Peru Economic Outlook Second quarter 2017 April 2017
Main messages 1. World growth continues apace, accompanied by a certain clarification regarding US policy. Overall, global risk remains a concern. 2. Economic activity. We have cut back our growth projection for 2017 from 3.5% to 2.5% in view of weak data in 1Q2017 and the El Niño Costero weather phenomenon. 3. Exchange rate. The PEN has depreciated due to the reduction in the interest rate differential between soles and US dollars. Improving trade figures and capital inflows will limit the depreciation. 4. Inflation. Temporary uptick due to supply shocks. It will start to come down from the second half of this year 5. Monetary Policy Rate. The central bank has hinted at a more dovish stance. We are projecting two rate cuts of 25 bps each in the remainder of 2017.
1. GLOBAL Growth is taking hold, but there are still risks
Positive global dynamic takes hold The main trends continue and the probability of the baseline scenario increases Recovery of industrial activity and international trade confirmed Substantial stimulus to the US economy seems less likely No stresses in financial markets but so do more protectionist scenarios Headline inflation continues to rise, but core inflation holds steady Central banks move towards normalisation 4
Financial stresses remain low BBVA financial stress index (normalised index) 2.0 1.0 0.0-1.0 Volatility has fallen despite uncertainty about economic policy Monetary stimulus measures mask a certain underlying unease Europe has been the exception, with sovereign spreads widening somewhat in connection with the French elections and the overall political panorama -2.0 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Latam Asia Ec. Developed Desarrolladas countries Source: BBVA Research 5
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Title Presentation Central banks move towards normalisation of their policies US Federal Reserve and European Central Bank (ECB) interest rates (bps) 2.5 2.0 1.5 1.0 0.5 ECB An end to full allocation Reduction of QE ECB End of QE, but policy of reinvestment 0.0 Source: BBVA Research, FED and ECB FED BCE 6 The Federal Reserve continues to raise its monetary policy rate, although it remains cautious as far as the economic panorama is concerned The ECB is increasingly discussing exit guidelines for monetary policy 6
World growth revised upwards USA EURO ZONE 2017 2.3 2018 2.4 2017 1.7 2018 1.7 2017 6.3 2018 5.8 CHINA Up Unchanged Down LATIN AMERICA 2017 1.1 2018 1.8 WORLD 2017 3.3 2018 3.4 Source: BBVA Research. Latin America comprises: Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela 7
USA: expected boost to the economy delayed GDP growth (YoY, %) 3 2.5 2 2.4 2.6 1.6 2.3 2.4 Accelerating activity in 2017 due to the expected improvement in investment; however, consumption is rather less dynamic 1.5 1 Economic policy risk continues despite the more optimistic tone in recent months 0.5 0 2014 2015 2016 2017 2018 April Previsiones forecast en 2016 Abril 2017 February Previsiones forecast en Febrero 2017 2017 Source: BBVA Research and the BEA 8
China: a new push from old drivers GDP growth (YoY, %) 8 7 7.3 6.9 6.7 6.3 We have revised our growth forecasts for 2017 and 2018 upwards in the light of recent figures and fiscal support. Gradual slowdown under way. 6 5 4 5.8 Nevertheless, medium-term risk is still considerable: The rebalancing process toward services and consumer spending has stagnated Economic policy mistakes may lead to a disorderly deleveraging process 3 2014 2015 2016 2017 2018 April Previsiones forecast en 2016 Abril 2017 February Previsiones forecast en Febrero 2017 2017 Source: BBVA Research and CEIC 9
