New York, June 25, 2019 -- Moody's Investors Service, ("Moody's") has today
affirmed the Government of Peru's long-term foreign-currency
and local-currency issuer ratings at A3. Concurrently,
the Government of Peru's foreign-currency and local-currency
senior unsecured ratings have been affirmed at A3, and its foreign-currency
senior unsecured shelf programs were also affirmed at (P)A3. The
outlook remains stable.
The affirmation of Peru's A3 ratings balances the following key
rating drivers:
1) Peru's moderate economic strength, underpinned by favorable
medium-term growth prospects and demonstrated resilience to shocks
in recent years
2) And the government's very high fiscal strength, bolstered
by stable low debt and fiscal outperformance in recent years
3) And the country's moderate institutional strength, reflecting
structural limitations related to institutional quality and the high level
of corruption
The stable outlook on the rating reflects Moody's view that upside
and downside risks to Peru's credit profile remain balanced. Economic
growth will continue to by supportive of creditworthiness, perhaps
enhanced somewhat by planned microeconomic reforms, fiscal performance
will remain sound and debt ratios will remain relatively stable,
even as institutional strength challenges that hinder the efficient allocation
of resources in the economy remain.
Peru's long-term and short-term foreign-currency
bond and deposit ceilings remain unchanged at A1/P-1 and A3/P-2,
respectively. The local-currency bond and deposit ceilings
remain unchanged at A1.
RATINGS RATIONALE
RATIONALE FOR THE AFFIRMATION OF THE A3 RATINGS
FIRST DRIVER: PERU'S MODERATE ECONOMIC STRENGTH, UNDERPINNED
BY FAVORABLE MEDIUM-TERM GROWTH PROSPECTS AND DEMONSTRATED RESILIENCE
TO SHOCKS IN RECENT YEARS
Peru's moderate economic strength reflects benign growth dynamics
and favorable medium-term economic prospects, counterbalanced
by relatively low national income levels. The country's investment-fueled
growth model over the past decade has produced average annual growth of
4.4% in 2009-18, facilitated by Peru's
stable and predictable macroeconomic environment. Despite multiple
recent adverse shocks including the commodity price shock of 2014-16,
the El Niño floods from 2017 and the ongoing various corruptions
scandals since 2017 to date, the economy's demonstrated resilience
has supported Moody's assessment of the country's economic
strength.
Peru's real GDP growth accelerated to 4% in 2018 from 2.5%
in 2017, as the shock from the 2017 El Niño floods dissipated.
Peru's average real GDP growth rate between 2014-18 of 3.2%
is in line with the 'A'-rated median of 3.4%.
The strong recovery in domestic demand that began in 2018 has helped the
economy resume progress on various social and development indicators,
such as reducing poverty (which stands at 21%) and absorbing a
larger amount of new entrants and existing workers into the formal economy
given Peru's favorable demographic profile.
Moody's forecasts that the Peruvian economy will continue to grow
near its current potential rate of 3.7% through 2022,
supported by a recovery of private investment that will underpin a faster
rate of capital formation and, in turn, a marginal improvement
in potential growth to 3.9% by 2022. Also supporting
these favorable medium-term prospects are the planned microeconomic
reforms tied to the national competitiveness and productivity plan,
which, if implemented, could increase potential growth above
4%.
SECOND DRIVER: THE GOVERNMENT'S VERY HIGH FISCAL STRENGTH,
BOLSTERED BY STABLE LOW DEBT AND FISCAL OUTPERFORMANCE IN RECENT YEARS
Peru's very high fiscal strength reflects the government's
low debt burden, its continually improving debt structure that decreases
rollover risk, and its prudent fiscal policy framework, which
has led to the accumulation of substantial fiscal savings over the last
decade.
Peru's general government deficit narrowed to 2.0%
of GDP in 2018 from 2.8% in 2017, outperforming the
authorities' mid-2018 guidance of a 3% of GDP deficit
for the non-financial public sector (and the 3.5%
of GDP deficit under the fiscal rule). Revenues in 2018 substantially
outperformed budgetary targets. Tax receipts grew 14.9%
in 2018 (13.4% in real terms), benefiting from stronger
domestic demand and various measures put in place to fight tax evasion
and avoidance, including a new requirement to use electronic receipts
and widen the tax base.
