News Column

Moody's upgrades Peru's rating to A3 from Baa2

July 7, 2014



Moody's Investors Service has today upgraded Peru's sovereign rating to A3 from Baa2. The outlook on the rating was changed to stable from positive.

The key drivers of today's rating action are the following:

1) Our expectation of continued strengthening of the government's balance sheet and fiscal framework.

2) Continued structural reform momentum to boost potential output growth while addressing institutional constraints.

3) Our expectation that economic activity will accelerate through 2016, underpinning a sustained improvement in credit metrics relative to similarly-rated peers.

RATINGS RATIONALE

The principal driver of Moody's decision to upgrade Peru's sovereign rating is the continued strengthening of the government's balance sheet.

Despite a cyclical slowdown in economic activity and a decrease in prices of key commodity exports, diversification of tax revenues has helped underpin fiscal health. The fiscal balance remained in surplus in 2013, coming to 0.7% of GDP, and the public debt ratio declined to 19.6% of GDP from 20.4% in 2012. Sustained fiscal surpluses have generated substantial liquid assets, driving the sovereign's public debt net of liquid assets to below 4% of GDP. Moody's forecasts that gross public debt will continue to decline to around 18% of GDP by 2016. The average maturity of Peru's government debt, currently 12.7 years, is likely to remain high, underpinning the sovereign's relatively low financing needs which Moody's forecasts will average 1% of GDP over the next three years.

Moreover, measures to diversify revenue sources and widen the tax base will underpin decreased vulnerability to commodity price volatility and buffer the fiscal accounts. The authorities have enhanced the asset and liability management framework to better control for financial risks, complementing the sovereign's conservative approach to policymaking that is anchored by fiscal rules to limit structural deficits and support sound public finances.

The second driver underpinning the upgrade is the continuing momentum for structural reform. In addition to the new laws and recent changes to the government's fiscal framework, important structural reforms have been legislated to increase productivity and support Peru's comparatively high growth rates. These include measures to decrease transaction costs and fees, increase coverage, and to foster greater competition in the pension system. There have also been education and healthcare reforms, tax reforms, and a landmark civil service reform that promotes meritocracy and efficiency throughout the public sector.

More recently, as economic activity has slowed somewhat, the authorities'

response has been to pursue further supply-side focused reforms. On 11 June, the government approved a new package of structural reforms that is now being debated in congress. These measures include changes to the tax system, labor market reform, cutting red tape, and enhancing transparency in public sector procurement. Moody's believes that these measures will enhance potential output and private-sector investment, while they also address concerns in the business community about red tape that have negatively affected economic sentiment.

As a result of these reforms and continued public infrastructure investment, we incorporate an expectation that GDP growth in Peru will accelerate to around 6% in 2015 and 2016 from a bit over 5% in 2014, underpinning a sustained improvement in credit metrics relative to similarly-rated peers.


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Source: EMBIN (Emerging Markets Business Information News)


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