PERU Preserving Sustained Growth and Macroeconomic Stability. Mr. Alfredo Thorne Minister of Economy and Finance May/June 2017 InPerú

Transcription

1 PERU Preserving Sustained Growth and Macroeconomic Stability Mr. Alfredo Thorne Minister of Economy and Finance May/June 017 InPerú

2 Two adverse shocks The recovery path in 017 A Growth Strategy for the medium term Debt management Capital markets reform

3 The Peruvian economy has been affected by two transitory and unexpected shocks Lava Jato Scandal (pipeline of infrastructure projects equivalent to.7% of GDP) Decline in infrastructure investment (1% of private investment) Fall in business confidence (70% of private investment) Private Investment (18% of GDP) El Niño Flooding (emergency area is equivalent to 17% of National GDP) Drop in agricultural production, commerce and services (1% of GDP) Property losses for home and business owners Employment Private Consumption (6% of GDP) GDP Source: MEF.

4 Two adverse shocks The recovery path in 017 A Growth Strategy for the medium term Debt management Capital markets reform

5 The Peruvian economy has been resilient to both shocks, growing even more than its regional peers in 017Q1 10 Gross Domestic Product (Annual real % change) Peru Latin American countries (excluding Peru) The lowest growth rate in the 1998 El Niño episode was -.0% in 1998Q. - 11Q1 1Q1 1Q1 1Q1 1Q1 16Q1 17Q1 1/ Includes Argentina, Brazil, Chile, Colombia and Mexico. For Argentina and Brazil, the median of the Bloomberg survey for 17Q1 is considered. Source: BCRP, Central Bank of Chile, National Administrative Department of Statistics (Colombia), National Institute of Statistics and Geography (Mexico), Bloomberg.

6 Leading indicators suggest that the economy has already started accelerating 1 10 Electricity demand 1 (Annual real % change) Total Non primary sector CB s Survey: Purchasing Orders / Inventories Ratio (Three-month moving average) Q 16Q1 16Q 16Q 16Q 17Q1 Apr-17 May Sep-0 Nov-07 Jan-11 Mar-1 May-17 1/ As of May 1st, 017. Source: COES, BCRP. 6

7 Expansionary fiscal policy will be the main driver of growth this year Non-Financial Public Sector Overall Balance (% of GDP) The Government has taken measures to accelerate the disbursement of public spending: o A fiscal stimulus of 1.% of GDP, in addition to the 017 public budget. o Prioritization of public investment projects under execution but lacking budget o Quick win: increase in maintenance spending. Previous path New path o Transfers to subnational governments earlier in the year (Q1 vs. historical Q). o Simplified procurement scheme for emergency areas that reduces the timeline of procedures up to 10 days. Source: BCRP, MEF Forecasts. 7

8 , primarily, in the second half of Public Investment 1 in 017Q1 (Annual real % change) Actual 11.7 Excluding effects from Lava Jato scandal and the coastal "El Niño" Public Investment and Maintenance of Infrastructure (Annual real % change, 017) Maintenance of infrastructure Public Investment Q1 17Q 17Q 17Q 0.0 o o Public investment in emergency areas is equivalent to 60% of total public investment. In 017Q1, public investment in emergency areas fell.% in real terms. Excluding the Lava Jato scandal and El Niño, public investment would have grown 11.7%. 1/ General government public investment. Source: MEF. o Public investment in the first quarter reached approximately 1% of total annual public investment ( average). o Maintenance expenditure in the first quarter represents 17% of total annual maintenance ( average). 8

9 Empirical evidence suggests that the economy should accelerate during the first two quarters after the natural disaster 10 GDP on years of natural disasters (Annual real % change, t = quarter when disaster occurred) Peru Peru Japan Mexico - 00 Colombia (right axis) Source: Bloomberg, BCRP. - t- t- t- t-1 t t+1 t+ t+ t

10 Global conditions are favorable to the Peruvian economy, even with recent volatility Export prices index (Three-month moving average of annual % change) Gold and copper prices (US$/troy oz., US$/lb.) 0 1,000 Gold (left axis) Copper (right axis) ,800 Copper exports:.% of GDP Gold exports:.8% of GDP 0 0 1, , , Apr-1 Feb-1 Dec-1 Oct-1 Aug-1 Jun-16 Apr-17 1, Apr-1 0/01 Apr-1 0/01 Apr-1 0/01 0/01 Apr-1 0/016 Apr-16 0/017 May-17 Source: WTO, BCRP. 10

