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Rating Action:

Moody's affirms Peru's A3 ratings, maintains stable outlook

25 Jun 2019

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

No Related Data.
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