Peru: Risk Assessment
Country Risk Rating
|A4||A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still acceptable on average.|
Business Climate Rating
|B||The business environment is mediocre. The availability and the reliability of corporate financial information vary widely. Debt collection can sometimes be difficult. The institutional framework has a few troublesome weaknesses. Intercompany transactions run appreciable risks in the unstable, largely inefficient environments rated B.|
Dynamic activity driven by the rise in mining output
In 2016, the Peruvian growth will remain one of the most dynamic in the region. It is mainly driven by the increase in mining production, including the expansion and commissioning of mines Cerro Verde and Las Bambas, but also by the recovery of public investment and ongoing productivity gains in agricultural sector. Household consumption (around 60% of GDP) should grow at a moderate pace, thanks to employment growth and the fall in the unemployment rate since mid-2015. It will also be bolstered by the long-run decline in poverty (the rate of which was reduced from 59% to 23% between 2004 and 2014). But it will remain constrained by the fact that household confidence is affected by a relatively high level of inflation. This level of inflation has triggered rate hikes by the central bank for 3 times, after the increase decided in September 2015. Inflationary pressures should however decrease by the end of the year due to the expected dissipation of the effects of El Niño on food prices and the appreciation of the exchange rate.
The government should continue to use its fiscal leeway to support short term growth
The fiscal deficit increased in 2015, especially because of lower tax revenues. The fall in income tax and the traditional problems (large informal economy, many exemptions) have contributed to this deficit. The new Peruvian president, Pedro Pablo Kuczynki, has already announced his government will request that Congress authorizes a deviation from the existing fiscal rules which calls for a budget deficit limited to 1 % of GDP. The government's goal is to achieve a deficit of about 3 % by 2017 in order to support growth and then return to the target set by Congress of 1 % in 2021. Against this backdrop, the public debt will increase while remaining at a low level. In addition, the country has a stabilization fund, the size of which is equivalent to close to 5% of GDP, which ensures that public finances do not spin out of control even if a negative shock requiring public intervention arises.
The current account deficit is expected to shrink somewhat thanks to an increase in copper production and exports after the commissioning of new mines. Trade in services and the income balance has remained negative because of foreign companies’ activity (repatriation of profits, transport services). This deficit is amply financed by foreign investments. Even though the central bank can draw on a very comfortable amount of foreign exchange reserves (19 months of imports), it will remain attentive to the evolution of monetary policy in the United States that started end-2015, in order to avoid excessive volatility in the sol, especially as the country’s companies have significant debt denominated in foreign currencies. Peru has nevertheless suffered less than most of the other Latin American countries from capital outflows in 2015.
Many challenges for the new President
On June 5, 2016, Pedro Pablo Kuczynki, the candidate of the party "Peruanos por el cambio" narrowly won the presidential elections in Peru (50.1% of votes) against his rival Keiko Fujimori, daughter of former President Fujimori of the party " Fuerza Popular ". His pro-market economic program aims to attract private investment aimed primarily at non mining sector notably through the easing of administrative formalities and tax incentives (lowering the VAT from 18% to 15%). He also provides a tax reduction for small and medium enterprises to encourage formal employment and wants to advance structural reforms (tax, pension, and judiciary). It should also contribute more actively to the advancement of major projects of public infrastructure (metro line 2 in Lima, for example). However, the task of the new president will not be easy: his party has only a small presence in Congress (18 of 130 seats) and will have to forge alliances with other parties, especially with the "Fuerza Popular" (pro-Fujimori), which holds the majority (73 seats out of 130). The business climate tends to improve thanks to the reduction in bureaucratic procedures and the upswing in privatization that should be pursued by the new government to attract foreign investors.