LONDON--(BUSINESS WIRE)--Prudent policy making in recent years has given Peru headroom to maintain accommodative monetary and fiscal policies as economic growth slows, providing a buffer for its 'BBB+/Stable' rating, Fitch Ratings says. Nevertheless, maintaining relatively rapid growth over the medium term will be important in further boosting per capita GDP and human development indicators, both areas where Peru lags ratings peers.
GDP increased just 1.7% yoy in 2Q14, sharply lower than the 5.1% growth seen in 1Q, the national statistics agency said 25 August, largely due to falling copper exports and a decline in investment. The 2Q growth rate is the slowest since 2009.
Growth may bounce back after delays to some mining projects and under-execution of public investment by some regional governments contributed to the weak 2Q reading alongside weaker global demand. Investment recovered rapidly after the 2009 slowdown, and mining investment could see copper production double by 2016. The Central Reserve Bank of Peru had officially cut its growth forecast for 2014 to 4.4% in July, down from 5.5% in April, but foresees annual growth recovering to close 6% in 2015. Evan at the central bank's lower estimate for 2014, growth would remain higher than the expected 'BBB' median of 2.9%.
Meanwhile, the authorities are maintaining a supportive fiscal stance, through existing policies such as scheduled wage increases and a strong push for investment via public-private partnerships and removing supply-side bottlenecks constraining investment. These initiatives may also help boost competitiveness. And the Central Bank followed up last November's 25bp cut in the reference interest rate (the first in more than four years) with a further 25bp cut in July to 3.75%.
A record of consistent inflation targeting and financial stability and a prudent fiscal stance, buttressed by a fiscal responsibility law, mean Peru can deploy accommodative policies without damaging the authorities' credibility or damaging fiscal metrics. Fiscal savings and conservative fiscal programming have strengthened the public finances, and we forecast a near-balanced fiscal position in 2014, consistent with a further decline in the already low debt burden.
Nevertheless, if prolonged, the slowdown could constrain Peru's sovereign credit profile by retarding growth in per capita GDP toward levels more comparable with peer investment grade commodity exporters and higher rated sovereigns. Alongside the impact of recent reforms and countercyclical stimulus, the ability of the authorities to translate growth into improved social indicators and a stronger institutional framework for implementing social and investment policies will remain part of our ratings assessment.
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