Peru Outlook Third quarter July 2017

Transcription

1 Peru Outlook Third quarter 2017 July 2017

2 Summary 1 We project low growth this year with a rebound in 2018, driven by reconstruction and infrastructure spending 2 Fiscal policy: the institutional framework for reconstruction increases the probability that the fiscal boost will take place in Financial markets: low risk premiums for domestic assets. We expect a degree of correction going forward 4 Inflation will continue to fall over the coming months, and could hit the floor of the target range in the first quarter of Monetary policy: a favourable backdrop for the Central Bank to implement a more aggressive stimulus 6 Risks: (i) abroad, related to slower growth in China; and (ii) domestically, delays in reconstruction and infrastructure projects 2

3 Peru Economic Outlook 3Q 2017 Contents 1. Economic activity 2. Financial markets 3. Inflation 4. Monetary policy 5. Risks

4 Peru Economic Outlook 3Q Economic activity

5 Economic activity remained weak in the second quarter GDP (% YoY change) Hangover from "El Niño Costero" Delays in infrastructure projects Weak public investment Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17* Increased political noise *Estimated Source: Central Reserve Bank of Peru and BBVA Research 5

6 Economic activity remained weak in the second quarter: i) after-effects of El Niño Costero weather phenomenon Trade and Services (% YoY change) Construction (% YoY change) 6.0 Services Commerce Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17* -9.2 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17* *Estimated Source: Central Reserve Bank of Peru and BBVA Research *Estimated Source: Central Reserve Bank of Peru and BBVA Research 6

7 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Peru Economic Outlook 3Q 2017 Economic activity remained weak in the second quarter: ii) delays in infrastructure projects Lima Metro line 2 (million Peruvian soles) S/ S/ % of 2017 budget (S/. 2000) Delays in approval of engineering studies Monthly average: Monthly 102 average: Delays in compulsory land purchases Source: MEF SIAF. 7

8 Economic activity remained weak in the second quarter: iii) weak public investment Public investment* (% YoY change) Total: -8% - National Gov: 13% - Regional Gov: -10% - Local Gov: -3% Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Investment spending has not taken off... l due to slow execution of infrastructure projectsl *General Government Source: MEF - SIAF. 8

9 Economic activity remained weak in the second quarter: iv) increased political noise Peru: political tension index* (average for last 10 days) The persistent political noise throughout the year is one of the factors behind confidence indicators remaining low The Odebrecht case Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 * Up to 22 June 2017 Source: BBVA Research 9

10 ...which has impacted confidence indicators Business confidence (points) Private investment (YoY % change) Optimistic Pessimistic Q1-15 Q4-15 Q3-16 Q2-17* Q1-13 Q4-13 Q3-14 Q2-15 Q1-16 Q4-16 Q2-17* Source: Central Reserve Bank of Peru and BBVA Research *Estimated Source: Central Reserve Bank of Peru and BBVA Research 10

11 ...which has impacted confidence indicators Consumer confidence (points) Private consumption (YoY % change) Optimistic Pessimistic Q1-15 Q4-15 Q3-16 Q2-17* 0 Q1-13 Q4-13 Q3-14 Q2-15 Q1-16 Q4-16 Q2-17* Source: Central Reserve Bank of Peru and BBVA Research *Estimated Source: Central Reserve Bank of Peru and BBVA Research 11

12 Against this backdrop, the labour market shows no sign of improvement New jobs* (thousands of jobs) 160 Underemployment rate* (% of economically active population in work) 37% % % 80 34% % 20 0 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 32% Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 % YoY change Dec.14 Dec.15 Dec.16 May.17 Busy EAP - Lima* Peru Employment - Urban** * Greater Lima area. This figure is the difference in the economically active population in work between two similar months in two consecutive years Source: INEI *Greater Lima area. ** Formal employment Source: INEI and MTPE 12

13 Going forward, our baseline scenario considers On the external side Growth in global activity will consolidate at over 3% in 2017 and Natural and cultural The resources FED will continue normalising monetary conditions in an orderly fashion, as announced. The terms of trade will recover in 2017, but will correct downwards in 2018, remaining stable going forward On the domestic side Confidence indices will remain mostly unchanged. The Natural institutional and design of the cultural Reconstruction resources Authority increases the probability that the spending will take place. Fiscal consolidation will be more gradual than announced by the Government. Improvements in execution of infrastructure projects from Work for the Pan-American Games will also have a positive impact. 1 13

14 On the external front: (i) global growth will consolidate at over 3% USA EUROZONE CHINA Growth forecasts for China and the Eurozone have been revised upwards LATIN AMERICA Compared to three months ago Up WORLD Unchanged Down Source: BBVA Research. Latin America comprises: Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela 14

