Peru Economic Outlook
August 9, 2016GDP growth decelerated in Q1 although the expansion was still well above the regional average. In May, the economic activity indicator rebounded from the weak rate seen in April, driven by a surge in the mining and hydrocarbon sectors. Pedro Pablo Kuczynski formally took office as president on 28 July with a broad agenda of policies to support economic activity. He promised to improve public health including access to drinking water and sanitation. Moreover, a cut to the Value-added Tax from the current 18% to 17% and tax exemption for corporations should reduce corruption in the private sector. Whether the new president and his cabinet succeed in implementing their propositions will depend on their ability to form alliances with Keiko Fujimori, his opponent in the race for president, and her party, the widely supported Popular Force (Fuerza Popular).
Peru Economy Data
5 years of Peru economic forecasts for more than 30 economic indicators.
Peru Economy OverviewEconomic Overview of Peru
The Peruvian economy, which is the seventh largest in Latin America, has experienced a structural change in the past three decades. Currently, the services sector is the main contributor to the country’s GDP, with nearly 60% of GDP stemming from this sector. Telecommunications and financial services are the main branches of the services sector; together they account for nearly 40% of GDP. However, the country still has a long way to go toward the modernization and competitiveness of its service sectors. Industry, which represents around 35% of GDP, has undergone a process of modernization, which has translated into increased employment in the country’s primary industrial areas.
Since GDP decelerated sharply in 2009, the economy has built on solid growth fundamentals. Domestic demand has been the main driver of growth as an overall improvement in confidence in the economy has boosted domestic consumption and investment. Moreover, the steady fiscal consolidation that led to a number of budget surpluses in the past decade has increased confidence in public finances and allowed for productive public expenditures. A period of relatively stable inflation and the progressive appreciation of the national currency, the sol, have helped the economy overcome periods of nominal volatility. Although the external sector’s contribution to economic growth has been diminishing, exports have remained strong. The main detraction from the external sector’s contribution to growth has stemmed from increasing imports, although capital goods imports have remained at healthy levels, which bodes well for the country’s productive capacity, economic growth and employment in the coming years.
The combination of economic modernization, natural resource abundance and continued improvements in economic governance and political stability that have been taking place, are helping Peru to emerge as one of the most stable economies in Latin America.
Peru Economic History
Like many Latin American countries, Peru underwent an intentional process of state-driven industrialization in the mid-twentieth century, yet the country did not emerge from this period with a competitive industrial fabric. In the 1980s, Peru and its counterparts in the region were strongly impacted by the regional debt crisis. The crisis, accompanied by strong political divisions and internal armed conflicts, prompted the country to ask for an intervention by the International Monetary Fund (IMF) in 1988.
In the 1990s, under the rule of Alberto Fujimori and backed by the strong performance of government investment and inflows of foreign direct investment, the country pursued sharp fiscal consolidation policies and structural and institutional reforms in order to halt the inflationary process that took place after the debt crisis. However, it was not until the 2000s that political stability and democratic progress came about. Nonetheless, institutional transparency was still fraught with several corruption cases during this period.
In the last decade, under the last two presidents Alan García (2006-2011) and Ollanta Humala (2011–2016), economic activity has benefited from a favorable international context, particularly from improving terms of trade. The expansion in economic activity has substantially increased the State’s resources, prompted social cohesion policies and paved the way for more public investment projects. Moreover, the expansion of the external sector has continued to provide increased resources to the Peruvian state, which, in turn, have allowed the country to find a balanced path of growth with increased social inclusion.
Peru’s Balance of Payments
In the last decade, Peru has changed its external position from being a net international creditor to a net debtor. However, its external position remains solid. After registering surpluses between 2004 and 2007, the current account balance has accumulated deficits since then. This change has come on the back of the progressive narrowing of the trade balance surpluses that had been in place since 2002. Whereas the service and the factor income balances have been broadly stable, the transfers’ balance—which mainly accounts for international remittances—has remained in surplus, although it has been narrowing in the last years.
