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UPDATE 1-Moody's downgrades Peru, citing 'polarized and fractured political environment'

(Adds Moody’s growth projections in fourth paragraph)

Sept 1 (Reuters) - Rating agency Moody’s Investors Service downgraded Peru’s rating to ‘Baa1’ on Wednesday, citing a “continuously polarized and fractured political environment,” which it says has increased political risk and “materially weakened policymaking capacity.”

The outlook has been changed to stable from negative, Moody's said in a note

Peru’s Congress on Friday confirmed a new leftist Cabinet nominated by President Pedro Castillo, allowing the fledging administration to continue an agenda focused on higher social spending coupled with higher taxes for the mining industry.

Moody’s said it revised its real gross domestic product growth forecast for 2021 to 12% from 9%. However, it added that growth projections for subsequent years have been lowered as the rating agency expects private investment to remain depressed given that the policy landscape in Peru could lead to lower business confidence.

Castillo took office a month ago after winning the presidency by a margin of just 0.25 percentage point against a rival candidate. His far-left platform has spooked markets, sending Peru’s sol currency tumbling to historic lows.

The Castillo administration had a contentious first month, mired by allegations that some Cabinet members are aligned with a Maoist rebel group and a low 38% approval rating.

Castillo’s supporters say instead that the Cabinet represents historically marginalized Peruvians who do not hail from capital Lima.

Reporting by Kanishka Singh in Bengaluru; Editing by Sandra Maler