15 On the external front: (ii) The FED continues to adjust its monetary policy FED interest rate (%) Projection FED: monetary base (US$ trillion) Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16 Dec Source: Bloomberg and BBVA Research Source: Bloomberg 15

16 On the external front: (iii) terms of trade will recover in 2017, but correct downwards in 2018 Terms of trade (2007 = 100) Price of copper (US$/Lb.) 110 Projection 3.77 Projection Source: Central Reserve Bank of Peru and BBVA Research Source: Bloomberg and BBVA Research 16

17 On the domestic front: (i) business confidence will remain at current levels Business confidence and private investment (points and % YoY change) Private investment Business Confidence (t-2) Private Investment (right axis) Optimistic Year % YoY change Pessimistic Q1-10 Q4-11 Q3-13 Q2-15 Q1-17 Q Source: Apoyo Consultoría and BBVA Research 17

18 On the domestic front: (ii) The institutional design of the Reconstruction Authority increases the probability that the spending will take place Institutional design Fast track mechanisms Executive president with the rank of a minister. Simplified tendering Foreign suppliers Simple governance. Structure defined by the allocation of resources. Fast track mechanisms. Administration facilities 1 Agreements with international bodies 1. All necessary administrative procedures for implementation of the Comprehensive Plan will be free of charge and completed in a maximum of 7 working days, being considered approved in the event of "administrative silence". 2. People living in high risk zones that cannot be mitigated must surrender their properties to access the benefits under the Plan. Source: Central Reserve Bank of Peru Works for taxes High risk zones 2 18

19 On the domestic front: (iii) fiscal consolidation will be more gradual than announced by the government Fiscal result (% of GDP) Gross public debt (% of GDP) BBVA MEF Projection 60 Projection Maximum Limit Source: Central Reserve Bank of Peru and BBVA Research Source: Central Reserve Bank of Peru and BBVA Research 19

20 On the domestic front: iv) improvements in execution of infrastructure projects from Infrastructure projects: contribution to GDP growth* (percentage points) Line 2 Line 2 Gas Pipeline 1.2 The contribution of projects to economic growth will be boosted by the start of the gas pipeline in *Lima Metro line 2, Majes Siguas, Chavimochic, the Talara refinery and expansion of the Jorge Chávez airport, the gas pipeline and Chinchero Source: Central Reserve Bank of Peru and BBVA Research 20

21 In this context, we forecast that GDP will grow by 2.2% in 2017 and 3.9% in 2018 GDP (% YoY change) Reconstruction Infrastructure Gas pipeline In line with potential GDP Avg. Source: Central Reserve Bank of Peru and BBVA Research 21

22 Peru: GDP growth by sector GDP by sector (% YoY change) Agriculture Fishing Mining and fuel Metals Fuel Manufacturing Based on raw materials Non-primary Electricity and water Construction Commerce Other services Global GDP Primary sectors Non-primary sectors Due A catch to the of 4.3 re-opening million metric of oil pipeline tons is projected in the North for the of Peru year Progress on infrastructure projects (Line 2) and reconstruction works Source: BBVA Research 22

23 Peru: GDP growth from expenditure side GDP from expenditure point of view (% YoY change) Domestic Demand a. Private Consumption b. Public Consumption c. Gross Domestic Investment Gross Fixed Investment Private Public Public spending up due to reconstruction, taking fiscal deficit to Progress with 2.9% of GDP infrastructure projects (Line 2) and reconstruction works 2. Exports GDP Imports % YoY change Private Expenditures without Inventories Public Expenditures Source: Central Reserve Bank of Peru and BBVA Research 23

24 Growth could accelerate if large projects currently in the pipeline are awarded rapidly and work starts quickly Mining USD million Quellaveco (USD ) Reconstructio n. Rebound following Niño Costero Transport USD 8500 million Line 3 (USD 5600)* Mina Justa (USD 1500) Toromocho expansion (USD 1300) Pukaqaqa (USD 480) Magistral (USD 300) Outer ring road (USD 2050)* Longitudinal de la Sierra highway stretch 4* (USD 460) Huancayo Huancavelica railway* (USD 200) Salaverry port terminal* (USD 220) *To be put out to tender. Source: Apoyo Consultoría and Proinversión. 24

25 Peru Economic Outlook 3Q Financial markets

26 Risk premiums remain low, with increasing appetite for local financial assets Peru: 5 year CDS (basis points) Non-residents holdings of Sovereign Bonds (billion) 35 Total balance: 73 billion Non-residents' holdings: 43% Total balance: 52 billion Non-residents' holdings: 34% Nov-16 Jan-17 Mar-17 May-17 Jul-17 0 Jan-16 May-16 Sep-16 Jan-17 May-17 Source: Bloomberg Source: MEF 26