The corresponding capital inflows benefit from a strong contribution from Foreign Direct Investment (FDI), which has performed strongly in the last decade with a record of USD 12.2 billion inflows in 2012. Among the countries that invest the most in Peru are Spain, the United Kingdom and the United States. Nearly a quarter of the total FDI is attracted by the mining sector and nearly the half of it is split among the financial, communications and industry sectors.
Peru’s Trade Structure
Despite the progressive improvement of internal demand, the external sector’s performance continues to be of crucial importance to the Peruvian economy. As a country rich in natural resources, it exports goods that are highly subject to price volatility, whereas it imports industrial goods, prices of which are less volatile. Therefore, Peru’s external position remains vulnerable to changes in the terms of trade (i.e., the relative price of exports over the price of imports). The country has benefited from a steady improvement in its terms of trade since 2000, which helped keep the trade balance in positive figures up until 2013. The trade balance peaked at a record-high surplus of USD 9.8 billion in February 2012. It has narrowed uninterruptedly since then and shifted to deficit in December 2013. This trend has been driven by falling global demand and decreasing prices for traditional Peruvian exports, such as copper, silver and natural gas. The increase in import volumes has also affected the trade balance negatively.
Moreover, the country has engaged in several bilateral and multilateral trade agreements that have opened new markets for its exports. Peru joined MERCOSUR in 2005, and between 2006 and 2016 it signed several bilateral treaties with other Latin American and Caribbean economies as well as with the United States. In 2016, the Pacific Alliance, a trade agreement including Chile, Colombia, Mexico and Peru came into force. The Trans Pacific Partnership Agreement, one of the biggest multinational trade deals in history, was signed in early 2016 but a prolonged period of negotiations over the terms is expected before it comes into force.
Exports from Peru
In Peru, ores and minerals exports make up over 50% of total exports, food accounts for 21% and mineral fuels account for 12%. As in many resource-rich countries with a traditional export-led growth model, international trade and financial conditions have largely affected the performance of the external sector. In fact, the economy as a whole has been affected by these conditions, even considering that domestic demand has been the main driver of growth in recent years.
Due to favorable conditions in international trade, the country has experienced average annual growth in real goods and services exports of 5.5% since 2000. That said, in the same period, imports have expanded at an average 8.0% annually, thus outpacing the strong performance in exports. In nominal terms, imports now exceed exports, which caused 2014 and 2015 to close with trade balance deficits after 11 years of recording surpluses.
Imports to Peru
Peru’s imports are mainly composed of final and intermediate goods, as opposed to exports, in which minerals and ores account for the majority of overseas sales. Imports of machinery account for roughly a quarter of the total value. Whereas these figures suggest the modernization of the national industry through private investment, they have not yet weighed on the trade balance.
After the weak performances of exports in 2014 and 2015 mainly caused by the global decline of commodity prices, imports have offset exports and thus the trade balance swung from a surplus to a deficit for the first time since 2001. In the first half of 2016, the trade deficit started to narrow to a certain extent due to a strong rebound in exports.
Peru’s Economic Policy
In the last decade, Peru has improved its economic governance and social integration remarkably. Following the turbulent 1990s, the country’s institutions have improved, which has produced positive spillovers to both fiscal and monetary policy implementation. However, poverty and inequality are still spurring grievances among the poorest communities. Therefore, economic policy in Peru needs to be analyzed on two fronts. On one hand, success in poverty reduction and social inclusion is crucial to guaranteeing the stable development of the country. On the other hand, institutional and macroeconomic stability is seen as capital to allow for the country’s achievement of its development goals.
Peru’s Fiscal Policy
Since 1998 when the country barely avoided bankruptcy by signing an agreement with the IMF, Peru has followed a steady path of fiscal consolidation. The fiscal balance has registered only four years of deficit in the last decade and those deficits have never been larger than 1.3% of GDP. Furthermore, public debt was cut almost in half, from the 44.3% of GDP tallied in 2004 to just 23.3% of GDP in 2015. The economy’s overall stable and strong performance has allowed the government to increase its revenues and, therefore, to balance the budget. President Pedro Pablo Kuczynski, who took office in July 2016, intends to increase public investment in infrastructure and has announced that Peru is likely to raise funds on international financial markets to finance these projects.
