Economic Analysis - Stimulus Will Push Deficit Modestly Wider - NOV 2017


BMI View: Increased public investment aimed at stimulating Peru ' s weakened economy will drive the country's fiscal deficit wider over the coming quarter s. S hort-term borrowing increases will not significantly weaken Peru's sovereign credentials, however, and we expect a return to fiscal prudence to see the deficit begin to narrow from 2019.

Peru's fiscal deficit will widen in 2017 and 2018 on fiscal stimulus efforts. We expect the Kuczynski government will move to increase public spending, particularly on capital expenditures, in H217 and into 2018 in an effort to stimulate tepid economic activity and rebuild infrastructure damaged by widespread flooding in March ( see 'Flooding And Infrastructure Delays Will Slow Economic Growth', April 25). As a result, we forecast Peru's fiscal deficit to widen to 2.5% of GDP in 2017 and 2.6% in 2018, from 2.3% in 2016. While these shortfalls will see the country's public debt rise in the near term, Peru will remain one of the least indebted countries in the region with a total public debt of 26.9% of GDP in 2018, and we do not expect any impact on the nation's sovereign credentials.

From 2019 onwards we expect a gradual narrowing of the deficit as the government pulls back on countercyclical stimulus. Additionally, revenue growth will be supported by a broader tax base amid an acceleration in economic growth along with rising mining royalties ( see ' Copper: Production Growth To Accelerate As Prices Edge Higher ' , June 16). As such, we forecast Peru's fiscal deficit to narrow to 1.1% of GDP by 2021.

Stimulus Efforts Will Place Consolidation On Hold
Peru - Fiscal Balance, PENmn
Source: BCRP, BMI

Fiscal stimulus will widen the deficit in 2017 and 2018 as the government ramps up public investment. While expenditure growth only reached 2.9% y-o-y in H117, we expect a surge in capital expenditures in H2 will see total expenditures expand by 4.4% in 2017. On August 27, the Minister of Economy and Finance announced that large construction efforts would drive a 15.0% increase in public investment in the second half of the year. We expect fiscal stimulus to continue next year, with the 2018 budget likely to contain additional allocations for infrastructure development and other investment programs. The government is slated to present its budget to congress on September 7. While we note potential risks to implementation stemming from the opposition-controlled legislature, we expect legislative debates will focus more on how funds should be spent rather than an effort to downsize the stimulus.

Fiscal Stimlus Efforts Reined In From 2019
Peru - Fiscal Balance, % of GDP
f = BMI forecast. Source: BCRP, BMI

Peru Will Maintain Fiscal Prudence And Low Debt Levels

Over the past decade, fiscal prudence during the years of the commodities boom saw Peru emerge as one of the least indebted countries in Latin America. As a result, the central bank and government have plenty of room to pursue fiscal stimulus efforts in the near term without threatening long-term sustainability. As of June, total public debt had reached USD52.4bn, or 24.6% of GDP, with interest payments in 2016 only amounting to PEN6.5bn, or 5.4% of total revenues.

We expect the Peruvian government will curtail further countercyclical stimulus efforts from 2019 as the Peruvian economy begins to pick up steam ( see ' Stimulus Efforts Will Support Growth Acceleration ' , September 1). This cutback in spending increases, coupled with an expanding tax base on income growth will see the primary balance turn positive by 2022 and allow for further debt reduction. As a result, Peru will maintain sovereign credentials among the highest in the region, with its debt currently rated A3 by Moody's and BBB+ by Fitch and S&P.