27 We expect a correction going forwards Peru: Sovereign bond yield curve (%) Peru: Sovereign bond yield 2023 (%) Dec-16 Var. Now vs. (in bps) : 31-Mar-17 Sovereign Sovereign Sovereign Sovereign Sovereign Sovereign Sovereign Sovereign Dec Average? December 31, 2017 March 31, 2016 July 7, Dec-12 Sep-13 Jun-14 Mar-15 Dec-15 Sep-16 Jun-17 Source: Bloomberg Source: Bloomberg 27

28 Exchange rate: we forecast a gradual depreciation of the local currency Exchange rate (PEN/USD) Depreciation of the PEN due to reduction in the spread of rates (FED monetary adjustment while additional cuts in Peru's policy rate) Projection The increase in the exchange rate will be softened by the trade balance: exports will continue to grow over the rest of the year Dec-11 Feb-13 Apr-14 Jun-15 Aug-16 Oct-17 Dec-18 Source: Central Reserve Bank of Peru and BBVA Research 28

29 Peru Economic Outlook 3Q Inflation

30 Inflation has returned to the target range: prices for various foodstuffs affected by El Niño Costero have normalised Prices of foodstuffs affected by El Niño Costero* (% YoY change) Inflation expectations (% YoY change) Upper limit of the target rate, 3% Target Range Feb-15 Sep-15 Apr-16 Nov-16 Jun-17 Food and Energy Total Without food and energy Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 One year ahead Tow years ahead *Includes foodstuffs such as poultry, vegetables, legumes, fruit and sugar. Source: INEI, Central Bank of Peru and BBVA Research Source: INEI, Central Bank of Peru and BBVA Research 30

31 Going forward, lack of inflationary and exchange rate pressures will see inflation moving down and closing the year around 2% Domestic demand* (% YoY change, accumulated, last 4 quarters) 9.3 Projection Inflation (% YoY change in CPI) Fiscal Stimulus Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 *Inventories not included. Source: Central Reserve Bank of Peru and BBVA Research Source: INEI, Central Reserve Bank of Peru and BBVA Research 31

32 Peru Economic Outlook 3Q Monetary policy rate

33 We expect a more aggressive monetary stimulus, consistent with the macro environment Monetary policy reference rate (%) 7 6 Projection Inflation within the target range, anchored inflation expectations and weakness of demand will lead the Central Bank to cut its policy rate twice more this year (by 25 bp each time), and once more in 1Q Ref erence rate Real interest rate expost Source: Central Reserve Bank of Peru and BBVA Research 33

34 Peru Economic Outlook 3Q 2017 Risks

35 Peru: risks to output growth forecasts in 2017/18 External Marked slowdown in China s economy More aggressive adjustment by the FED More delays in construction of major infrastructure projects Domestic Falling confidence Frictions in rapid execution of reconstruction expenditure Source: BBVA Research 35

36 Peru Outlook Third quarter 2017 July 2017

37 Appendix Peru Economic Outlook 3Q 2017

38 Macroeconomic forecasts for 2017 and 2018 Main macroeconomic variables GDP YoY Domestic Demand YoY Inflation (% a/a, fdp) Exchange Rate (vs. USD, fdp) Interest Rate (%, fdp) Private Consumption (% a/a) Public Consumption(% a/a) Gross Fixed Investment (% a/a) Fiscal Outcome (% GDP) Current Account (% GDP) Source: Central Reserve Bank of Peru, INEI (National Statistics and IT Institute), MEF and BBVA Research 38

39 Examples of successful reconstruction experiences Country/year Entity Comments Mexico 1985 (Mexico City earthquake) Renovación Habitacional Popular (RHP) A new agency formed by personnel from ministries with no previous experience of reconstruction. Planning of construction of multi-family homes. Adequately funded, built 48 thousand homes. Colombia 1999 (Armenia earthquake) Fondo para la Reconstrucción Económica y Social del Eje Cafetalero (FOREC) A new entity with functional and regulatory independence. A Directorate comprising central and local government and the private sector. Rapid assessment of damage. Planning of actions to offset risks. Adequate funding. Use of sub-national government capacity for land administration. Decentralised implementation based on NGOs and, to a lesser extent, local government. Iran (Bam earthquake) Steering Committee Work group based on line ministries. Free to establish reconstruction policies, which included redesign of the areas affected and implementation by the national housing body. Source: Central Bank of Peru Inflation report (June 2017). Box 1. Extraordinary reconstruction measures following disasters (page 62). 39