1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 3Q2019 1Q2020 3Q2020 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 3Q2019 1Q2020 3Q2020 Title Presentation Commodities: we continue to see commodity prices gently converging to their long-term equilibrium BRENT CRUDE (US$ per barrel) 120 100 80 60 40 20 0 COPPER (US$ per lb.) 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 Previsiones February forecast en Febrero 2017 2017 Previsiones April forecast en 2017 Abril 2017 Previsiones February forecast en Febrero 2017 Previsiones April forecast en Abril 2017 2017 Source: BBVA Research and Bloomberg Source: BBVA Research and Bloomberg Oil prices continue to rely on the OPEC agreement on production limits and the increase in demand. Copper prices benefit not only from greater demand but also from interruptions in supply. No significant change in long-term outlook for commodities. 10
The main global risks for the region and for Peru centre on policies in the US and rebalancing in China 1 Lingering uncertainty about measures to be taken in the US, especially regarding trade 2 The monetary policy stimulus measures taken to bolster the recent strength of investment in China may hold up the process of reducing imbalances 3 Election results in France and Italy in the (unlikely) event of a win for anti-eu parties 4 Risks associated with the normalisation of monetary policy, especially in the US. Source: BBVA Research 11
2. PERU Growth hit by weak domestic demand and the El Niño Costero weather phenomenon
Economic activity Title Presentation
We are cutting back our growth forecast for 2017 1 pp less growth: GDP 2017 (chge. % YoY) 3.5 1Q17 (Jan) -1 pp 2.5 1 1 2 2 Current Source: Central Bank of Peru and BBVA Research Figures for the first two months of the year weaker than expected Effects of the El Niño Costero weather phenomenon Fall in business confidence Less public spending on infrastructure (Lima Metro Line 2 and Talara Refinery modernisation) Public spending on emergency/reconstruction (implying a deficit of 2.9% of GDP) -0.2-0.6-0.7 0.4-0.7-0.2 0.4-0.7-0.5 0.4-0.7 0.4 +0.5 14
El Niño Costero : damage to infrastructure estimated at equivalent to 1.9% of GDP Damage to infrastructure caused by El Niño Costero* Sectors Units USD * Millions % Part. % GDP Roads (Km) 8,951 1,424 35 0.7 Housing (Units) 278,123 944 24 0.4 Bridges (Units) 839 474 12 0.2 Farming areas (Ha) 82,083 234 6 0.1 Schools (Units) 2,165 152 4 0.1 Irrigation canals (Km) 23,176 628 16 0.3 Country tracks (Km) 12,843 68 2 0.0 Health centres (Units) 742 91 2 0.0 Total 4,015 100 1.9 (*) as at 18 April Source: BBVA Research 15
Confidence in negative territory Business confidence (index in points*) 65 60 55 50 45 40 35 Optimistic Pessimistic *Values of more (less) than 50 indicate expectations of better (worse) economic performance in the next three months 54 62 55 44 Relative to January forecasts, the reduction in private investment due to falling confidence will shave 0.2 pp off this year s growth. 30 Jul-14 Jan-15 Ene-15 Jul-15 Jan-16 Ene-16 Jul-16 Jan-17 Ene-17 Consumer confidence (index in points) 59 57 55 53 51 49 47 Optimistic 52 Pessimistic 58-9 March 2017 compared with March 2016 Households future situation Households current situation 45 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17-6 -1-1 54 Employment Prices 50 48 Source: Central Bank of Peru and BBVA Research Source: Apoyo Consultoría and BBVA Research 16
Thousand Miles de personas of people Percentage Porcentaje Title Presentation Job creation in Greater Lima slows, with a fall in suitable employment for the first time since 2005 Job creation (number of people in thousands and chge. % YoY) Job creation by category (number of people in thousands) 180 160 140 120 Employment Generación generation empleo - eje - Left izq. asle Var.% %- -Right eje der. axle 3.5 3.0 2.5 200 150 100 100 2.0 50 80 1.5 0 60 40 20 0-20 Jan-14 ene-14 Aug-14 ago-14 Mar-15 mar-15 Oct-15 oct-15 May-16 may-16 Dec-16 dic-16 1.0 0.5 0.0-0.5-50 -100-150 -200 ene-14 may-14 sep-14 ene-15 may-15 sep-15 jan-16 ene-16 may-16 sep-16 jan-17 ene-17 jan-14 may-14 jan-15 Properly Adecuadamente employed empleados Underemployment Subempleo total Employed PEA ocupada EAP Source: INEI Source: INEI 17