Peru’s Monetary Policy
The Central Bank of Peru (BCP) started targeting inflation in 2002 and is now committed to keeping inflation between 1.0% and 3.0%. The BCP’s commitment to stable inflation—and the ongoing achievement of this goal—has favored inflows of capital as well as exchange rate stability.
In order to conduct the inflation targeting policy, the BCP uses the overnight interbank interest rate as the main device to control inflation. In November 2013 the Bank lowered the rate from its two-year average of 4.25% to 4.00% in an attempt to spur economic activity, and continued lowering it gradually as the global commodity price shock was dragging on GDP growth in H2 2014 and H1 2015. In September 2015, the BCP started its rate-hiking cycle and the rate has been back at 4.25% since February 2016. The Peruvian financial system became highly dollarized after the 1998 IMF intervention. Since the 2000s, and given the increased stability in the financial and monetary sectors, the financial system has been de-dollarizing progressively. In fact, credit denominated in soles is increasingly gaining ground, a sign of both confidence as well as good management of the country’s finances and monetary affairs.
Peru’s Exchange Rate Policy
The BCP conducts a managed floating regime for the exchange rate of the PEN versus the USD. The Bank allows the market to determine the value of the currency, although it intervenes to avoid large fluctuations.
In a financially dollarized economy, the stability of the exchange rate is crucial to promote firms’ investment and consumer confidence. Because consumers and firms might borrow in USD but buy and sell products in local currency, any fluctuation of the foreign exchange can lead to distortions in both production and consumption decisions. Despite that the Peruvian financial system has been progressively reducing its degree of dollarization, the BCP is highly vigilant about the fluctuations of the sol.
The external sector’s strong performance in the last decade has allowed Peru to build a large cushion of international reserves, which currently cover the cost of over 19 months of imports. The increase in reserves has allowed the BCP to guarantee a broadly-stable sol in the exchange market. After recording a sizeable appreciation and reaching a multi-year low of 2.55 PEN per USD at the end of 2012, the sol has depreciated to PEN 3.41 per USD at the end of 2015. The depreciation was mainly driven by the U.S. dollar increasing in value against the majority of currencies and weaker demand for the Peruvian sol was not a major influencing factor. The end of the quantitative easing program in the United States in October 2014 slowed the supply rate of USD. Moreover mounting global uncertainties such as a slowdown in Chinese growth and the commodity price shock in late 2015 triggered safe haven demand for U.S. dollars, especially in 2015 and the first half of 2016.
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|Bond Yield||5.65||0.0 %||Aug 03|
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|Stock Market||15,405||0.47 %||Aug 03|
Peru Economic Growth
August 9, 2016Kuczynski is likely to face challenges to secure approval for his economic policy agenda as Fujimori’s party holds the absolute majority of the seats in Parliament. Aside from potential political turbulence, Peru’s healthy growth trajectory is expected to continue. FocusEconomics panelists see the economy rising 3.7% this year, which is up 0.1 percentage points from last month's projection. Next year, the panel expects GDP growth to accelerate to 4.1%.
Peru Economic News
August 22, 2016
After a positive start to the year, Peru’s economy lost some steam in the second quarter as domestic demand slowed down in comparison to the previous quarter.
August 5, 2016
In June, the trade balance recorded a USD 278 deficit million deficit, which was a deterioration over the USD 92.8 million deficit recorded in the same month last year.
August 5, 2016
The business confidence indicator came in at 61.0 points in July, according to the Central Bank.
August 5, 2016
Consumer prices for Metropolitan Lima remained broadly stable in July, increasing just 0.08% over the previous month, which was down from the 0.14% rise registered in June and below the 0.24% increase expected by market analysts.
August 3, 2016
In July, the consumer confidence indicator published by GfK inched up from June’s 109 points to 110 points.