Big-Spending Congress Hinders Peru Plan to Curb Debt, Fitch Says
Big-Spending Congress Hinders Peru Plan to Curb Debt, Fitch Says
(Bloomberg) -- Pressure on Peru’s government to boost spending on everything from pensions to public sector wages risks undermining its plan to rein in debt, according to Fitch Ratings.
The economic devastation caused by the coronavirus lockdown has fueled spending demands at a time when public debt is already soaring, said Fitch analyst Kelli Bissett-Tom in an interview.
The nation’s debt burden will rise to 44% of gross domestic product in 2022 from 27% last year, according to Fitch, as the government spends on stimulus programs to try and reverse one of the world’s deepest slumps. Congress is pushing initiatives that will make it harder for the next government to curb the budget deficit after it takes office in July, she said.
“The crisis has hit lower-income households severely,” Bissett-Tom said by phone. “More spending and more budget support may be required to maintain social and political demands.”
Since the pandemic hit, congress has approved pay rises for health professionals, suspended road tolls, and allowed early withdrawals from private pension funds -- all despite opposition from the government. Lawmakers are now debating a second round of private pension withdrawals, a large payout by the state retirement fund and the removal of caps on public sector pay.
Fitch cut its rating on Peru’s local currency debt in June to BBB+ from A-, the first reduction in almost two decades. It left Peru’s foreign currency debt rating unchanged at BBB+, three notches above junk.
Since then, the outlook has deteriorated further. The economy contracted 30% in the second quarter, and Fitch forecasts a 13% drop for the year.
For Fitch, the strong public finances of Chile, Peru and Colombia have long compensated for risks arising from high inequality and poverty when compared to similarly-rated Asian nations, Bissett-Tom said. But the Andean nations’ fiscal credibility is now being tested.
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Bissett-Tom also sees a risk that Peru’s next leader will face the same kind of governability problems that have plagued President Martin Vizcarra, with congress dominated by a fractured opposition. This would increase uncertainty about Peru’s ability to stabilize public debt, she said.
Fitch usually reviews the country’s rating about every six months. On Thursday, it cut Chile’s foreign debt rating by one notch to A- after spending rose in response to social unrest last year, and the pandemic.
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