11 The expansionary measures taken by the Government and the recent signs of gradual recovery have boosted confidence indicators -month ahead economic expectations (Points) 1-month ahead economic expectations (Points) Optimistic Optimistic Pessimistic 0 Apr-1 Aug-1 Dec-1 Apr-16 Aug-16 Dec-16 Apr-17 0 Pessimistic Apr-1 Aug-1 Dec-1 Apr-16 Aug-16 Dec-16 Apr-17 Source: BCRP. 11

12 In fact, business confidence in Peru surpasses its regional peers 8 Business confidence (Points) Colombia Peru Chile Mexico Brazil 7 6 Optimistic trench Pessimistic trench Jan-1 May-1 Sep-1 Jan-16 May-16 Sep-16 Jan-17 May-17 Source: Bloomberg, BCRP, ICARE, INEGI. 1

13 Two adverse shocks The recovery path in 017 A Growth Strategy for the medium term Debt management Capital markets reform

14 Three pillars to consolidate the economic growth in the medium term In a stable macroeconomic framework The Reconstruction Plan 1 Accelerate investment: Infrastructure and mining Increase formalization: Competitiveness shock National Infrastructure Plan Infrastructure Fund Creation of Invierte.pe Reform of PPPs and Work for Taxes Tax System Reform SUNAT Transformation Improvement of the Social Security System Unlock projects already awarded Environmental regulation for mining exploration Red tape removal 1

15 Implementing structural reforms will increase potential growth Peru: potential growth (Annual real % change) +1.0 p.p p.p. Higher investment Formalization and greater productivity Source: MEF estimates and forecasts. 1

16 and diversify the engines of growth GDP Peru (Annual real % change, contribution in percentage points) Potential GDP growth (Annual real % change, contributions in percentage points). 1. Mining Non-mining GDP Capital stock Total factor productivity, 0,,0 Labor Potential GDP,0 1,0 0,, Source: BCRP, MEF forecasts. 16

17 1. Accelerate investment Nov.16 D.L. N 10 Strengthen the Work for Taxes mechanism D.L. N 11 Strengthen of PPPs and projects on assets D.L. N 1 Creation of Invierte.pe Jan. 17 D.L. N 1 APIP D.L. N 1 Creation of Fondo de Adelanto Social D.L. N 11 The new Procurement law Feb.17 D.S. N PCM Creation of the Vice-Ministry of Territorial Governance D.S. N EF Regulation of the national system of multi-annual programming and investment management D.S. N EF D.S. N EF D.S. N EF Mar.17 Regulation of Work for Taxes Regulation of PPPs and projects on assets Regulation of The Procurement law Portfolio of mining projects accounting for US$ 18,700 million PPP Project portfolio in : US$ 1,10 million May.17 R. M. N MEM Environmental Protection Regulation for mining exploration activities 17

18 ,000 10,000 8,000 6,000,000, An important pipeline of infrastructure projects will be awarded in the next months under a more modern institutional framework Public-Private Partnership projects 1 (Number of projects, US$ million) Works for taxes 1 (US$ million) Investment in US$ millions (VAT included) Number of projects - PPP 11,79 11, , ,860, ,08 6 GSP ($,79 MM) 9, 88 1,0 10 8,71 1, / Red bar indicates forecasts and targets set by ProInversion. PPPs do not include Michiquillay for 017 neither Colca nor Jalaoca for 018. Source: ProInversion. 18

19 A new cycle of mining investment is expected in the coming years due to higher metal prices, low cash cost and policy measures Investment in mining exploration (Annual % change) Main prioritized mining projects over US$ 18 billion portfolio Michiquillay US$ 1,90 millions As of 017Q1 Mina Justa: 16% San Gabriel:.% Expansion of Toromocho US$ 1,00 millions Q1 1Q1 1Q1 1Q1 1Q1 16Q1 17Q1 Mina Justa US$ 1,00 millions Pampa de Pongo US$ 1,00 millions Quellaveco US$,000 millions San Gabriel US$ 0 millions Source: MINEM. 19

