Peru Outlook Fourth quarter 17 October 17
Peru Outlook 4Q 17 Summary 1 The economic outlook is improving in the second half of the year. The Peruvian economy will grow at around.5% YoY in the second half of the year (and at around the same rate for 17 as a whole), with increased support from domestic demand GDP will grow at close to 4% YoY next year. This forecast is subject to the fiscal stimulus. 3 Although somewhat weaker, Peru will still enjoy tailwinds from the global environment. Jointly with the fiscal stimulus, it will facilitate improved private sector spending 4 In the coming months, the foreign exchange will trend upwards, albeit in a limited fashion: both the Fed and ECB will gradually normalise their monetary policy stance, China s growth rate will moderate, and metal prices will see a downward correction 5 Inflation returned to within the target range in September. In the absence of supply-side shocks, it will gravitate downwards in the next few months and end the year below.5%yoy. It will transitorily keep going down at the beginning of 18 6 The Central Bank has been loosening its monetary policy stance by lowering both reserve requirements and the policy rate. We do not rule out a further rate cut over the rest of 17 to underpin the recovery of private spending
How will the year close in terms of economic activity?
Peru Outlook 4Q 17 The economic outlook is improving in the second half of the year First half El Niño coastal flooding Lava Jato scandal Infrastructure Construction delays Second half External scene Positive: world growth, metal prices, Fed (tightening only gradual) El Niño coastal flooding Adverse effects are wearing off Economic policy Counter-cyclical vein Given this setting 4
Peru Outlook 4Q 17 what do we foresee in the second half of the year? Improved domestic demand, bolstered in particular by public spending Forecast trends: Domestic demand and exports Exports Series3 Private Series spending Series3 Series1 Government spending Series Forecast GDP growth No major differences to the first half GDP structure Domestic demand gains strength; exports slow down Government spending Increasing in 3Q17, even more notably in 4Q17 17 Q3-17 Q4-17 Q1-17 Q-17 Q3-17 Q4-17 Q3-16 Q316Q4-16 Q416 Q1-17Q117 Q-17Q17 Q3-17Q317 Q4-17 Q417 Private spending Private investment will grow again, with consumption lagging slightly Source: BBVA Research 5
Peru Outlook 4Q 17 What do the third quarter activity indicators tell us? Government investment is reviving Government investment* (% change YoY) 18 1 6-6 -1-18 Q1-16 Q Q3 Q4 Q1-17 Q Q3 * Gross Capital Formation of general government Sub-national governments Increased spending on sanitation The 19 Pan American Games Residential complex for the Games in Villa El Salvador Lima Metro Line Work has picked up speed since August Reconstruction? Still not much Source: Central Bank - Ministry of Economy and Finance (IFMS) 6
Peru Outlook 4Q 17 What do the third quarter activity indicators tell us? Upturn in private investment Domestic cement consumption Capital goods imports (3-month moving average, % change YoY) (volumes, 3-month moving average, % change YoY) 5 1 1-3 -1-7 Jan-17 Mar-17 May-17 Jul-17 Source: National Institute of Statistics and Informatics (INEI) Mining investment (USD million, 3-month moving average, % change YoY) 3 15-15 -3-45 Jan-17 Mar-17 May-17 Jul-17 Source: Ministry of Energy and Mines (MINEM) - Jan-17 Mar-17 May-17 Jul-17 Source: Central Bank Business confidence (points) 63 56 49 4 Optimism Pessimism 35 Feb-17 Apr-17 Jun-17 Aug-17 Source: Central Bank 7
