), with a slow-down year-on-year growth to 0.9% in December from 1.7% in November, although activity in mining and hydrocarbons sector rose 9.3% year-on-year in December.

“The protests are seriously affecting the tourism and add to the periodic interruption of the mains minor. The disruption of the road network has increased the Food priceskeeping inflation close to recent highs (annual CPI was 8.9% in January 2023), which will weigh on consumption,” he said.

The mining sector in Peru is affected by the protests
The mining sector in Peru is affected by the protests

Finally, Fitch said the economic outlook and of weakened investmentif continued through 2023-2024 as planned, could undermine the macro trajectory there prosecutor of peru compared to their “BBB” peers.

“The risk of populist economic measures, like more retirement withdrawals, has increased. The previous five rounds of withdrawals have reduced the capacity of domestic market financingwhile the interest rate they rose (the central bank kept its benchmark rate unchanged this month for the first time since 2H21, at 7.75%),” he said.

Fitch has indicated that it will update its macroeconomic and fiscal forecasts next March in its publication Sovereign data comparator.

Categorized in: