Forecast for Peru. (Annual percentage changes unless specified)

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Scot Arnold
5 years ago
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1 1 Country Economic Highlights The economy slowed sharply in Q, with annual GDP growth easing to just 1.7% from.1% in Q1, undermined by year-on-year falls in agriculture, fishing, mining, manufacturing and construction. This was the weakest overall performance since 9. However, we believe that activity bottomed in Q and expect year-on-year growth to recover to % in Q and Q. As a result, we now forecast full-year growth of.1% in 1, followed by.8% in 1 (last month we expected.% and.% respectively). Although this pace of growth would still place as the second fastest growing of the major economies in Latin America (behind Colombia), it would mean that 1 was the weakest year for the vian economy excluding 9 since 1. The speed at which the economy has slowed has prompted the central bank (BCRP) to cut interest rates again this month to.%. Moreover, with inflation falling to.7% in August and expected to average below the % target ceiling next year, we now expect the BCRP to cut rates by another bp in October or November. However, once the economy is on a much firmer footing, we would expect interest rates to return to % during the course of next year. The easing in monetary policy has only had a slight impact on the exchange rate, the nuevo sol (PEN). Moreover, the BCRP has announced that it will make use of swap contracts to intervene in the foreign exchange markets in order to reduce the volatility of the PEN similar to the Brazilian central bank s strategy. As such, we forecast the PEN will remain fairly stable this year close to.8 per US$, before depreciating modestly next year as the US Fed starts to hike its interest rates. On the external front, the picture is mixed. On the one hand, the sharp contraction of exports on the back of lower demand from Asia was a key factor behind the poor GDP figures in Q. But on the other hand, imports have also eased in response to weakening domestic demand. However, with metal prices also lower, we project a widening current account deficit this year (-.6), albeit FDI inflows should largely cover this shortfall. for (Annual percentage changes unless specified) Real GDP growth (% year) CPI inflation (%) Exports of goods ($ bn) Exports of services ($ bn) Imports of goods ($ bn) Imports of services ($ bn) Exports of goods (% year) Imports of goods (% year) Current account ($ bn) Current account balance () Exchange rate per USD (year average) External debt total ($ bn) Government balance () Population (millions) Nominal GDP ($ bn) GDP per capita ($ current prices) 6,11 6,68 6,8 7,18 7,61 8,7 Economist: Marcos Casarin, Economist Tel: mcasarin@oxfordeconomics.com 1

2 1 Overview Growth slowed sharply in Q s economy expanded at its slowest pace since 9 in Q, on the back of a sharp decline in exports and investment, dampened by lower metal prices and weaker demand from Asia. As a result, we now expect GDP will grow just.1% this year. prompting the central bank to cut rates Another consequence of the marked slowdown was the central bank s decision to cut interest rates further in September. And we now think that another cut will follow in the coming months. This easing, in conjunction with a gradual improvement in world trade, should help the economy to bounce back and grow by.8% in 1 returning to the top of the growth table of leading LatAm economies. Overall, our forecast for is driven primarily by the following factors: Strong government finances with public debt below, the government has plenty of room to increase its consumption and investment to support growth until world trade improves more decisively. The budget for 1 includes a 7% rise in spending in real terms, which will lead to a small fiscal deficit for the year as a whole the first since 9. Investment in infrastructure around % of the increase in government spending in 1 is earmarked for investment, particularly construction. The budget for infrastructure spending is % higher while spending on education, health and sanitation is also being raised. This will boost demand in the short term and raise potential output. Credit availability strong bank lending to the private sector (up nearly 1% year-on-year in July) is also helping to underpin consumer spending, which we now expect to rise by.1% in 1 and.8% in 1. Wider deficit, but still covered by FDI inflows Declining mineral prices external conditions are less favourable. We expect world metal prices to fall 8% on average this year, hitting exports as around 7% of s exports are commodities. But at the same time, weaker investment has led to imports edging lower. Overall, we forecast that the current account deficit will widen this year, to US$1bn or.6, though sizeable FDI flows should ensure that external financing stays comfortable. Latin America: GDP growth forecast for 1 Colombia Mexico Chile Latin America Brazil Argentina Venezuela % year : Inflation % year World metals price = Target range..1.8 Economist: Marcos Casarin, Economist Tel: mcasarin@oxfordeconomics.com