Peru Outlook 4Q 17 What do the third quarter activity indicators tell us? The outlook for private consumption is unclear Sales of consumer durables have improved; the total wage bill is also starting to rise, but New family car sales (% change YoY) 1 1 8 6 4 1 Total wage bill (Lima, actual, 3-month moving average, % change YoY) 6 5 4 3 1-1 - -3 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17-4 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Source: Peruvian Association of Automobile Representatives (ARAPER) and Central Bank Source: National Institute of Statistics and Informatics (INEI) 8
Peru Outlook 4Q 17 What do the third quarter activity indicators tell us? The outlook for private consumption is unclear Job creation (Lima, 3-month moving average, change YoY, thousands of persons) Bank consumer loans (% change YoY) 8 6 15 1 5 Occupied EAP Suitable Underemployment 4 Jan-17 Mar-17 May-17 Jul-17 Source: Superintendency of Banking, Insurance and Pension Funds (SBS) Consumer confidence (points) 56-5 5 Optimism -1-15 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Source: National Institute of Statistics and Informatics (INEI) 48 46 44 Pessimism 4 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Source: APOYO Consultoría 9
Peru Outlook 4Q 17 although private consumption usually reacts to an upturn in investment with something of a lag Investment Employment Private consumption Correlation between private consumption and investment lags (quarters) GFI* and private consumption (% change YoY) 1,,8,6,4,, 1 Series Series3 Series1 15 Investment (left axis) Private consumption (right axis) Series Series1 14 1 7 5 7 1 5 9-7 -5-1 14 3 7-14 T31 T13 T114 T414 1T315 T16 T117 T41 T41 T114 T15 T316 T417-6 -5-4 -3 - -1 1 3 4 5 6 The evidence points to private consumption reacting to investment with something of a lag 7-7 -14 Q41 Q114 Q15 Q316 Q417 *Includes government and private investment but not inventory accumulation. Has a lag of one quarter 9 5 3 1 Source: Central Bank and BBVA Research Source: Central Bank and BBVA Research 1
Peru Outlook 4Q 17 The latest indicators are therefore consistent with forecasts we have for the second half of the year Domestic demand and GDP* (% change YoY) GDP by economic sector (% change YoY) 5 4 Domestic demand recovers. Yet the GDP gap is still negative 4 Construction 1.5 5.1 Non-primary manufacturing 5..5 Services.9 3.3.5 1.6 3-1.6-1.5 -.8 Commerce 1-6.8 1H-16 H-16 1H-17 H-17 1H-16 H-16 1H-17H-17 1H-16 H-16 1H-17H-17-1 1H-16 H-16 1H-17 H-17 Primary GDP Domestic Demand (excluding inventories) *Figures for the second half of 17 are estimates Source: Central Bank and BBVA Research GDP 7.3 5.8. Reduction is consistent with decline for Fishing and Manufacturing based on raw materials 17 GDP: +.4% 1H-16 H-16 1H-17 H-17 Source: Central Bank and BBVA Research 11
What do we expect for next year? Key factors which underlie our projected base scenario
Peru Outlook 4Q 17 Key factors which underlie our projected base scenario GDP World growth Fiscal stimulus Monetary policy in the most developed economies Metal prices Business confidence 14
Peru Outlook 4Q 17 1 World growth remains robust but embraces more regions United States 17 18.1. Eurozone 17 18. 1.8 China 17 18 6.7 6. South America 17 18.6 1.5 World 17 18 3.4 3.4 Source: BBVA Research 15
Peru Outlook 4Q 17 Global financial markets will still favour emerging economies, although increasingly less so Central Banks are moving towards a very gradual normalisation process FED Balance sheet normalisation from October and next rate hike in December, with two more in 18 Scaling back of bond purchasing in 18, but no rate hikes are expected until mid 19 ECB High degree of uncertainty: In the United States due to slowing inflation and the expected change to the FOMC in 18 In the Eurozone, bias towards more gradual tapering (euro strength) and a delay to the rate hike cycle (low inflation) 15
Peru Outlook 4Q 17 3 Metal prices, particularly copper? It will drift back over 18 because the tail winds driving world financial markets are dying down and China s growth rate is slowing down Non-commercial copper positions (thousands of contracts) Copper price (USD/lb) 31 15 9 1 7 5 5 3-5 -1 13 14 15 16 17 1 19 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18 Dec-18 Execution Projection Source: Bloomberg and BBVA Research Source: Bloomberg and BBVA Research 16
Peru Outlook 4Q 17 4 and 5 Locally Business confidence 4 5 Within the range denoting optimism (as in 17, on average) Fiscal stimulus 5.a Reconstruction 5.b 5.c Infrastructure Pan American Games in 19 17
Peru Outlook 4Q 17 5.a Reconstruction Investment USD 7.4 billion (3.6% of GDP) Estimated Time horizon time 4 years 4 years (17-) (17-) Funding About half using public savings Sectors Transport and education account for more than 6% Share of regions in reconstruction expenditure (% of total) 83% of reconstruction expenditure 9% 1% 3% 17% Tumbes Piura Amazonas Jan 17 Lambayeque Cajamarca 14 San La Libertad Martín 14% 8% Áncash Lima Loreto Huánuco Pasco Huancavelica Junín Ayacucho Ica Ucayali Madre de Dios Cusco Apurímac Slightly over USD billion (in 18) Puno Arequipa Impact on 18 GDP 1p.p. Moquegua Tacna Source: Reconstruction Plan (Law 3556 passed on 1 September) and BBVA Research 18
Peru Outlook 4Q 17 5.b Infrastructure Investment in infrastructure* (USD million) 5 Impact on 18 GDP 1p.p. Lima metro Line Overall investment USD 5.7 billion 18:USD 8 million (.4% of GDP) Construction of five stations The government hopes to complete the freeing up of 85% of the land 15 1 5 14 15 16 17 18 Talara refinery Overall investment USD 5.5 billion 18:USD 88 million (.4% of GDP) Project has been executed as expected (construction has progressed 63%) and does not show funding problems *Selected projects Source: Proinversion, Ministry of Economy and Finance, Central Bank and BBVA Research 19
Peru Outlook 4Q 17 5.c 19 Pan American Games Investment Approximately USD 9 million Time horizon 17 July 19 Construction Eight venues and transport infrastructure Expenditure in 18 USD 7 million Impact on 18 GDP.3p.p.
Peru Outlook 4Q 17 5 Fiscal stimulus in 18 will boost activity but increase the deficit, although this will only be temporary Fiscal balance (% of GDP) Gross government debt (% of GDP)..3 Fiscal stimulus Fiscal consolidation 57 Peru Countries with similar credit ratings* 47 -.3 37 7 Legal limit: 3% -.6 -.7-3.3 -.7 -.1 17 11 13 15 17 19 1 7 6 9 1 15 18 1 *Includes countries which Fitch, S&P and Moody s consider as having a similar sovereign credit rating to that of Peru. Uses the median for this group of countries Source: Central Bank and BBVA Research Source: IMF, Central Bank and BBVA Research 1
In these circumstances, what do we forecast for 18 in terms of economic activity?
18 Peru Outlook 4Q 17 We estimate that economic activity will grow at about 4% in 18, which means that Peru is set to continue at the forefront in the region GDP and domestic demand (% change YoY) GDP (% change YoY) 5,8 Domestic demand (excludes the change in inventories) Projection 5 4 Peru,4 3,3 4,,4 3,9 3 Chile Colombia 1 Brazil 13 14 15 16 17 18 1 3 17 Source: Central Bank and BBVA Research Source:BBVA Research 3
GDP on the expenditure side Sector GDP Peru Outlook 4Q 17 The improvement in Construction and Non-Primary Manufacturing sectors is notable, as is investment on the expenditure side GDP by component (% change YoY) 8 6 4 - -4-6 Construction 3 1-1 - Non-primary manufacturing 7 6 5 4 3 1 Services 5 4 3 1 Commerce 1 1 8 6 4 - Primary GDP -8 14 15 16 17 18-3 14 15 16 17 18 14 15 16 17 18 14 15 16 17 18-4 14 15 16 17 18 15 1 5-5 Public investment 1 1 8 6 4 Public consumption 4 - -4 Private investment 5 4 3 Private consumption 1 1 8 6 4 Exports -1-6 1-15 14 15 16 17 18 Source:BBVA Research - -8 14 15 16 17 18 14 15 16 17 18 14 15 16 17 18-14 15 16 17 18 4
What do we foresee for the exchange rate?
Peru Outlook 4Q 17 Pressure on the local currency to appreciate in recent months due to... Peru: trade balance (acum. over the last twelve months, in USD billion) 44 43 4 Forex market: Central Bank buying intervention (USD million) 37 37, 34 1,5 3T13 3T14 3T15 3T16 3T17 Exports Source: Central Bank Imports 1, Non-resident holdings of Sovereign Bonds (PEN billion) 4 Total balance: 84 billion Non-resident holdings: 46% 5 35 3 5 Total balance: 54 billion Non-resident holdings: 36% -5 Jan-17 Apr-17 Jul-17 Oct-17 15 Source: Central Bank 1 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Source: Bloomberg 6
These pressures have eased in recent weeks though, with the PEN trending slightly weaker from now on Peru Outlook 4Q 17 Why will the PEN trend weaker? Exchange rate (USD/PEN) FED Gradual monetary tightening China Slowdown in economic growth 3.44 3.3 3.41 3.6 17 3.3 3.7 3.5 18 3.35 3.3 Copper price Downward correction Domestic demand Will gain traction and so will imports Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18 Dec-18 Source: Central Bank and BBVA Research 7
What do we predict for inflation over the rest of the year and into the next?
Peru Outlook 4Q 17 Inflation returned to within the target range in September: foods are experiencing a downward correction Food and fuel prices (% change YoY) Inflation (% change YoY) 5 1 8 Food (not underlying) Fuel 4 3 3..9 6 4 Central Bank target range 1 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Source: Central Bank and BBVA Research Source: Central Bank and BBVA Research 9
Peru Outlook 4Q 17 In the absence of supply-side shocks, inflation will remain on a downward course over the next few months and see out the year at a shade under.5% Private consumption (acum. over the last four quarters, % change YoY) 6 5 4 3 1 Q1-14 Q4-14 Q3-15 Q-16 Q1-17 Q4-17 Source: Central Bank and BBVA Research WTI price (USD/BR) 55 Lemon price (PEN per kilo) 16 1 8 4 Source: Minagri Jan-17 Mar-17 May-17 Jul-17 Sep-17 Exchange rate (% change YoY) 5 45 - -4-6 4 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Source: Central Bank and BBVA Research -8 Dec-16 Mar-17 Jun-17 Sep-17 Dec-1 Source: Central Bank 3
Going into 18 inflation will continue to fall back, but further ahead, and towards the end of the year, it will stand at a level similar to that in 17 Peru Outlook 4Q 17 Positive base effect El Niño coastal flooding in 1Q16 Inflation (% change YoY of the CPI) Slack in the economy There will still be some in certain sectors 5. 4.5 Abnormal weather? It will be a more normal year Exchange rate Mild depreciation (< %) Commodity prices Increase in the oil price 4. 3.5 3..5. 1.5 1..5 Central Bank target range.5% % Financial costs Moderate rise in dollar rates. Feb-13 Dec-13 Oct-14 Aug-15 Jun-16 Apr-17 Feb-18 Dec-18 Source: Central Bank and BBVA Research 31
Further reference rate cuts?
