New York, January 31, 2023 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of Peru's Baa1 foreign-currency and local currency long-term issuer ratings to negative from stable. Concurrently, Moody's has affirmed the Baa1 long-term foreign-currency and local currency issuer ratings, the Baa1 ratings for the government's long-term local and foreign-currency senior unsecured debt, the (P)Baa1 foreign-currency senior unsecured shelf rating, and the Baa1 rating for the local currency deposit note/CD program.
The outlook change to negative from stable reflects Moody's view that social and political risks have intensified threatening, over the next few years, a deterioration in institutional cohesion, governability, policy effectiveness and economic strength through successive governments.
The affirmation of the Baa1 rating reflects Moody's view that sovereign creditworthiness remains anchored by the strength of the government's balance sheet and Moody's expectation that Peru's institutions and overall policies will prove effective in containing the erosion of fiscal and economic strength despite pressures coming from the sociopolitical environment.
Peru's local and foreign-currency ceilings remain unchanged at Aa3. The four- notch gap between the local currency ceiling and the sovereign rating is maintained, reflecting the government's relatively low footprint in the economy and the financial system. 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 and restrictions in foreign or local currency.
RATINGS RATIONALE
RATIONALE FOR THE CHANGE IN OUTLOOK TO NEGATIVE FROM STABLE
SOCIAL AND POLITICAL RISKS INCREASE CHALLENGES TO GOVERNABILITY, POLICY EFFECTIVENESS AND ECONOMIC STRENGTH
Social unrest following the removal of former president, Pedro Castillo, in conjunction with associated political risks, threaten to weaken the strength of Peru's institutions and governance, and in particular governability and policy effectiveness over time. Persistent political and social disruptions risk eroding investment further, with negative consequences for economic strength.
Recurring social confrontations, which denote an inability to address social discontent, risk undermining governability by absorbing significant executive capacity and further undercutting the credibility of the legislature, potentially beyond the current transitional government. In turn, this environment risks restricting the ability to adopt reforms that enhance investment sentiment and effectively address Peru's structural challenges. Recurrent social conflicts can lead to a gradual deterioration of institutional strength and result in successive governments having weak mandates with a reduced ability to preserve policy continuity and a medium-term focus for policymaking.
Although business confidence rebounded following the removal of Pedro Castillo as president in December, ongoing social unrest and uncertainty about the outcome of the next general election and, more generally, the political environment in the next few years risk weighing durably on investor sentiment and economic activity.
RATIONALE FOR THE AFFIRMATION OF THE BAA1 RATINGS
The affirmation of the Baa1 rating reflects Moody's view that creditworthiness remains anchored by the strength of the government's balance sheet and Moody's expectation that Peru's overall policy and institutional framework will prove effective in containing any potential erosion of fiscal and economic strength despite the risks from the unsettled sociopolitical environment.
The sovereign's balance sheet remains among the strongest in the 'Baa' category based on its low debt burden, its favorable debt structure including a lengthy maturity profile, substantial fiscal savings, all reflecting a prudent fiscal policy framework.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Peru's ESG Credit Impact Score is moderately negative (CIS-3), reflecting moderate exposure to environmental risks, highly negative exposure to 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 Nino 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 highly negative (S-4 issuer profile score) on account of low income levels, which are regionally unevenly distributed, and a large informal economy. Over the years, wide regional inequalities have led to recurring social tensions. Low quality basic services including sanitation, health and education generate latent risks. Segments of the population will increasingly demand better public services, which may encourage populist policies in the absence of tangible improvements to these services. Regional inequalities have proven fertile ground for social discontent leading as of the end of 2022 to politically motivated protests in the southern regions of Peru, which have negatively affected governability and economic sentiment.
The influence of governance on Peru's credit profile is neutral-to-low (G-2 issuer profile score). 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. The negative outlook captures medium-term risks to the strength of economic institutions.
GDP per capita (PPP basis, US$): 14,023 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 13.6% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 6.4% (2021)
Gen. Gov. Financial Balance/GDP: -2.6% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.3% (2021) (also known as External Balance)
External debt/GDP: 45.1% (2021)
Economic resiliency: baa2
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 26 January 2023, 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 institutions and governance strength, have materially decreased.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook could be changed to stable if social unrest eases with a seemingly durable political and social solution, and there is no indication of material deterioration in Peru's institutional framework, in particular on elements associated with macroeconomic policy effectiveness. Political conditions that result in a government that is willing and able to uphold policy continuity would support investment and economic prospects and the maintenance of conservative fiscal management.
Although unlikely given the negative outlook, a more harmonious political environment that strengthens institutional cohesion and results in the adoption of sustainable growth-enhancing reforms could lead to an upgrade of Peru's sovereign rating. Strengthening of governance indicators, particularly those related to political institutions, corruption, and the informal economy, would improve sovereign creditworthiness.
Continued social instability that reinforces political polarization, undercuts policy effectiveness and results in abrupt policy shifts would weigh on investor confidence undermining medium-term growth prospects and complicating fiscal management could lead to a downgrade. Institutional uncertainty derived from a constitutional process launched with the intention to instigate a broad revision and modification of the economic model and policy framework would weaken the structural underpinnings of Peru's credit profile and could also lead to a downgrade.
The principal methodology used in these ratings was Sovereigns published in November 2022 and available at https://ratings.moodys.com/api/rmc-documents/395819. Alternatively, please see the Rating Methodologies page on https://ratings.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
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At least one ESG consideration was material to the credit rating action(s) announced and described above.
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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
Mauro Leos
Associate Managing Director
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
