Peruvian authorities are using the country’s fiscal strength to cushion external negative effects, and the Government’s stimulus is favoring economic growth and business expectations, Moody’s Investors Service reported.
"The 2015 fiscal stimulus, afforded by ample fiscal buffers and low debt levels, prevented a further slowdown in economic activity and worsening of economic sentiment," Vice President - Senior Analyst Jaime Reusche said.
Fiscal Deficit
As a result of the counter-cyclical stimulus, Moody's forecasts that the fiscal deficit will widen to 1.8% of GDP in 2015.
“Given a negative output gap, the government deficit will remain consistent with medium-term structural deficit targets,” he stated.
Moody's expects the authorities will gradually withdraw the fiscal stimulus in 2016 as the economic recovery firms up.
Credibility and Flexibility
"The policy stance will provide support for the still-fragile economic recovery while the announced consolidation path signals a steadfast commitment to fiscal prudence, benefiting from the sovereign's strong fiscal policy credibility," Reusche continued.
In the event of continued weak economic activity through 2016, he added, fiscal rules provide flexibility to maintain an expansionary fiscal stance if a negative output gap is present.
Growth
However, economic performance in the first half of 2015 points to a tepid recovery supported by a reversal of supply shocks, and a gradual firming of domestic demand.
Moody's expects private investment will no longer be a drag on economic activity by the second half of the year.
For 2015, Moody's projects GDP will increase over 3.0%, with growth accelerating in the second half of the year and the recovery extending into 2016.
A3 Rating Reaffirmed
Early this week, the credit rating agency reaffirmed Peru's A3 rating with stable outlook, due to the low and affordable government debt, substantial fiscal savings, a strong balance sheet and solid fiscal policy credibility.
Finally, Reusche said he does not expect Peru's credit quality to change significantly over the next two years.
On Thursday, the Lima Chamber of Commerce (CCL) pointed out the level of Net International Reserves (NIR), which is equivalent to 30% of Peru’s GDP, favors the country’s current credit rating, since this is the indicator rating agencies focus on.
(END) JJN/JJN/RMB/MVB
Published: 8/28/2015