20 . Increase formalization Dec.16 D. L. N 169 Creation of the new tax regime for Micro and Small enterprises D. L. N 19 Special regime for VAT recovery D. L. N 16 D. L. N 17 D. L. N 18 Repatriation of capital regime FRAES Deductions for personal income tax Jan. 17 R. M. N EF/10 Call for a Social Protection Committee Feb.17 D. S. N EF Regulation of the IGV Justo Mar.17 Economic Stimulus Plan Flexible credit line for medium and small enterprises conditional to new tax regime D.S. N EF Regulation of FRAES D.S. N EF Regulation of repatriation of capital 0

21 Formalization strategy seeks the reduction of tax distortions faced by micro and small enterprises Peru: Tax on growth 1 (Percentage change in net profit due to change in tax regime) 0 Before After Actually Tax reform strategy includes: Increase of the tax base through the formalization of the value chain. Use of invoices and electronic payment vouchers % reduction More progressive regime. Reduced compliance costs From RER to General Regime From RMT to General Regime 1/ RER accounts for Special Regime and RMT accounts for the new MSE Tax Regime. Source: Pagés (010), SUNAT, MEF. 1

22 Credit constraints on formal firms will be eased through a Credit Revolution that reduces financing cost and boosts credit supply Impact of the Credit Revolution over financial costs for MSEs 1 7 (Thousands of USD) - % 18 The Credit Revolution includes: Credit lines provided by the Development Bank of Peru (COFIDE) for more than US$ 0 million with lower interest rates to reduce the cost of financing for micro and small enterprises. VAT refund for the acquisition of machinery and equipment. Bono de Buen Pagador. Interest without credit revolution Interest with credit revolution 1/ It takes for assumption a credit of USD 0 thousand to be paid in years at an interest rate of %. The credit revolution includes the benefits for good payer bonus and VAT refunds. It is assumed only one change over the credit principal. Source: PRODUCE, MEF

23 Increasing formalization will permanently boost fiscal revenues in the medium term General Government Revenue (% of GDP) Central Government Tax Revenue (% of GDP) 17 Mining Projects average: Less VAT refunds Tax Reform 1/ Base scenario Excl. Mining and hydrocarbons: / It Includes revenues from capital repatriation and the deepening of this tax reform. Source: SUNAT, BCRP, MEF Forecasts.

24 . The Reconstruction Plan Feb.17 D.U. Nº More budget flexibility in the case of rains and dangers D. L. N 16 D.U. Nº D.U. Nº Mar.17 Fiscal stimulus More resources to FONDES Housing provision bonds Supplementary credit for health services and support to Regional Governments D.U. Nº SBS Resolution Apr.17 Measures for agricultural and fishing productive recovery Measures of financial relief for states in emergency Attendance to MSEs in emergency areas Reconstruction Plan: PCM unity, exception clause and financing

25 First, the fiscal deficit will widen by.% of GDP between to finance the reconstruction plan Non-Financial Public Sector Overall Balance (% of GDP) Allocation to FONDES 1, (US$ Millions, % of GDP) Total US$ 6,00 (.% of GDP) Previous Path New Path US$,00 (1.7% of GDP) US$,000 (1.% of GDP) 1/ FONDES: Fondo para Intervenciones ante la Ocurrencia de desastres naturales. It is an intangible fund to finance interventions in case of natural disaster events. / Estimates consider 017 nominal GDP forecast. Source: MEF.

26 without hurting our macro and fiscal stability Overall fiscal balances and its targets 1, 016 (% of GDP) Credit Rating Outlook 0-1 S&P Moody s Fitch Effective Target Brazil Colombia Uruguay Chile Peru Mexico Peru Chile Mexico Colombia Stable Negative Negative Negative Stable Stable Negative Stable Stable Negative Negative Stable 1/The fiscal deficits have the following coverage: Central Government (Chile, Colombia), Non-Financial Public Sector (Peru, Brazil), Federal Public Sector (Mexico), and Consolidated Public Sector (Uruguay). Also, the fiscal targets shown are the ones established in 01 for the formulation of 016 public budget. Source: MEF, Ministries of Finance of other countries, Bloomberg. 6

