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Fitch: Solid fiscal fundamentals to cushion Peru against political risks

Peru's solid fiscal fundamentals and economic institutions should back policy predictability and help shield the country's finances from economic risks amid an ongoing political crisis, Fitch Ratings said.

President Martin Vizcarra's dissolution of the country's opposition-led Congress is the latest development in a political tug of war between the administration and the legislature. After defeating Keiko Fujimori, a leading opposition figure, in the 2016 election, former President Pedro Pablo Kuczynski resigned in 2018 following several impeachment attempts from opposition lawmakers.

Vizcarra scheduled interim legislative elections in January 2020, in a bid to end his yearlong impasse with lawmakers who have failed to pass reforms and who recently rejected a bill for a snap general election.

Despite the political risks, Fitch expects Peru's economy to remain stable amid fiscal policies that aid in the prudent management of public finances, low and stable inflation supported by the central bank's inflation framework, large international reserves and a competitive mining code.

Robust macroeconomic policies are a sovereign rating strength for Peru, Fitch said, noting that previous instances of political volatility did not affect policy-making.

However, Fitch said the current political scenario has dampened the country's near-term GDP growth forecasts. The rating agency earlier cut growth expectations by 1 percentage point to 2.5% for 2019 and by 0.7 percentage point to 3% for 2020 and 2021.

Economic weakness is also expected to pose challenges in the government's revenue-led deficit reduction plan, Fitch noted.