Fiscal Balance in Peru

Peru - Fiscal Balance

Government unveils region’s largest stimulus package to combat coronavirus crisis

The government announced a massive stimulus package worth up to 12% of GDP at the end of March, in a bid to mitigate the economic fallout from Covid-19. The Peruvian economy is expected to be hard hit by the pandemic as a stay-at-home mandatory isolation period and curfews squash domestic spending, while low metals prices and shriveled demand dent the important export sector. However, aggressive measures by both fiscal and monetary authorities should help the economy weather the storm relatively well compared to other emerging market peers. Relative to its peers, the country also has ample fiscal space, low debt levels and solid buffers.

The stimulus package is divided into three phrases of SOL 30 billion (around USD 9 billion) aimed at combating the current economic fallout, supporting struggling businesses and fueling the recovery after the health crisis ends. Highlights include approximately 4% of GDP to be spent on cash transfers to vulnerable citizens, early pension fund withdrawals and employee subsidies to corporations to prop up households’ cash flows.

Commenting on Peru’s outlook, Daniel Velandia, director of research at Credicorp Capital noted:

“The Peruvian economy has one of the strongest macroeconomic fundamentals in emerging markets: high international reserves (29% of GDP), low CAD (-1.5% of GDP), low public debt (27% of GDP), and high fiscal savings (12% of GDP). Nonetheless, it is clear that Peru will not be able to escape the effects of a severe deterioration of the international environment and the COVID-19 outbreak. We believe that the recovery in 2H20 will be gradual and the key factors to carefully monitor are: i) a lockdown extension and the subsequent restrictions, ii) the financial health of households and firms, iii) the effectiveness of the adopted policy measures, and iv) the need to avoid populist measures that undermine macroeconomic stability that has been built in the past 30 years.”

FocusEconomics panelists are still factoring the latest developments into their projections. An updated Consensus Forecast will be released on 21 April.