Peru budget watchdog flags risks posed by ’out of control’ deficit

LIMA, Oct 9 (Reuters) - The management of Peru's public finances has led to an "out of control" increase in the government's budget deficit, which has surpassed its own target, an autonomous state watchdog said on Wednesday.

Peru's mining-dependent economy, for years a standout performer in South America, entered a technical recession last year dragged down by prolonged political and social strife, but this year expects a rebound to 3.1% growth.

The annual fiscal deficit stood at 4.0% of the Andean country's economy at the end of the second quarter, according to central bank data, significantly above the economy ministry's target of 2.8% of gross domestic product (GDP) for 2024. The budget's red ink marks the highest deficit since 2020, when pandemic-related measures pushed it to nearly 9% of GDP.

The Fiscal Council, whose five members include two former economy ministers, warned on Wednesday that violating the budget deficit target could harm the government's credit rating in the short and medium term, making public and private financing costlier.

This year's fiscal deficit reached 1.4 percentage points higher than at the same point in 2023.

The Fiscal Council flagged what it described as the fourth breach of spending rules since their implementation in 2000, as well as warning that Peru is on track to mark the second consecutive year with an above-target deficit.

Last month, central bank chief Julio Velarde attributed the high deficit to a surge in public spending as revenue has dropped, as well as the government's financial support to heavily-indebted state oil company Petroperu.

Fitch Ratings, one of the world's top credit agencies, announced in September that it was unlikely that Peru's government would meet its revised deficit target for this year even though it expected additional revenue due to rising copper prices. (Reporting by Marco Aquino; diting by David Alire Garcia and Daniel Wallis)