Peru's G2G reliance 'risks lowering credit rating'

Peru’s reliance on the government-to-government (G2G) model to carry out large infrastructure projects will put additional stress on its fiscal accounts, and could eventually endanger its credit ratings, according to a former chief advisor to the economy ministry, Alfonso Garcés. 

“These tend to be very expensive projects, with which the State loses fiscal space to maneuver, loses capacity to carry out other projects, and also runs the risk of lowering its credit rating, especially within a context such as the one we’re in,” Garcés said during a G2G webinar held by Huancayo’s Continental University.

The government is planning to carry out three mayor projects under the model, which entail total investment of 47.3bn soles (US$13.1bn): lines No. 3 and 4 of Lima’s metro with a yet to be determined partner country, and a 136km section of the Central highway with France.

Garcés said debts incurred under the G2G model cannot be deferred, unlike PPPs and concessions, which he argued would be a better alternative for projects such as the Central highway.

Another criticism of the G2G the model is the lack of a guarantee as to who will operate the infrastructure after it is constructed, with a tendency to award contracts to companies from the partner country and which, “like any public work, requires the regular budget to finance it.”

Garcés said the combined budget for the three major projects is not included in the 2021-24 macroeconomic framework, and would triple the yearly amount allocated in the budget for investments.

In the case of the Central highway, the transport ministry (MTC) expects the project’s development will be in full swing by 2024, with 1.6bn soles that year, followed by 3.2bn soles in 2025, and 3.2bn soles in 2026.

“Because of the pandemic we have used all of our fiscal savings. Our priority is sanitary issues and mitigating the pandemic’s economic effects on the most vulnerable populations,” he said. 

Both Fitch and Standard and Poor’s currently have a ‘BBB+’ rating on Peru’s foreign bonds, while Moody’s rates them ‘A3’. 

Peru is also carrying out US$2bn in investments under a G2G agreement with the UK to rebuild infrastructure damaged by the 2017 El Niño floods.

When consulted by BNamericas on the criticisms of the model, reconstruction agency RCC avoided addressing them directly, instead saying it will continue “to advance in our functions according to the existing framework.”