Peru's fiscal adjustment may take place in 2016

Subject

Peru's fiscal policy.

Significance

On January 1, Peru's new tax legislation entered into effect. The move is part of the government's counter-cyclical fiscal and monetary strategy that aims to boost short-term growth and combat the slowdown in both domestic and foreign demand. The government's expectation is that tax cuts will have the effect of increasing corporate investment and consumer spending.

Impacts

• Government attempts to stimulate investment are unlikely to have an impact on the decision-making processes of large foreign investors.
• Structural impediments may complicate raising the threshold of direct taxation -- an important criterion for eventual OECD membership.
• In spite of a growing fiscal deficit, Peru's credit rating will remain strong.