27 With significant financial assets (17% of GDP) and low debt, the government can finance the reconstruction without surpassing the debt limit of 0% of GDP Financial assets and debt items that could be used quickly to finance the fiscal deficit 1 Contingent Credit Lines Concept % of GDP.1 Savings of non financial public sectors. Fiscal Stabilization Fund (FEF). Total (1++) 8.6 Source: BCRP, MEF. 7

28 The Reconstruction Plan will be a key driver to accelerate the execution of public spending projects in the coming years Who manages the resources? Without the Plan Ministries, Subnational Governments With the Plan (Reconstruction Law) Centralized resources in just one fund Who designs and executes the reconstruction? Ministries, Subnational Governments One entity decides what, who and through which modality it is executed Which are the costs and benefits? Project atomization Low implementation Absence of capacity of monitoring the Executive branch It facilitates the transmission of resources to suppliers. Centralized plan: In order to make something better than before Includes territorial planning and prevention 8

29 The Reconstruction Plan will reduce the estimated deadlines for the start of reconstruction up to 0% Estimated reconstruction deadlines Partial rehabilitation 1 Q017 Q017 Public work Q018 Total rehabilitation Public work Work for taxes Q017 1Q018 Public work 1Q00 Public work Q018 Reconstruction Work for taxes Q Without plan With plan 1/ Maintenance of general infrastructure and equipment reposition. Source: Apoyo Consultoría and experts in public investment, MEF. 9

30 Two adverse shocks The recovery path in 017 A Growth Strategy for the medium term Debt management Capital markets reform

31 Peru is in a sound fiscal position with a public debt to GDP ratio well below its regional peers and economies with similar credit rating Peru: Public Debt (% of GDP) Public Debt, (% of GDP) Latin America Similar credit rating peers 1/ Pacific Alliance Peru 1/ Similar credit rating peers include economies with A credit rating by Moody s and BBB+ by S&P Global Ratings and Fitch Ratings. Source: IMF, BCRP. 1

32 The treasury expects debt levels to remain low and below its regional peers as debt profile and composition remain solid Short-term and Long-term Debt (% of GDP) Debt Average Term to Maturity (Years) 0 0 Long Term Short Term * * BCRP March 017. Source: BCRP.

33 The sources of financing come from asset management and internal and external liabilities Lines of defense to Finance Economic Growth Assets Liabilities Savings Mechanism Fiscal Stabilization Fund Fund size as of April 0, 017 USD 8,61 million National Emergency International Crisis Local Market Issuance of Soberanos Stock as of April 0, 017 PEN 6,76 mn; USD 0,1 mn equivalent Debt Capital Markets International Market Issuance of Global Bonds Stock as of April 0, 017 USD 9,6 mn EUR,100 mn Sources of Funds Other Non Financial Public Sector financial Assets Total amount of 1.8% of GDP Multilateral and Bilateral Loans CAF BID BIRF Others Of which Secondary Liquid Reserve size as of April 0, 017 Contingency loans PEN 87mn; USD88 mn equivalent As of April 0, 017 Average 016: PEN 1,716 mn USD,00 million Source: BCRP, MEF.

34 Solarize debt and develop local debt capital markets Composition of Public Debt by Currency (% of total debt) * Soles Dollars Other Liability Management (LM) (Millions of dollars) LM 016 LM 01, , 1,01 1,0 1 LM 01,0 1, BS BG 0 BG 6 BG 7 BS 1 BG 0 BS 8 BG No USD paper No New money * MEF-March 017. Source: MEF.

35 Peru has significantly increased its Soberano (PEN) debt stock by focusing on international format debt issuances (GDNs) Debt Capital Markets Local Market Development of the local debt market through sovereign bond issues in soles Local Soberanos Linkers Treasury Bills GDN s Since 00, Peru has successfully increased its Soberanos (PEN) debt stock by 7.x compared to a growth of 1.8x for its Global Bond (USD and EUR) debt stock 7.x Soberanos and Global Bonds (PEN MM, USD/EUR mn, nominal) Global Soberanos,89 6,76 International Market 6,008,961 Taking advantage of windows of opportunity to maintain liquidity/efficient yield curves USD Global Bonds EUR Global Bonds 1.8x 11,8 8,71 9,8 11,0 8,09 6,1 Dec 0 Dec 10 Dec 1 Dec 1 Apr 17 Source: BCRP, MEF.

