OREANDA-NEWS. Peru's macroeconomic and fiscal policies have prudently managed a positive commodity and international financing cycle without accumulating large economic and external imbalances, according to a new Fitch Ratings special report. The policies also presently enable the use of counter-cyclical stimulus to smooth growth.

Peru's policy framework is underpinned by a credible inflation targeting regime, proactive macro-prudential management and a rules-based fiscal policy. 'Peru's policy mix has enabled the sovereign to develop a track record for policy coherence and credibility, leading to entrenched macroeconomic and financial stability, and generated counter-cyclical policy space,' said Erich Arispe, Director in Fitch's Sovereign Group.

Through the use of inflation targeting, Peru has established a record of low inflation in spite of lingering financial dollarization. Anchored inflation expectations have provided space to implement monetary policy stimulus in spite of depreciation pressures.

In spite of weaker economic growth and Peruvian sol depreciation, financial sector fundamentals remain sound. Effective macroprudential management has prevented the build-up of vulnerabilities during the years of high growth, rapid appreciation and abundant external liquidity.

High financial dollarization, in relation to 'BBB' peers, poses limits to exchange rate flexibility and challenges to monetary policy. However, policies directed at dedollarization of credit, high international reserves, macroprudential measures and availability of FX intervention tools have reduced risks related to high dollarization.

Prudent fiscal management offers room to ease policy to confront a more challenging external environment. After recording consecutive surpluses and reducing debt levels below 20%, the government intends to provide 2pp of GDP in fiscal stimulus for 2015. Peru's fiscal financing flexibility is strong due to its institutionalized fiscal stabilization fund, significant government deposits, favorable debt composition and amortization profile, and a developing local debt market.

Peru's expansionary monetary and fiscal policies should provide a boost to the economy in 2015 and 2016. 'The challenge for authorities is to withdraw the monetary and fiscal stimulus in a timely and prudent manner to safeguard policy credibility and rebuild counter-cyclical space,' added Arispe.

Reforms to boost productivity and competitiveness improvements will be needed to improve long-term growth prospects in the absence of rising commodity prices and abundant external liquidity.

The full special report titled 'Peru's Management of the Post Commodity Cycle' is available at 'www.fitchratings.com'.