Credit ratings agency Fitch notes that prudent policy in recent years has given Peru headroom to keep accommodative monetary and fiscal policies as economy slows, providing a buffer for its 'BBB+/Stable' rating.
Nevertheless, the global rating agency cautions that maintaining relatively rapid medium-term growth will be key in further boosting per capita GDP and human development indicators, areas where the nation lags ratings peers.
According to the national statistics agency, INEI, Peru’s GDP grew 1.7% yoy in 2Q14, sharply lower than the 5.1% growth seen in 1Q, mainly due to falling copper exports and a decline in investment.
However, growth may bounce back after delays to some mining projects and under-execution of public investment by some regional governments contributed to the weak 2Q reading alongside weaker global demand.
It should be noted that investment in Peru recovered rapidly after the 2009 slowdown, and mining investment could see copper production double by 2016.
On the other hand, the Central Reserve Bank of Peru (BCR) had officially cut its growth forecast for 2014 to 4.4% in July, down from 5.5% in April, but foresees annual growth recovering to close 6% in 2015.
Even at the central bank's lower estimate for 2014, growth would remain higher than the expected 'BBB' median of 2.9%.
Meanwhile, the authorities are maintaining a supportive fiscal stance, through existing policies such as scheduled wage increases and a strong push for investment via public-private partnerships and removing supply-side bottlenecks constraining investment.
These initiatives may also help boost competitiveness. And the Central Bank followed up last November's 25bp cut in the reference interest rate (the first in more than four years) with a further 25bp cut in July to 3.75%.
A record of consistent inflation targeting and financial stability and a prudent fiscal stance, buttressed by a fiscal responsibility law, mean Peru can deploy accommodative policies without damaging the authorities' credibility or damaging fiscal metrics.
“Fiscal savings and conservative fiscal programming have strengthened the public finances, and we forecast a near-balanced fiscal position in 2014, consistent with a further decline in the already low debt burden,” Fitch Ratings added.
Nevertheless, if prolonged, the slowdown could constrain Peru's sovereign credit profile by retarding growth in per capita GDP toward levels more comparable with peer investment grade commodity exporters and higher rated sovereigns.
Fitch revealed their ratings assessment will incorporate their view on authorities’ ability to translate growth into better social indicators and a stronger institutional framework for implementing social and investment policies.
Besides the impact of recent reforms and countercyclical stimulus, will remain part of the said ratings’ estimation.
(END) NDP/RMB
Published: 8/28/2014