36 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr 1 Peruvian Sovereign Bonds in local currency 1,000 Primary Market Activity (PEN million) 1,000 Secondary Market Activity (PEN million) 10,000 8,000 6,000 10,00 7,000 CNM 1 OTC 1 Monthly Average PEN,8 Monthly Average PEN 6,906 Monthly Average PEN 9,1,000,00, In the last years, sovereign bond trading has increased in volume. The monthly average trading in 01 was PEN,8 mn, in 016 PEN 6,906 mn, while in the first four months of 017 it was PEN 9,1 mn. This is in line with the primary market activity which also increased the volume of the annual issuances in that years. 1/ CNM: Centralized Negotiation Mechanism; OTC: Over the counter. 6

37 Diversification of non-resident investor base for local bonds Historical Series of Holdings Soberanos Bonds (% by investor class) Foreign Ownership Holdings Soberano Bonds (% by investor class) % 0% 8% 0.8 %.700% Aug 0s PEN 7,18 MM Issue date; Nov 1 % 7.80% Aug 00s PEN,196 MM Issue date; Nov % Aug 01s PEN,9 MM Issue date; Mar 1 6% % % 0% May-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Local Foreign PEN-denominated international issuances have further developed the PEN market and significantly increased foreign-ownership of bonds. Source: MEF, Bloomberg. 7 % 6.0% Aug 08s PEN 10,1 MM Issue date; Sep 16 7% Foreign Local % Tender for Cash Aug 08s [VAL OR]

38 The government will continue to develop the local market and strengthen its position as one of the leading issuers in the region 1 Action Plan to Enhance Public Debt Market Repurchase Agreement (REPO) Develop and increase repo transactions (i.e. Repo to term). Sovereign Debt Fund Develop Peruvian Treasury Index / Securities Lending. Market Maker Program Increase the depth and liquidity of including treasury bills. 6 Liability Management Exercises Relevant Benchmarks International Settlement Platforms (Euroclear, Clearstream) Manage debt stock to optimize cost and debt profile. Issue benchmarks with large volumes (To increase liquidity). Diversify investor base. 7 8 Next steps: Securities Lending / Short Selling Liability Management in local market Provide liquidity to the secondary market. Optimize debt profile. 8

39 Two adverse shocks The recovery path in 017 A Growth Strategy for the medium term Debt management Capital markets reform

40 Developing a competitive local capital market Local market strengthening Local market sophistication Integration strategy Development of financial schemes for infrastructure and SME financing. Diversify the set of available financial products. Development of more sophisticated products, channels and processes. Improve the framework of incentives to promote a more active participation in the local market. Strengthen the integration process with strategic partners, such as the Pacific Alliance - PA. Increase the participation of local and foreign investors. Sophistication of participants. Short term Medium term 0

41 Promote greater liquidity in the capital market By leveling the playing field with traditional financial instruments Tax incentives: Capital gains tax exemption for equity, fixed income, listed mutual funds, REITs and receivables listed in public exchanges. REITS and factoring tax structure for individuals, including via investment funds and trusts. Benefits: Value traded in the Lima Stock Exchange (In US$ Billions) Exemption for EQ begins..6 Fixed Income and others added 6.1 Greater liquidity in the Lima Stock Exchange. Aligning the tax structure to that of our partners in the Pacific-Alliance *017 * Annualized Source: BVL. 1

42 Enhancement of the capital market s depth and diversity By developing new products and segments REITs 1 : Better regulatory framework: Investment funds: operating, US$ 0 million AUM, starting in Potential of REITS in emerging markets (Index 011=100) AAGR: 17% Trusts: created in 016, based on Mexican FIBRA Tax incentives for REITs (capital gains and deferral of income and realestate taxes). Factoring: Improving operational regulation 100 AAGR: 7% MSCI US REIT Index AAGR: Annual Average Growth Rate FBMEX Index Factoring market development (Millions of US$) Promoting electronic issuance systems Tax incentives for individuals (%), including via investment funds and trusts 1/ Real Estate Investment Trust Sources: Bloomberg, MEF Ago-1 Oct-1 Dec-1 Feb-16 Apr-16 Total Amount Traded Jun-16 Ago-16 Oct-16 Dec-16 # of operations (right axis)

43 PERU Preserving Sustained Growth and Macroeconomic Stability Mr. Alfredo Thorne Minister of Economy and Finance May/June 017 InPerú