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Rating Action:

Moody's changes outlook on Peru's A3 rating to negative; affirms ratings

21 May 2021

New York, May 21, 2021 -- Moody's Investors Service, ("Moody's") has today changed the outlook on the Government of Peru's A3 foreign currency and local currency long-term issuer ratings to negative from stable. Concurrently, Moody's has affirmed the A3 long-term foreign currency and local currency issuer ratings, the A3 ratings for the government's long-term local and foreign currency senior unsecured debt, the (P)A3 foreign currency senior unsecured shelf rating, and the A3 rating for the local currency deposit note/CD program.

The outlook change to negative from stable reflects Moody's view that an increasingly polarized and fractured political environment has been undermining the effectiveness of the country's policymaking, leading to a progressive deterioration in Peru's institutional strength. If sustained, this erosion will undermine economic resilience continuing to weigh on business sentiment and impair investment. Lower economic resilience alongside diminished policymaking capacity will adversely affect the sovereign's ability to reverse the fiscal deterioration of recent years. Whatever the outcome of the upcoming presidential election, the coming months will offer valuable insights into the policies the new administration will pursue and into its ability to implement those policies given the fractured nature of the legislature.

The affirmation of the A3 rating reflects Moody's view of the relative resilience of the Peruvian economy and the strength of the government's balance sheet even after consideration is made of the effects of the pandemic. Core credit metrics remain relatively strong and Moody's anticipates the economy will bounce back strongly from the pandemic. To date, the deterioration of the sovereign's balance sheet has been somewhat contained and the increase in public debt has been moderate relative to peers.

Peru's local and foreign currency country ceilings remain unchanged at Aa2. The four notch gap between the local currency ceiling and the sovereign rating reflects the relatively low government footprint in the economy and the financial system, as well as the predictability and reliability of credible and supportive economic institutions. The lack of a gap between the foreign currency ceiling and the local currency ceiling reflects the absence of balance of payments constraints, capital controls, exchange rate controls or restrictions in foreign or local currency.

RATINGS RATIONALE

RATIONALE FOR THE CHANGE IN OUTLOOK TO NEGATIVE FROM STABLE

WEAKENING OF PERU'S INSTITUTIONS POSES A THREAT TO THE SOVEREIGN'S ABILITY TO REVERSE THE ECONOMIC AND FISCAL DETERIORATION OF RECENT YEARS

Before the pandemic, in 2017-19, economic growth averaged 2.8% (compared to the authorities' 3.3%-3.5% potential growth estimate in those years). Sluggish economic activity was partly the result of supply shocks, the El Niño weather phenomenon, and a more negative international environment, but also due to the Lava Jato corruption scandal. Political tensions detracted from policy execution, led to a constitutional crisis over the appointment of constitutional court judges and culminated in the dismissal of congress by then-President Martin Vizcarra in October 2019.

A new congress was elected in January 2020, but tensions continued affecting institutional cohesion. Following the onset of the pandemic, a severe 11.1% contraction of real GDP in 2020 precipitated congressional policies with a short-term focus that Moody's anticipate will have adverse fiscal and economic effects beyond the legislative term.

In November 2020, former President Vizcarra was removed from office based on corruption allegations. His immediate successor resigned following deadly protests within days after his confirmation. A new interim president was assigned by congress to lead a transition government that will culminate on 28 July 2021, when the winner of the 6 June presidential runoff election will assume office.

The institutional deterioration from recurrent political tensions and increased congressional initiatives with negative fiscal and economic repercussions has created further challenges for policymakers to rein in the large fiscal deficit that resulted from the shock to economic activity and stimulus measures during the pandemic. The results of the 11 April 2021 presidential and legislative elections suggested continued challenges to institutional cohesion. A highly fragmented congress makes it unlikely that the next government will be able to reach consensus on adopting competitiveness-enhancing reforms to raise productivity and support stronger growth. The next government is also likely to face political gridlock at a level similar to the one that has hampered economic activity over the last four years.

Concerns over institutional deterioration are exacerbated by the increased risk of a weakening of the quality of policymaking as a result of social pressures and the possibility that abrupt policy shifts would undermine policy continuity following the runoff election. Navigating the fragile economic recovery and the associated fiscal challenges will require prudent and credible policymaking that supports economic sentiment and fosters robust growth. A deterioration in the quality of policymaking that undercuts the authorities' ability to cement a robust economic recovery and effectively address associated fiscal challenges would weigh heavily on Peru's creditworthiness.

