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Credit: Andina

Peru post-elections: Fitch Ratings shows perspectives to investors

Political scenario is an important challenge and polarization can increase populist measures

June 28, 2021

In an effort to help investors in Peru to understand the presidential candidates’ fiscal, economic and political plans, GRI Club gathered members with Fitch Ratings experts last 11th June. 

According to Kelli Bisset-Tom, director of Sovereign Ratings, Fitch will focus on the concrete proposals of the new administration and its impact on the growth outlook, as well as the trajectory of fiscal accounts and debt. 

Some positive factors can disappear in the next months depending on how the situation unfolds itself, like government debt, confidence in favorable economic growth after the pandemic and institucional capacity of governance standards.

Peru has a highly fragmented Congress and the election polarization can increase incentives for populist measures, which would boost the risk of renewed political instability under weakened political institutions.

Due to low capacity to pass fiscal legislation, infrastructure companies might start suspending new investments in Peru. If Pedro Castillo is confirmed as elected-President, he will not have the majority in the Congress to approve many policies that are part of his government plan, such as tax reforms. 

For now, Castillo’s plan lacks policy framework, macro stability focus, policy credibility, budget projectability, volume and pace for infrastructure. The first outlook from Fitch Ratings says that he will concentrate efforts on policy continuity for fiscal platform and framework - committed to the current economic agenda: response to the pandemic, economic recovery and growth.

Other current negative factors are the failure to reduce the government deficit and financing with government debt/GDP in order to achieve stabilization, lack consistency and credibility of the fiscal policy framework, political instability due to polarization, lockdown lowering the economic capacity and deterioration of the external balance sheet.

Policies that undermine the pillars of macro stability, investment and growth - as well as public financial sustainability - could accelerate rating pressures to a lower level. Regardless of the presidential election outcome, the result can be a lost opportunity to achieve or gain some credibility regarding institutional stability and predictability.

Writing by Henrique Cisman

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