NEW YORK--(BUSINESS WIRE)--The Peruvian government's plan to lower tax rates and increase spending would not undermine its finances, as the country has relatively little debt, strong financial buffers and a history of prudent fiscal management, Fitch Ratings says.
Last week, the government proposed increases in public investments and cuts to corporate, individual and gas taxes. These measures are meant to boost business confidence and stimulate the economy, which has lagged in 2014 due to weakening foreign demand and declining commodity prices and mining output. The total fiscal impact could amount to 2% of GDP in 2015. However, Peru's Congress will need to approve the proposed changes before they are implemented.
In our view, the sovereign has the fiscal flexibility to undertake these measures, as Peru has notched three years of fiscal surpluses and general government debt now stands at 19.7% of GDP. In October, Peru's 12-month rolling non-financial public sector maintained a surplus in spite of lower growth and weaker commodity prices. Moreover, Peru has a solid cushion of government deposits in addition to a USD9 billion fiscal stabilization fund.
In contrast, other South American investment-grade sovereigns have recently implemented tax increases to either sustain revenue levels (e.g. Colombia) or finance increased expenditures (Chile). Peru has proposed measures to remove obstacles to investment, easy labor market inflexibility, especially for young workers, and facilitate sub-national spending execution, which could also support improvements in competitiveness.
Fitch expects growth in Peru to dip below 3% in 2014 before recovering to 5% in 2015 and 5.4% in 2016. Mining sector output will likely recover, and stronger public sector investment will add to the robust pipeline of infrastructure projects under public-private partnerships.
Additional information is available on www.fitchratings.com.
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