The forceful reduction of the fiscal imbalance in 2018 allows for a smoother
consolidation path toward the medium-term objective of 1%
of GDP by 2021, and highlights the authorities' commitment
to fiscal prudence given that stronger-than-expected revenues
were used to frontload fiscal consolidation rather than for increased
spending. The non-financial public sector deficit target
for 2019 remains 2.2% of GDP as outlined in the updated
medium-term fiscal framework published in April 2019, but
Moody's believes that it is likely that the authorities will outperform
the target and post a deficit closer to 2% of GDP.
Gross non-financial public sector debt reached 25.8%
of GDP in 2018, below the 36.5% median for 'A'-rated
sovereigns. Based on the fiscal trajectory, Moody's
now expects debt will peak at 26.5% of GDP in 2019 instead
of 29% previously, and that the ratio will slowly decline
toward 25% through 2022. The affordability of government
debt as measured by the general government interest payments-to-revenue
ratio, has deteriorated in recent years, reaching 7.0%
in 2018, and is now weaker than the 3.9% 'A'
category median. This is partly a reflection of decreased revenues
given that the interest burden relative to GDP at 1.3% remains
stronger than the category median, but also the costs associated
with an improved government debt structure given an emphasis on long-dated,
fixed-rate, local-currency bond issuances.
The Peruvian sovereign's average maturity of total debt at 12.4
years is one of the longest among emerging market sovereigns with market
access, which decreases rollover risk. Additionally,
the sovereign's liquid assets totaled 14.3% of GDP
at end-2018, supporting its healthy government balance sheet
with net debt (gross debt less liquid assets) of 11.5% of
GDP in 2018. This favorable government debt structure supports
very high fiscal strength.
THIRD DRIVER: THE COUNTRY'S MODERATE INSTITUTIONAL STRENGTH,
REFLECTING STRUCTURAL LIMITATIONS RELATED TO INSTITUTIONAL QUALITY AND
THE HIGH LEVEL OF CORRUPTION
Peru's moderate institutional strength incorporates the country's
scores in the Worldwide Governance Indicators, which portray a weak
picture of political institutions in the country. The scores place
Peru's government effectiveness, rule of law and other dimensions
of institutional quality near or below the 50th percentile among sovereigns
rated by Moody's, according to the latest figures based on
2017 surveys. These scores are considerably lower than the 'A'
category medians and hold back institutional strength in spite of strong
economic institutions and strong policy capabilities.
Although the economy and fiscal accounts have remained resilient to various
recent corruption scandals and political instability, including
the resignation of then-President Kuczynski in March 2018,
these scandals reflect some of the inherent structural bottlenecks that
constrain institutional quality, holding back growth, faster
income convergence with peers, and hence credit prospects.
Corruption, political infighting, a weak judicial system,
low levels of education and an inefficient bureaucracy, particularly
at the local and regional government levels, are the greatest institutional
challenges facing the Peruvian state. These factors represent the
key constraint on the sovereign's credit profile over the medium-term
because they undermine governability and policy execution, detract
from the efficient allocation of resources, contribute to a large
informal sector and impose substantial costs on the economy. Current
reform proposals seek to address some of these issues, by enacting
changes to the country's political governance structure and increasing
transparency in the judiciary, but vested interests and resistance
among the political class suggest that tangible progress will demand continued
reform efforts and a lengthy period of time.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook on the rating reflects Moody's view that upside
and downside risks to Peru's credit profile remain balanced. Moody's
expects economic performance will remain resilient and that the sovereign
will continue to adhere to the fiscal trajectory it has set out for narrowing
the fiscal imbalance, and that debt ratios will remain relatively
stable, even as institutional strength challenges that hinder the
efficient allocation of resources in the economy remain, constraining
upward mobility for the sovereign's ratings.
WHAT COULD CHANGE THE RATING UP
A substantial increase in income levels or a significant strengthening
of governance indicators, particularly related to political institutions,
corruption and the informal economy, would contribute to improving
creditworthiness.
WHAT COULD CHANGE THE RATING DOWN
Downward pressure on the sovereign's credit profile would emerge if government
debt ratios were to deteriorate significantly on account of large fiscal
imbalances. The absence of structural reforms to preserve the economy's
favorable growth potential that ensures healthy public finances and a
convergence in income levels with rating peers would also pressure creditworthiness
GDP per capita (PPP basis, US$): 14,224 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4% (2018 Actual) (also
known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.2%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: -2.3%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -1.6% (2018 Actual)
(also known as External Balance)
External debt/GDP: 34.5% (2018 Actual)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 21 June 2019, a rating committee was called to discuss the rating
of the Peru, Government of. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have not materially changed. The issuer's
institutional strength/ framework, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Jaime Reusche
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