RATIONALE FOR THE AFFIRMATION OF THE A3 RATINGS

The decision to affirm the A3 rating incorporates the relative resilience of the Peruvian economy. The combination of a favorable base effect given the deep contraction in the second quarter of 2020, the supportive external environment with favorable commodity prices (at record levels for Peru's key exports), a significant increase in public investment from the stimulus measures approved for 2021 and the overall recovery of domestic demand, is likely to result in real GDP growth of at least 9% in 2021, and 4.5% in 2022, before moderating to average annual growth of 3.3% in 2023-24, in line with potential.

Peru's 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 led to the accumulation of substantial fiscal savings over the last decade. The outbreak of the coronavirus pandemic led to a significant increase in the government deficit and debt levels in 2020. However, relative to peers, the 8.4% of GDP deficit and the 8.2 percentage point increase in the debt-to-GDP ratio in 2020 were relatively moderate. Gross non-financial public sector debt reached 35% of GDP in 2020, below the 49.1% median for 'A'-rated sovereigns. The sovereign was able to tap into its fiscal reserves to contain the increase in debt-to-GDP, despite the deep contraction in activity owing to the "induced coma" from the highly restrictive quarantine in 2020. Based on the authorities' medium-term fiscal framework, Moody's expects debt will peak at 37.5% of GDP in 2022, and that the ratio will slowly decline toward 35% through 2025.

The Peruvian sovereign's average maturity of total debt at 13.1 years is one of the longest among emerging market sovereigns with market access, which decreases rollover risk. Additionally, the sovereign's liquid assets totaled 12.2% of GDP at year-end 2020, supporting its healthy government balance sheet and allowing the sovereign to ride out episodes of market volatility. This favorable government debt structure supports high fiscal strength and the sovereign's creditworthiness.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Peru's ESG Credit Impact Score is moderately negative (CIS-3), reflecting moderate exposure to environmental and social risks, and limited exposure to governance risks as a result of high economic resilience.

Peru's exposure to environmental risks is moderately negative (E-3 issuer profile score). Although the country's substandard infrastructure and primary sector activity is exposed to droughts and floods from the El Niño weather phenomenon, the shock appears at highly irregular intervals of 10 years or more, and primary sectors account for just over 20% of gross value added, limiting the adverse effects of the weather phenomenon. Nevertheless, the damaging effects of this and other climate shocks have had a negative impact on fiscal performance when replacing damaged infrastructure and providing relief to the affected areas.

Exposure to social risks is moderately negative (S-3 issuer profile score). Social risks have not led to any instability that has adversely affected its economic or fiscal performance over the past 15 years. However, low income levels, a large informal economy and income inequality have led to social tensions that delay the construction of mining projects or impose added costs when remote communities reject infrastructure projects and other types of large-scale investments. Although social tensions contribute to the noisy political environment in the country, these tensions have rarely boiled over to encompass mass protests, unlike in other countries in Latin America. However, low quality basic services including sanitation, health and education generate latent risks. Certain segments of the population will increasingly demand better public services, which may encourage populist policies in the absence of tangible improvements to these services.

The influence of governance on Peru's credit profile is neutral to low (G-2 issuer profile). The country has a long history of credible and prudent macrofiscal policies and strong economic institutions that offset very weak political institutions evidenced by the presence of corruption, political infighting, a weak judicial system, low levels of educational attainment and an inefficient bureaucracy, especially at the regional and local level.

GDP per capita (PPP basis, US$): 13,328 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.2% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.9% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -1.4% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -1.2% (2019 Actual) (also known as External Balance)

External debt/GDP: 34.7% (2019 Actual)

Economic resiliency: baa2

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 18 May 2021, 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 institutions and governance strength, have materially decreased. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become increasingly susceptible to event risks.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Although unlikely due to the current negative outlook, 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 the sovereign's creditworthiness.

Conversely, a further weakening of the quality of policymaking and adverse policy outcomes as a result of continued tensions between executive and legislative powers, political pressures that lead to credit negative policies, or abrupt shifts that undermine policy continuity and jeopardize growth and public finances would likely result in a downgrade. The absence of structural reforms that preserve the economy's growth potential, in turn supporting public finances and promoting income convergence with similarly-rated peers, would also weigh on the sovereign's creditworthiness.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, 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 further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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

Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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