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Bulletin: Peru Is Likely To Maintain Stable Economic Policies Amid Constitutional Crisis And High Political Uncertainty

Bulletin: Peru Is Likely To Maintain Stable Economic Policies Amid Constitutional Crisis And High Political Uncertainty

MEXICO CITY (S&P Global Ratings) Oct. 2, 2019--Over the past few months, political uncertainty in Peru has increased, and tensions between President Martín Vizcarra and Peru's Congress have escalated. Nevertheless, we assume that the contours of economic policy and its implementation will not change, despite the political developments and uncertainties, given Peru's track record of stable economic policies across administrations and its solid economic and financial profiles. As a result, our sovereign ratings on Peru are currently unchanged (foreign currency: BBB+/Stable/A-2; local currency: A-/Stable/A-2).

On Sept. 30, 2019, President Vizcarra announced the dissolution of Congress, after months of confrontation between the executive and legislative powers amid their inaction on a confidence vote, and called for new legislative elections on Jan. 26, 2020. President Vizcarra designated former justice minister Vicente Zeballos as new prime minister. They are expected to announce a cabinet in the coming days.

However, at the same time, Congress, led by the opposition party Fuerza Popular, approved the confidence motion, suspended President Vizcarra for 12 months, and swore in Vice President Mercedes Aráoz as acting president. Ms. Aráoz later resigned her position as vice president and her designation as interim president. At this point, there is substantial legal uncertainty regarding the next steps to solve this constitutional crisis.

Martín Vizcarra assumed the presidency in March 2018 following the resignation of former president Pedro Pablo Kuczynski. With little support in a fragmented Congress, President Vizcarra has struggled to push legislation to reform Peru's political system. Many members of Congress opposed his proposed reforms, seeing them as restrictions on their own authority. In contrast, the president has been able to advance with his economic policies.

President Vizcarra enjoys considerable popular support (48% according to a September 2019 Ipsos survey, down from 54% in August), owing largely to his support for anti-corruption and political reform. Meanwhile, popular disapproval of Congress is high (78% in September). Recent polls show that popular support for early presidential and Congressional elections, as advocated by President Vizcarra (including no reelection for himself), is at 70%.

Our sovereign rating assumes continuity in prudent fiscal and monetary policies and a solid external profile, notwithstanding the complicated and fluid political situation. The potential hit to GDP growth will depend on the duration of political uncertainty. We currently expect real GDP growth of 2.6% in 2019, down from 4% in 2018, in part because of weakness in copper and fishing production. In addition, the mining sector has disappointed due to the escalation of social conflicts. As a small, open economy, Peru is vulnerable to changing external conditions, including lower commodity prices and trade volumes amid increased trade discord.

Our expectation of policy continuity reflects the track record of successive Peruvian administrations that have demonstrated a commitment to fiscal responsibility. We expect the government will continue its gradual fiscal consolidation and post a deficit of around 2% of GDP, on average, for 2019-2022. Peru's external risks will remain moderate. We expect the current account deficit to remain below 2% of GDP in the coming three years, fully financed by net foreign direct investment. The country's external debt is modest, as narrow net external debt is likely to decline below 20% of current account receipts.

However, as we said in our most recent summary analysis on Peru, lasting political uncertainties and difficulties in passing legislation in Congress would cause Peru's investment environment to deteriorate. A weakening of Peru's institutions that could harm economic growth prospects, potentially leading to a drop in GDP per capita, and the country's efforts to maintain sustainable public finances would lead us to lower the ratings over the next two years.


  • Credit Conditions Latin America: Policy Uncertainty Undermines Growth Prospects, Oct. 1, 2019
  • Peru, March 22, 2019

This report does not constitute a rating action.

Primary Credit Analyst:Livia Honsel, Mexico City + 52 55 5081 2876;
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