Fiscal And Debt Outlook - Stimulus Efforts Will Modestly Widen Deficit In 2018 - FEB 2018


BMI View: Peru ' s fiscal deficit will widen in 2018 due to f iscal stimulus efforts focused on infrastructure and post-flooding reconstruction. Low debt levels will limit the impact on Peru ' s sovereign credentials and we expect spending reductions and revenue gains will see the deficit begin to narrow from 2019.

Fiscal stimulus efforts will widen Peru's fiscal deficit in 2018 as President Pedro Pablo Kuczynski's government moves to increase spending in an effort to bolster economic activity. Capital expenditure increases, especially on reconstruction efforts surrounding widespread flooding associated with the Coastal El Nino event in March 2017, will be a key driver of expenditure increases. While we expect revenues will rise with economic activity gains next year, these will be outpaced by increased spending. We forecast Peru's fiscal deficit to widen to 3.1% of GDP in 2018, from 2.5% in 2017. This represents an upward revision from our forecast for a deficit of 2.6% of GDP in 2018 previously due to higher than anticipated expenditure allocations in the 2018 budget.

We do not expect shortfalls in the coming years to place significant pressure on public debt or sovereign credentials. Peru remains one of the least indebted countries in the region, and we expect a gradual narrowing of the deficit from 2019 as the government reins in countercyclical stimulus efforts. As a result, we forecast Peru's fiscal deficit to narrow to 2.8% in 2019 and to 1.6% by 2022.

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

Stimulus efforts will widen the deficit in 2018 as the government increases public investment. The 2018 budget will increase budgeted expenditures to PEN157.2bn, a 10.3% increase over 2017 levels. Spending will focus on infrastructure projects and reconstruction efforts, building on the investment increases we have seen in the second half of 2017. Monthly capital expenditures increased from a low of PEN1.5bn in February to 3.0bn in October.

The 2018 budget will increase spending on infrastructure development, especially in the 13 regions in the north and west of the country that were hardest hit by flooding in March 2017. PEN7.1bn will go to reconstruction efforts, representing 17% of total capital expenditures for 2018. PEN11.3bn will go to transport and PEN1.6bn for projects associated with preparations for the Pan-American Games scheduled for 2019. Health, education, and housing programmes will also receive large increases in spending next year.

Capital Expenditures Will Be The Focus
Peru - Expenditure Growth, % y-o-y, 12mma
Source: BCRP, BMI

Sovereign Credentials Will Remain Strong

Despite near-term fiscal stimulus efforts and borrowing, we expect Peru will remain committed to the broad fiscal responsibility it has demonstrated over the past decade. Fiscal prudence during the commodities boom saw Peru emerge as one of the least indebted countries in Latin America, with a total public debt of 24.6% of GDP as of June 2017. From 2019, we expect the Peruvian government will pull back from current countercyclical stimulus efforts. Coupled with rising revenues, this will see Peru's sovereign credentials remain among the strongest in the region. Peru maintains an A3 credit rating with Moody's and BBB+ with Fitch and S&P, second only to Chile in the region.