3 1 Positive medium-term prospects Despite the downward revision to 1-1, medium-term prospects are still favourable, and we expect GDP growth of around % in 17-, provided that macroeconomic and political stability is maintained. Mineral wealth is a key factor in s potential growth, but lower prices in the short term could delay some investment plans. supported by sound policies World mineral demand is the largest producer of gold and silver in Latin America and the main supplier of copper after Chile. It is also a major supplier of several other minerals used in industrial processes. We expect mining activity to increase in the longer term as world demand for minerals picks up, with production supported by buoyant foreign investment (the government expects FDI in mining to exceed US$1bn this year). But local protests against the environmental effects of mining activity could slow project development. Potential rise in hydrocarbon exports there are also untapped reserves of natural gas, including shale reserves and petroleum in the Amazon Basin. is a net exporter of natural gas, and could also become a net oil exporter if resources are exploited to help reverse shrinking output. Supportive monetary policy the central bank cut its key policy rate by bp in September, taking it to.%. The bank has become more focused on growth as the economy has slowed this year. We forecast one further cut in Q, before rates begin to be raised in mid-1 partly as a response to the likely US Fed tightening. We expect interest rates will be.% at the end of 1 and % a year later (by which time the economy should be growing much more robustly). Responsible fiscal policy we expect to run small fiscal deficits in the medium term, allowing the government to support growth but not threatening any significant rise in public debt. but exports lack diversification Reliance on mineral exports the economy has become more open to external trade over the past ten years, with goods exports rising from 16 in to % in 1. While these exports go to many regions, the nature of the products themselves has become increasingly concentrated on minerals. Hence, the business/investment cycle tends to be closely correlated with trends in mineral prices. : Current account balance (RHS) (LHS) : Government budget balance - - (RHS) F'cast (LHS) Latin America: Central bank policy rates % Brazil Chile Colombia Mexico F'cast - - Economist: Marcos Casarin, Economist Tel: mcasarin@oxfordeconomics.com

4 1 Background Despite a disastrous performance during his first term in office in the late 198s, which ended in chaos amid food shortages, hyper-inflation and foreign debt repudiation, the return of Alan Garcia as president after the elections in 6 was generally welcomed. Garcia promised a more responsible second period in office and which he broadly upheld after taking office in July 6. He was not initially favoured by the markets but became the favourite in the run-off election against the nationalist Ollanta Humala (the former army leader who led a coup attempt in ). Garcia soon advanced his support for a free-market economy and foreign investment and signed up to an IMF standby programme in January 7. Also, a free-trade agreement (FTA) with the US was fully ratified while enhanced trade arrangements with China, reached in April 9, were put into effect in 1. Garcia struggled to deliver on his pledge to improve the living conditions of the poor, despite the impressive economic record of his term. Efforts were made more difficult by the fact that his party held a minority in a divided Congress and his belated moves during 9-1 were partly reliant on decree legislation. The congressional elections in April 6 gave Humala s then party (Unión por el Perú) seats in the (then) 1-seat Congress, while Garcia s American Popular Revolutionary Alliance (APRA) won seats. Garcia inherited a strongly performing economy, which in turn helped to fund some of his public spending plans. After deepening political crisis restrained GDP growth to just.8% pa in the period, economic activity then accelerated sharply as investor confidence returned under President Toledo. Growth reached 7.6% in 6, the highest in eleven years and then rose to almost 1% in 8, before slowing sharply to.9% in 9 as the global recession hit. Global recovery then saw GDP growth of 8.8% in 1 and almost 7% in 11. Inflation has been among the lowest in the region, ending 9 at.% before picking up to.7% at end-11. The budget also moved into a surplus of. in 8 as strong growth boosted tax revenues more than expected. In addition, the economy achieved an export boom, helped by buoyant world prices for gold, zinc and lead. Mineral exports account for about 6% of total exports. The trade surplus rose strongly and the current account returned to small surplus in, the first since 1979, and then rose to US$.9bn in 6 before easing to US$1.bn in 7 as the trade surplus weakened. A return to current account deficit, at US$.bn, was seen in 8 as import growth eroded the trade surplus generated by stronger exports and, after a small surplus in 9 rising imports pushed the account back into deficit, at US$.bn in 11 and US$6.bn in 1. After successful negotiations with the Paris Club of official creditors since, external public debt was reduced to under compared with 8% in 1, in turn reducing debt interest payments (to about 1% of the budget in 1). s sovereign credit rating has also improved after the downgrades at the time of Fujimori s chaotic departure from office. Fitch raised to investment grade in April 8, soon followed by S&P (and both upgraded the long-term foreign currency rating to BBB+ in 1). In December 9, Moody s gave its lowest investment grade (Baa) to s foreign currency debt, with further upgrades to Baa in August 1 and A in early July 1. The period of relative political stability since the departure of Fujimori encouraged strong investment inflows into the mining sector but large-scale mining operations have intensified protests by local communities in mining areas about the environmental impact of such activities. Some of the protests have been violent, especially as regards the Conga gold mining project which was suspended at end-august 1 to resolve water supply issues. Garcia s APRA-led administration sustained good growth and stability ahead of the 11 elections but in the April 11 election Humala and Fujimori s daughter Keiko won most votes. In a tightly fought run-off in June 11, Humala won 1.% versus 8.% for Keiko. Humala took office in July 11 for a five year term. Humala s Gana grouping won most seats (7) in Congress, followed by Keiko s Fuerza (7) and Toledo s Posible (1) with just four for APRA. Humala secured backing from Posible for a majority in the 1-seat legislature but in December 11 Toledo s party withdrew its support. In September 1 other Humala allies left Gana to form a rival leftist group. Since then Humala s popularity has waned further to under %, and his minority administration has now begun consensusbuilding with other parties in the wake of social disquiet and protests over aspects of government policy as well as dissatisfaction with congress. Guerrilla threats have receded with the elimination of two Sendero guerrilla leaders in early August 1. Economist: Marcos Casarin, Economist Tel: mcasarin@oxfordeconomics.com

