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S&P: Odebrecht corruption scandal could take toll on Peru banks' credit quality

The corruption scandals involving Brazilian company Odebrecht and Peru's major construction companies could affect the Peruvian banking system through increasing default rates, S&P Global Ratings said.

A rise in bankruptcy filings among construction firms after the passing of an anti-graft decree last year could result in rising delinquency, S&P said in a report. The rating agency added that the decree has discouraged banks from financing large construction projects due to fears of lending to companies involved in the corruption probe.

As a result, infrastructure construction in Peru has slowed down and impaired GDP growth, prompting Congress to reconsider and replace the decree. The corruption probe has also brought about political developments, including impeachment moves against President Pablo Kuczynski, that continue to hurt investor confidence and could jeopardize the expected economic rebound, S&P said.

As of December 2017, about 2% of banks' total loans were granted to construction companies, with the off-balance sheet exposure possibly accounting for a much larger amount. "Given that banks have been working on improving their asset quality by tightening underwriting standards amid the strengthening economic prospects, we had expected asset quality to improve in 2018," S&P noted. "However, if losses — resulting from the stalled infrastructure program surge, asset quality will likely remain under pressure."

Due to these factors, S&P could assess the credit risk in Peru's economy as rising and the banking system's creditworthiness as declining, which would pressure banks' ratings.

Odebrecht, which was involved in large projects in Peru, had admitted in 2016 to bribing Peruvian officials in exchange for receiving contracts. Peru's government passed a decree in February 2017 intended to sanction construction companies involved in corruption, but it also resulted in the involuntary disruption of infrastructure projects, S&P said.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.