The Central Bank has been loosening monetary conditions: lowering reserve requirements and the policy rate Peru Outlook 4Q 17 Marginal reserve requirement for foreign exchange (%) 8 Reference rate (%) 4.5 7 4. 6 5 3.5 Sept 17 3.5 4 3 41 4 3. Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Source: Central Bank.5 Feb-13 Dec-13 Oct-14 Aug-15 Jun-16 Apr-17 Feb-18 Dec-18 Source: Central Bank and BBVA Research We do not rule out a further rate cut over the rest of the year Weak private spending (will grow at around % this year), slack in the economy, weak credit, falling inflation, the PEN s depreciation will be limited; this ought to supplement the stimulus on the fiscal side 33
Chief risks to forecasts
Peru Outlook 4Q 17 Chief risks to forecasts External Local FED Delays to construction on infrastructure projects China Friction that hampers a swift implementation of spending on reconstruction Falling confidence Source: BBVA Research 35
Summary of projections
Peru Outlook 4Q 17 Macroeconomic projections for 17 and 18 1 13 14 15 16 17 (estimated) 18 (forecast) GDP (% YoY) 6. 5.8.4 3.3 4..4 3.9 Domestic demand (excl. inventories, % YoY) 9.8 6.4.5 1.8 1. 1.9 3.8 Private spending (% YoY) 6.5 7. 1.9.7 1.3..9 Private consumption (% YoY) 7.4 5.7 3.9 3.4 3.4.5.8 Private investment (% YoY) 15.5 6.9 -.3-4.3-5.9 -.5 3.5 Public spending (% YoY) 11.6 8.1 3.6 3.6 -..5 7.8 Public consumption (% YoY) 8.1 6.7 6 9.8 -.5. 4.9 Public investment (% YoY) 19.5 11.1-1.1-9.5.6 3.7 15.1 Exports (% YoY) 5.8-1.3 -.9 4 9.5 3. 3.8 Imports (% YoY) 1.7 4. -1.4.4 -..8 3. Exchange rate (vs. USD, EOP).57.79.96 3.39 3.4 3.8 3.34 Inflation (% YoY, EOP).6.9 3. 4.4 3..3. Reference rates (%, EOP) 4.5 4 3.5 3.75 4.5 3.5 3.5 Fiscal balance (% of GDP).3.9 -.3 -.1 -.6 -.7-3.3 Current account (% of GDP) -.8-4.7-4.4-4.8 -.7-1.7-1.9 Forecast closing date: 6 October 17 Source: Central Reserve Bank of Peru and BBVA Peru Research 37
Peru Outlook Fourth quarter 17 October 17
Peru Outlook 4Q 17 This report has been produced by the Peru Division Chief Economist, Peru Hugo Perea hperea@bbva.com +51 1 114 Francisco Grippa fgrippa@bbva.com Yalina Crispin yalina.crispin@bbva.com Vanessa Belapatiño vanessa.belapatino@bbva.com Ismael Mendoza ismael.mendoza@bbva.com Marlon Broncano marlon.broncano@bbva.com BBVA Research Jorge Sicilia Serrano Macroeconomic Analysis Rafael Doménech r.domenech@bbva.com Global Macroeconomic Scenarios Miguel Jiménez mjimenezg@bbva.com Global Financial Markets Sonsoles Castillo s.castillo@bbva.com Long-Term Global Modelling and Analysis Julián Cubero juan.cubero@bbva.com Innovation and Processes Oscar de las Peñas oscar.delaspenas@bbva.com Financial Systems and Regulation Santiago Fernández de Lis sfernandezdelis@bbva.com International Coordination Olga Cerqueira olga.cerqueira@bbva.com Digital Regulation Álvaro Martín alvaro.martin@bbva.com Regulation María Abascal maria.abascal@bbva.com Financial Systems Ana Rubio arubiog@bbva.com Financial Inclusion David Tuesta david.tuesta@bbva.com Spain and Portugal Miguel Cardoso miguel.cardoso@bbva.com United States Nathaniel Karp nathaniel.karp@bbva.com Mexico Carlos Serrano carlos.serranoh@bbva.com Middle East, Asia and Geopolitical Álvaro Ortiz alvaro.ortiz@bbva.com Turkey Álvaro Ortiz alvaro.ortiz@bbva.com Asia Le Xia le.xia@bbva.com South America Juan Manuel Ruiz juan.ruiz@bbva.com Argentina Gloria Sorensen gsorensen@bbva.com Chile Jorge Selaive jselaive@bbva.com Colombia Juana Téllez juana.tellez@bbva.com Peru Hugo Perea hperea@bbva.com Venezuela Julio Pineda juliocesar.pineda@bbva.com ENQUIRIES TO: BBVA Research Peru: Av. República de Panamá 355, San Isidro, Lima 7, Peru. Tel: + 51 1114 - bbvaresearch@bbva.com - www.bbvaresearch.com 39