Loss of confidence will raise cost of credits

The financial rating agency Standard & Poor’s (S&P) announced last Friday that Peru’s long-term foreign currency debt rating was downgraded from BBB+ to BBB, making it the second-lowest investment grade rating.

S&P alleges the decision was made as a result of Peru’s continued political paralysis, undermining efforts to maintain strong investor confidence and limiting economic growth prospects.

Although it is worth emphasizing that the S&P revised Peru’s outlook from negative to stable, due to the fact that a continuous fiscal adjustment is expected that will keep the net debt of the general government below 30% of the Gross Domestic Product (GDP) in the next two to three years.

How does the discount affect?

The loss of reputation for these agents will translate into more expensive debt for the citizen both for the country’s political decisions and for households, since there will be a higher cost of credit as a result of lower credibility, says the dean of the faculty of Economy of the UP, Carlos Casas.

“We see what is happening in Petroperú. These bickering in the main company in the country plays in favor of us having all this problem. It is given (the reduction) more due to mismanagement and the uncertainty that there are populist policies, although it is unlikely because the MEF is quite orthodox, but this political noise drags us into a mediocre environment”, he maintains for La República.

However, Casas acknowledges that Peru has a debt ratio that is not very high, and to get out of the negative path, it is urgent to encourage collection to reduce this year’s debt from the generation of more taxes, although, with the “current alliance” between the Executive and Congress, believes that the necessary reforms will not be applied to ensure the country’s growth.

For his part, Alberto Arispe, general manager of Kallpa SAB, adds that the downgrade of the debt rating will bring less growth, less work and more poverty, since the cost of capital and risk rate of companies, projects and assets operating in Peru will rise.

In addition, it indicates that the net present value of the future cash flows of businesses and ventures will go down, and new projects will be less economically viable. On the other hand, companies will borrow at a higher rate and invest less.

“More risk brings less investment, less economic activity, less business, less work, more poverty. The State will collect less taxes and will have to allocate more money to pay interest on debt. Fewer schools, hospitals, among others. We all lose,” she concluded.

MEF puts cold cloths after downgrade

The Ministry of Economy and Finance recalled that, despite the fall, Peru remains the country with the second best credit rating in the region for implementing prudent and pragmatic policies.

This strength is explained by the greater fiscal reduction last year – it fell from 8.9% of GDP in 2020 to 2.6% in 2021. In addition to the fact that liquid fiscal savings were accumulated for almost 2.2% of GDP.

They add that public debt (36.2% of GDP in 2021) remains one of the lowest among emerging economies (64.3% of GDP) and Latam (73.0% of GDP).

The data

Look. S&P forecasts that Peru’s GDP will grow 2.5% this year, thanks to external factors such as high metal prices despite a rise in financing costs.