S&P said it lowered Peru’s credit rating by one notch to BBB-, the lowest investment grade, and Fitch affirmed its negative outlook on its BBB rating, as lingering political uncertainty hurts investment and economic growth.
High public disapproval of President Dina Boluarte, the country’s fifth leader in as many years, and Congress are limiting the government’s efforts to drum up investment and revive the economy, S&P said in a report late Thursday.
“The lack of consensus at the political level continues to prevent policies aiming to rebuild important buffers lost to the pandemic and subsequent economic crises, such as pension savings and the increase on the government’s debt burden,” S&P said in a statement.
The ratings agency said it expects the country’s “complex political landscape” to persist in the run-up to the next presidential and Congressional elections, which are due to take place in April 2026.
Peru’s track record for fiscal prudence and robust economic growth made it a darling of bond investors and one of the most solid credits in Latin America for the good part of two decades before a series of corruption scandals upended the status quo. S&P cut its rating by one notch in March 2022 after nine years at BBB+ after the policies of Boluarte’s predecessor, leftwing populist Pedro Castillo, spooked businesses and investors.
Castillo was impeached after attempting to dissolve congress and rule by decree in December 2022, sparking weeks of social unrest. Boluarte, his vice president, was sworn in as his replacement but is now under investigation after she was found to have Rolex watches in her possession and struggled to explain their origin. She denies any wrongdoing.
INVESTMENT GRADE
Beth Morrissey, a managing partner at Washington DC-based emerging markets advisory firm Kleiman International Consultants, said that while the downgrade did not come as a surprise, she does not expect Peru to lose its investment grade unless Boluarte is impeached by Congress, “which would further pressure the economy.”
S&P said the stable outlook on Peru’s rating reflects expectations of moderate economic growth of around 2.7% this year and an expected narrowing of its budget deficit to 2% of GDP by 2027 as the fishing, agriculture and primary manufacturing sectors recover from the El Niño weather cycle, and as lower inflation and interest rates provide better conditions for consumption and investment.
A law passed by congress allowing a limited withdrawal of funds from private retirement plans — the seventh since the 2020 — is bad for Peru’s prospects since it could limit local financing options and increase fiscal pressure, Fitch said in a report Friday.
“The passage of another round of private pension fund withdrawals, while perhaps a boost for consumption spending, will keep the markets down as the funds will have to offload holdings to meet redemptions,” Morrissey added.
Fitch said it projected Peru’s financing needs at USD10 billion in 2024, equivalent to 3.8% of GDP.
“Peru should not have any near-term financing pressures given its low financing needs and favorable debt structure,” the agency said. “The treasury is prioritizing debt in soles to slowly return to the pre-pandemic currency debt composition. Reliance on domestic markets has risen in the last couple years, but this could be complicated by the pension fund withdrawal.”