Dagong Maintains the Sovereign Credit Ratings of the Republic of Peru with a Stable Outlook
Dagong Global Credit Rating Co., Ltd.
May 9th, 2017
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided today to maintain both the local and foreign currency sovereign credit ratings of the Republic of Peru (“Peru”) at BBB+, each with a stable outlook. Peru's political environment is basically stable. The banking system remains stable. De-dollarization continues to advance. Although Peru's economic growth is slowing temporarily and the fiscal deficit is rising slightly, the optimized debt structure, the increased balance of payments surplus and ample foreign exchange reserves should guarantee the stability of government solvency in terms of both local and foreign currency.
The primary reasons for maintaining the sovereign credit ratings of Peru are as follows:
1. The debt repayment environment remains fundamentally stable. The new government is committed to advancing economic liberalization and strengthening public security. However, progress will be slow due to implementation capacity constraints and corruption. Although asset quality has deteriorated, given the fact that the increase in loan interest rates led to increased borrowing costs, the banking system remains generally sound. De-dollarization continues to advance, and the credit environment is basically stable.
2. The slowdown in private consumption growth dragged down economic growth slightly, but structural problems will constrain long-term economic growth. In the short term, the impact of rising borrowing costs is transferred to employment and the real income of residents, and consumer confidence is declining. This is leading to a slowdown in private consumption growth. Although the government planned to increase spending on transport and communications, education, agriculture, internal affairs, and labor markets through the introduction of an economic stimulus plan, as well as taking measures to accelerate delayed projects and increase public spending for the reconstruction of areas affected by El Niño, it is difficult to completely offset the negative impact of the slowdown in private consumption on the economy. Peru’s economic growth is expected to be slightly reduced to 3.5% in 2017. Subsequently, private investment will gradually resume a faster pace of growth, supported by the re-start of the operation of main projects and through future investment projects. Peru's economic growth is expected to rise to 3.7% in 2018. In the medium and long terms, the new government’s economic liberalization reform will help to stimulate economic growth. But corruption, informal employment and other issues will suppress the economic growth potential. Peru's average economic growth rate is expected to be 3.5% in the medium and long terms.
3. The government’s fiscal deficit will widen slightly in the short term, but the government’s debt repayment sources remain stable. Given the fact that the economic stimulus plan will increase government expenditure, it is expected that the general government’s fiscal deficit will expand to 2.8% in 2017 and narrow slightly to 2.6% in 2018. With the gradual implementation of the government's fiscal consolidation policy, the fiscal deficit will gradually narrow. It is expected that the financing needs of the general government will be 3.5% and 3.4% of GDP respectively in 2017 and 2018. Thanks to domestic debt financing and concessional loans from international institutions, the government’s debt repayment sources will remain stable.
4. The government’s debt burden rose slightly over the recent short term, but its solvency remains stable. The average debt maturity increased in the tracking period. Because of the economic stimulus plan, it is expected that Peru’s general government debt burden will increase to 26.0% in 2017 and 27.0% in 2018. But the optimized debt structure ensures government solvency in the local currency. Peru's external debt burden rate was only 38.2% at the end of 2016. An improved balance of payments and ample foreign exchange reserves will guarantee stable government solvency in foreign currency.
In the short-term, although Peru's economic growth is expected to slow slightly and the fiscal deficit is expected to rise slightly, the optimized debt structure, the increased balance of payments surplus and ample foreign exchange reserves will ensure stable government solvency. Therefore, Dagong has decided to maintain a stable outlook for both the local and foreign currency sovereign credit ratings of Peru for the next one to two years.