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Scotiabank Sceptical Government Will Comply With New Fiscal Rule Proposal

PERU
  • Peru’s fiscal deficit has risen from 1.7% of GDP in early 2023, to 3.9% of GDP in May 2024, which Scotiabank notes is starting to become a source of concern. The deficit is now at its highest since the covid period, due both to low fiscal income growth and to greater spending. Fiscal revenue was down by 2.9% y/y in the Jan-May period, according to Scotia, while government expenditure rose by 10.3% y/y over the same period.
  • Scotiabank says that although the deficit has become uncomfortably high, it remains manageable, and they expect some improvement through to year-end and more notably in 2025.
  • Nonetheless, the degree of deterioration has been unexpected and Scotiabank is sceptical that the government will comply with its new fiscal rule proposal (2.5% of GDP fiscal deficit this year; 2.2% next). In turn, it does increase the likelihood that Peru’s sovereign bond rating may be revised down again, in their view, after S&P recently reduced the rating by one notch from BBB to BBB-.
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