S&P lowers Peru’s debt outlook to “negative” due to political risk

S&P Global Ratings has cut Peru’s credit outlook to negative from stable, in a tumultuous period for the government and when leadership changes highlight the risk of political impasse.

The move indicates a one in three chance that the credit rating agency will downgrade Peru, depending on its political track record and risks to economic policy and growth, S&P analysts Constanza Pérez Aquino, Joydeep Mukherji and Sebastián Briozzo wrote in a statement on Monday.

S&P affirmed Peru at BBB, two notches above junk territory, in line with Panama and Uruguay.

“We could lower the ratings one notch if prolonged political stalemate or further adverse developments reduce the predictability of policymaking or worsen institutional stability, which would bode poorly for policy outcomes,” they wrote.

“The prolonged political impasse between Peru’s executive and legislative branches has limited, in our opinion, the government’s ability to implement economic policies in a timely manner,” they continued.

The negative outlook marks a clear increase in risk for Peru’s bondholders, who have grown accustomed to overlooking political chaos due to the nation’s fiscal strength. Dollar debt ended up last week, even as Dina Boluarte was sworn in as the country’s sixth president in four years after the ouster of Pedro Castillo.

Since Castillo’s ouster, protesters have gathered in the streets to demand his release from the police base where he is being held, the dissolution of Congress, early elections and a new draft of the Constitution.

S&P warned that regardless of the new leadership, frictions between the governing institutions continue to threaten Peru’s growth and fundamentals.

Fitch Ratings said on Monday that political turmoil increases economic and fiscal risks, and confirmed its BBB rating and negative outlook. Moody’s Investors Service rates the nation Baa1, three notches above junk, with a stable outlook.

“Unless Peru removes deep-seated sources of political instability, I think the country is headed for a downgrade,” said Ramiro Blazquez, head of research and strategy at BancTrust & Co. before S&P changed its outlook.

With the collaboration of Leda Alvim/Bloomberg Línea