Peru is likely to exceed its fiscal deficit ceilings this year and next as public revenue falls short of expectations, according to the nation’s official budget watchdog.
(Bloomberg) — Peru is likely to exceed its fiscal deficit ceilings this year and next as public revenue falls short of expectations, according to the nation’s official budget watchdog.
“Tax revenue is coming in much lower than expected, and that is partly tied to an excess of optimism when it comes to forecasting GDP growth,” Carlos Oliva, head of Peru’s Fiscal Council, said in an interview. “The finance ministry is doubling down on the same mistake with its 2024 forecasts.”
Peru has set conservative deficit ceilings of 2.4% of gross domestic product this year and 2% in 2024. But the budget gap has widened to 2.8% by September, as authorities grapple with a rare recession that has hurt tax revenue. Complicating matters, the prospect of massive flooding brought on by El Nino in coming months is set to drag down the economy and pressure the government to increase spending.
The finance ministry said in a statement that it will meet the 2.4% deficit target. It said the deficit over the last 12 months is above target because of one-off expenses incurred toward the end of last year that will not be included when the full year 2023 deficit is calculated.
“The ministry ratifies its position that the deficit for 2023 will be 2.4%,” it said.
Peru’s economy, once the fastest growing in Latin America, has been steadily weakening. With years of political instability slowly eroding economic fundamentals, Peru emerged from the pandemic as an underperformer. This year, massive protests and El Nino pushed the country into recession.
Read More: Peru Economy Shrinks Again, Pointing to Negative Growth in 2023
Barclays, which forecasts the Peruvian economy to shrink 0.6% this year, sees growing risks not only to the nation’s fiscal outlook, but also its sovereign credit rating. Peru is currently rated at BBB, the second-lowest investment grade level, by both S&P Global Ratings and Fitch Ratings.
Credibility at Risk
To be sure, Peru’s deficit is manageable and its public debt is relatively low, but the government’s insistence on increasingly unattainable targets may hurt its credibility, according to Oliva.
“There is a fine line between credibility and optimism, and the finance ministry appears to have crossed that line,” he said. “The finance ministry has more than once promised numbers that in practice have not materialized.
Read More: Peru Struggles to Revive Its Days as Latin America’s Top Economy
Most notably, Finance Minister Alex Contreras has repeatedly forecast earlier this year an economic recovery that didn’t materialize. He has later acknowledged the weaker state of the economy and, in August, the finance ministry lowered its 2023 growth forecast to 1.1% from 2.5%. That’s still more optimistic than the market consensus for a slight contraction this year.
“What the finance ministry most needs is for people to believe in what they are saying,” Oliva said. “They are putting their credibility on the line.”
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