1 Key Facts Politics Head of state: President Ollanta HUMALA Head of government: President Ollanta HUMALA Political system: Democracy Date of next presidential election: 16 Date of next legislative

5 1 Key Facts Politics Head of state: President Ollanta HUMALA Head of government: President Ollanta HUMALA Political system: Democracy Date of next presidential election: 16 Date of next legislative election: 16 Currency: nuevo sol (PEN), floating exchange rate Long-term economic & social development * GDP per capita (US$) Inflation (%) Population (mn) Urban population (% of total) Life expectancy (years) & World Bank Structure of GDP by output * 1 or latest 11 available year Agriculture 6.% Source : CIA Factbook Industry 6.% Location: Western South America, bordering the Services 7.% South Pacific Ocean, between Chile and Ecuador Source : World Bank (CIA Factbook) Long-term sovereign credit ratings & outlook Corruption perceptions index 1 Foreign currency Local currency Score Fitch BBB+ (Stable) A- (Stable) Developed economies (average) 7. Moody's A (Stable) A (Stable) Emerging economies (average) 7. S&P BBB+ (Stable) A- (Stable) 8. Western Hemisphere.6 Structural economic indicators * Current account (US$ million) Trade balance (US$ million) FDI (US$ million) Debt service (US$ million) Debt service (% of exports) External debt () Oil production ( bpd) Oil consumption ( bpd) / World Bank / EIA Source: Transparency International Scoring system 1 = highly clean, = highly corrupt Composition of goods & services exports, 1 Manufactures 1.% Other goods exports 19.% Transportation.% Travel.% Destination of goods' exports (1) European Union (7) 17.1% China 17.1% United States 1.% Switzerland 11.% Canada 7.% Source : WTO Source : WTO Fuels and mining products.% Agricultural products 1.1% Other commercial services.1% Economist: Marcos Casarin, Economist Tel: mcasarin@oxfordeconomics.com

Uruguay. Highlights and Key Issues. Forecast for Uruguay

Uruguay. Highlights and Key Issues. Forecast for Uruguay Highlights and Key Issues We expect s GDP growth to slow moderately to 4% in 212 from 5.7% last year. Growth had started to ease towards the end of 211, with GDP up only 3.5% on the year in Q4. And growth