Fitch Ratings warns of a potential downgrade in Peru: Here are the reasons | Risk Assessment Institute | GDP | Peruvian Economy | economy

The executive recalled that in the fifth month of this year, the international company Fitch reviewed Peru’s credit rating was maintained at ‘BBB’ with a negative outlookBut now there are dangers.

-What helped Peru retain its BBB rating, but with a negative outlook?

Two things that help Peru is that they have low sovereign debt, which will reach 34% of GDP in 2022, which gives it room. However, we believe this year will vary due to financial issues; For all social problems, sometimes governments try to pacify them by spending a little too much. Additionally, Peru has a very strong international presence that helps them.

-In May, the accumulated fiscal deficit over the past 12 months was 2.4% of GDP, the second month this indicator has been “in the range”, is this a concern?

We believe that the (fiscal deficit) will reach 2.4% of GDP this year (at the end), but the debt remains low. If that level rises in the medium or long term it would be a concern as it would greatly affect the debt landscape for the country, but it is still below 40% and that is a strength.

– What lies ahead?

We did our review in May this year because we do two a year, one each semester, and we maintained our BBB rating for Peru with a negative outlook. But now we see a downside risk in valuation.

-What are the reasons for being at risk of a credit rating downgrade?

Due to political uncertainty, this is higher than in the past; This has disrupted governance and affected economic growth. Before 2016, political problems did not always affect the economy, but now they do, and this affects private investments more.

The strikes lasted for three months in December (2022), but what we didn’t see was that Tina Poluarte was able to remain in the presidency, which created stability. “unbalanced”, because from the Republican Congress, the left wants him out of office, but the right seems to support him. Therefore, the risk of protests could again destabilize the country politically or end his (Boluarte’s) mandate very soon.

read more: Peru and possible credit rating downgrade? This is what BCR thinks.

President Tina Polwarte has said that she will carry out her mandate until 2026. Is that scenario positive or negative for investors?

Our situation is that he can keep her cool because he is in power. The question for Perusas is what outlook she holds on to in power. It is good for an investor to be politically committed, but it can lead to social problems.

Are you feeling the lingering political uncertainty?

We believe that the political problem (economics) will continue to affect reform efforts. This could affect the macroeconomic and financial trajectory of the sovereign in the BBB and therefore affect the rating.

So, are there pressures to downgrade Peru’s credit rating in the short term?

It depends, because our outlook (Panorama) is two years old and we already had a negative outlook. So, we still have one year left. We are waiting to see if the economy stabilizes after the protests, but so far it remains weak. It is also to be seen how the political question develops.

What other factor do you consider a potential downgrade?

The political situation may change due to protests, and depending on their impact, it may change the trajectory of the outlook (evaluation). Additionally, we expect the World Bank (WB) to release its governance indicators, which it will release in September. For example, they are declining in Ecuador.

read more: Rising prices: July will record high rate of inflation, why?

-In that vein, how do you see the governance landscape for Peru?

It is expected that there will be downward pressure on management (from the World Bank), but another issue we need to think about is whether the deterioration of governance reflects what happened in December and earlier this year. It’s November to November and we’ll see how the rating reacts with that.

-In the case of Petroperú, what is the outlook for valuation on the corporate side?

This represents a contingency for the government. Last year they had to pay in PetroPeru and that is naturally not good for the fiscal structure because it increases the deficit and increases the debt.

-Does Petroperú still need more economic support from the government?

In the short term it may have improved PetroPeru’s management, but in the medium and long term these financial pressures are affecting the credit path it maintains.

read more: Waldo Mendoza: “1% growth is a problem, but it’s no reason not to improve”.

Impact of El Niño on the Peruvian Economy

-Regarding the growth forecast for the Peruvian economy, they cut it from 2% to 1.8%, is there a downward bias?

We maintain a forecast of 1.8% and there is a downward bias because (the economy) is weak. Let’s see what happens in the coming months and the impact of social protests.

What are your indicators of reduction?

They are related to political uncertainty that affects the decisions of economic agents and investment. Private investment in the country is low and previous protests have briefly affected tourism, mining and inflation. All these affect the economic situation.

-How much impact is the global El Niño expected to have on the Peruvian economy?

In fact, it is dangerous for the entire region. For example, the mining industry requires a lot of water to operate, so climate change has an impact and can cause severe flooding. This will affect the trade, sales, tax issue, in addition, inflation, because if a disaster occurs, rice cannot be produced or some goods can be sold. Climate change always has an impact.

-However, the BCR notes that it will remain weak to moderate, however, inflation will continue to decline, but at a slower pace…

Slowing inflation in Peru and the El Niño issue pose a risk to the economy’s outlook (Panorama); If it is strong (El Nino) it will affect inflation. (PCR) If they see it (a) at low-moderate intensity, they may not realize that it is so damaging, but El Niño will affect the supply of goods.

-Inflation eases, it stands at 6.46% in June, BCR maintains interest rate at 7.75% for sixth consecutive month. Time for cuts?

Core inflation has a greater influence, standing at 4.35% in Peru. It’s already low and has room for (interest rate) cuts, but you have to look at how strong the labor market and the local currency are. In general, central banks are looking to cut their rates.

read more: Inflation will continue to slow, but there is a risk that it will be at a slower pace.

Companies are cautious about investing

Notices are given of new mobilizations in Peru. Saul Del Real, Director of Sovereigns Fitch RatingsHe pointed out that this is usually a risk, because in the face of uncertainty, small companies do not want to invest.

“They realize that sales are going to decline, so political uncertainty is the same risk that affects debt. Credit has fallen sharply in Peru, in the same sense – reflecting a slowdown in (economic) growth.”, he pointed out.

He added that despite the fact that the mining sector could be at risk due to the protests, the government has ordered the police to ensure that mining exports reach international markets.

“We know they work on highways, ports and products. During the protests last year and this year, the production did not decrease, but (there were problems) the transportation of copper had to be removed. Now companies will access the roads”, he noted.

read more: CCL: Every day of immobility in Lima and Callo, S/ 1,000 million is lost

Investors’ view of Peru

Representative of Fitch Ratings Restoring investor confidence in Peru is key, he noted.The market still sees the country as low risk (investment) compared to other parts of the Latin American region”.

He recalled that a few weeks ago Peru issued bonds, especially in the local currency, which saw a large number of foreign investors.

With this, the country entered the international market more than three years after issuing bonds in the local currency.

However, Del Real said that in recent years, during the Covid-19 pandemic, large pensions have been withdrawn from AFPs and this could have an impact. “Therefore, the assets of the pension sector are reduced, which means that the local capital market collapses, leading to the need for more private loans to pay off the sovereign debt or to issue more bonds.”, he emphasized.

Along these lines, the executive emphasized that more investor confidence needs to be created and this can only be achieved with “political commitment”.

“If you know ‘the rules of the game are going to change’ in a year, you might not invest because of the political noise, and they might be a little wary of that uncertainty.”, he mentioned.