Peru Economic Forecast

Peru Economic Outlook

July 12, 2016

Although the economy remained solid in Q1, growth lost some stream due to a pronounced destocking process. More recent data suggest that the economy slowed down further in Q2. In April, the economic activity indicator decelerated to a nearly-one-year low, while manufacturing output contracted at the fastest pace since the height of the financial crisis in 2009. Moreover, the unemployment rate climbed to an over-one-year high in May. In the political Arena, on 10 July, President-elect Pedro Pablo Kuczynski, who will take office on 28 July, announced that he would appoint Fernando Zavala as the country’s new prime minister. Kuczynski had already confirmed that Alfredo Thorne will be the new finance minister.

Peru Economy Data

Population (million)30.030.530.931.431.9
GDP per capita (USD)5,7056,3196,5476,4675,993
GDP (USD bn)171193203203191
Economic Growth (GDP, annual variation in %)
Consumption (annual variation in %)
Investment (annual variation in %)5.816.37.3-2.1-4.9
Manufacturing (annual variation in %)
Retail Sales (annual variation in %)
Unemployment Rate7.
Fiscal Balance (% of GDP)
Public Debt (% of GDP)22.120.419.620.023.3
Money (annual variation in %)13.725.
Inflation Rate (CPI, annual variation in %, eop)
Inflation Rate (CPI, annual variation in %)
Inflation (PPI, annual variation in %)
Policy Interest Rate (%)
Stock Market (annual variation in %)-16.75.9-23.6-6.1-33.4
Exchange Rate (vs USD)2.702.552.802.993.41
Exchange Rate (vs USD, aop)2.752.642.702.843.18
Current Account (% of GDP)-1.9-2.8-4.3-4.0-4.4
Current Account Balance (USD bn)-3.2-5.3-8.6-8.1-8.4
Trade Balance (USD billion)
Exports (USD billion)46.447.442.939.534.2
Imports (USD billion)
Exports (annual variation in %)29.62.3-9.5-7.9-13.4
Imports (annual variation in %)
International Reserves (USD)48.864.065.762.361.5
External Debt (% of GDP)28.130.830.031.735.7

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Peru Economy Overview

Economic 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.

In the past five years 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 recent years, under presidents Alan García (2006-2011) and Ollanta Humala (2011-incumbent), 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 both before and after the recent global financial crisis 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 2013 it signed several bilateral treaties with other Latin American and Caribbean economies. In addition, in 2006 Peru and the United States signed the United States-Peru Trade Promotion Agreement (PTPA), which has been operative since 2009.

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 growth in real goods and services exports of 6.3% annually since 2000. That said, in the same period, imports have expanded at an average 8.5% annually, thus outpacing the strong performance in exports. In nominal terms, merchandise imports have reached the size of exports, which caused 2013 to close with a zero trade balance surplus.

According to FocusEconomics Consensus Forecast panelists’ projections from June 2014, Peruvian exports are expected to expand in the coming years following a contraction in 2013. Panelists see exports increasing to USD 43.7 billion in 2014 and tallying an annual growth rate of 3.5%. For 2015, panelists expect exports to increase to USD 47 billion. In 2018, panelists expect exports to reach USD 63.6 billion and to record an annual growth rate of 12.1%.

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.

Since 2002, imports have not offset exports, although they have been expanding at a faster level since then. In fact, given the weaker performance of exports in the first half of 2014, imports are likely to outweigh exports and drive Peru’s trade balance to the first deficit since 2001.

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 more than in half, from the 44.3% of GDP tallied in 2004 to just 19.2% of GDP in 2013. The economy’s overall stable and strong performance has allowed the government to increase its revenues and, therefore, to balance the budget. Despite the fact that government consumption has expanded faster than GDP in the last decade, the Humala administration is committed to fiscal responsibility while simultaneously aiming at promoting social development and productive public investment.

As of the June 2014 FocusEconomics Consensus Forecast report, panelists surveyed expected Peru’s public accounts to be balanced by 2014. For 2015, the same result is expected; and in 2018, the panel projects a surplus of 0.2% of GDP.

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 the last two years, the BCP has kept the monetary policy rate virtually unchanged at 4.25%. Only in November 2013 did the Bank lower the rate to 4.00% in an attempt to spur economic activity. 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.

In June 2014, FocusEconomics Consensus Forecast panelists projected that the Peruvian sol would be broadly stable versus the U.S. dollar for the foreseeable future. Panelists projected that the sol would trade at 2.85 Peruvian sol (PEN) per USD by end of 2014. By the end of 2015, panelists forecast the sol to be broadly stable and to trade at 2.86 PEN per USD. In 2017 and 2018, the sol is expected to strengthen, trading at 2.79 PEN per USD and at 2.77 PEN per USD, respectively.

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 five years of imports. The increase in reserves has allowed the BCP to guarantee a stable sol in the exchange market and has even allowed for a sizeable appreciation (from 3.41 PEN per USD in 2004 to 2.70 PEN per USD in 2013). This appreciation also has been prompted by the increase in the world supply of USD following the Fed’s quantitative easing programs. Thus, the PEN has followed somewhat of an appreciation path, although during 2013 and the first half of 2014 it remained broadly stable at around 2.8 PEN per USD.

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Peru Facts

Bond Yield5.720.14 %Jul 22
Exchange Rate3.32-0.17 %Jul 22
Stock Market14,763-0.10 %Jul 22

Peru Economic Growth

July 12, 2016

While markets welcomed the outcome of the presidential election, Kuczynski’s economic policy agenda is likely to face challenges in the legislature, causing some uncertainty, at least in the short term. FocusEconomics panelists see the economy rising 3.6% this year, which is unchanged from last month's projection. Next year, the panel expects GDP growth to accelerate to 4.1%.

Peru Economic News

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