Slowdown in job creation and deterioration in quality of employment affects total household incomes and will slow consumption in the remainder of the year Total payroll and private consumption (chge. % YoY) Total payroll and private consumption (chge. % YoY) 8.0 Private Consumo consumption privado (var.%) (var.%) Real Masa wage salarial bill(var.%) real (var.%) 5.0 Private Consumo consumption privado (var.%) (var.%) Masa Real wage salarial bill(var.%) real (var.%) 7.0 4.0 6.0 3.0 5.0 2.0 4.0 3.0 1.0 2.0 0.0 1.0 0.0 2012 2013 2014 2015 2016-1.0-2.0-0.6-1.0 I-16 II-16 III-16 IV-16 Dec-Jan-Feb17 dic-ene-feb17 Jan-Feb-Mar17 ene-feb-mar17 Source: INEI Source: INEI 18
Public deficit will increase temporarily due to the reconstruction effort, but without endangering fiscal sustainability Fiscal result (% of GDP) Public Debt (% of GDP) 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0-4.0-2.3 3.1 2.5-1.4 2.3 Projection -1.0-2.1-2.0-1.5-2.6-2.9 2002 2005 2008 2011 2014 2017 2020 60.0 50.0 40.0 30.0 20.0 10.0 0.0 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Projection 27.5 26.0 Source: Central Bank of Peru and BBVA Research Source: Central Bank of Peru and BBVA Research 19
Peru: GDP growth in 2017 by sector GDP by sector (chge. % YoY) 2016 2017 Agriculture 1.8 2.0 Fishing -10.1 17.0 Mining and oil and gas 16.3 4.2 Metal mining 21.2 4.1 Oil and gas -5.4 4.8 Manufacturing -1.6 0.1 Primary -0.5 4.3 Non - Primary -1.9-1.4 Electricity and water 7.3 4.0 Construction -3.1 0.8 Trade 1.8 0.9 Other services 4.3 3.2 Global GDP 3.9 2.5 Primary GDP 9.8 3.9 Non - primary GDP 2.4 2.0 Source: BBVA Research A Anchovy catch of 4.3 catch million projected metric at 4.3 tons million is projected metric tons for the for year the year Mining: copper up by 7.3% Oil: commissioning of oil pipeline A catch of 4.3 million metric tons is projected for the year Reconstruction works A Less catch private of 4.3 million spending metric tons is projected for the year 20
Peru: GDP growth in 2017 from the expenditure point of view GDP from expenditure point of view (chge. % YoY) 2016 2017 1. Domestic Demand 0.9 2.1 a. Private Consumption 3.4 2.7 b. Public Consumption -0.5 5.4 c. Gross Domestic Investment -4.9-1.4 Gross Fixed Investment -5.0 0.4 - Private -6.1-1.5 - Public -0.5 8.0 2. Exports 9.7 2.2 3. GDP 3.9 2.5 4. Imports -2.3 0.5 Public spending up due to reconstruction, taking fiscal deficit to 2.9% of GDP Private demand will remain weak: falling investment and slowing consumption Contribution to growth (pp) Private Expenditure 1.0 1.4 Public Expenditure -0.1 1.0 Source: Central Bank of Peru and BBVA Research 21
Peru: temporary acceleration in growth in 2018 and 2019 GDP (chge. % YoY) Reconstruction. Rebound of primary sectors Gas pipeline In line with potential GDP 3.3 3.9 3.9 4.0 3.5 3.8 El Niño Costero 2.5 2015 2016 2017 2018 2019 2020 2021 Source: BBVA Research 22
Peru: risks to growth forecasts External More marked slowdown in China s economy Uncertainty about policies of the new US administration (fiscal, trade, deregulation and immigration) Domestic More delays in carrying out infrastructure works Confidence failing to recover, or even continuing to fall Execution of public spending not achieved Source: BBVA Research 23
Financial markets and exchange rate Title Presentation
Risk indicators have moderated so far this year Peru CDS at 5 years (bps) EMBIG Peru (bps) 138 133 128 123 118 113 108 103 98 93 July-16 Jul-16 Aug-16 Ago-16 Sep-16 Set-16 Oct-16 Nov-16 Dec-16 Dic-16 Jan-17 Ene-17 Feb-17 Mar-17 Apr-17 Abr-17 210 200 190 180 170 160 150 140 130 120 Jul-16 Ago-16 Set-16 Oct-16 Nov-16 Dec-16 Dic-16 Ene-17 Jan-17 Feb-17 Mar-17 Apr-17 Abr-17 Source: Bloomberg Source: Bloomberg 25
Sovereign bond yields decline Yields on Sovereign Bonds (%) Series1 Series2 Series1 31 Dec. Series1 2016 Series2 Series2 Current* 8 8 8 7 7 7 6 6 6 5 5 5 4 4 3 4 23 2 3 2 201720202023202420262028203120372042 2017 2020 2023 2024 2026 2028 2031 2037 2042 Yields on Sovereign Bonds (% and bps) Bond Dec-16 (A) Yield (%) Actual data (B) 2020 5.2 4.5 2023 5.7 5.1 2024 5.9 5.3 2026 6.4 5.8 2031 6.8 6.2 2037 6.9 6.4 2042 7.2 6.6 * Var. Actual data vs. (en pbs) Dec-16-70.0-56.0-52.0-59.3-55.0-51.0-65.0 (*) As at 18 April. Source: Bloomberg (*) As at 18 April. Source: Bloomberg 26
while non-residents holdings increase 0 0 0 0 0 0 0 0 Balance of Sovereign Bonds (S/. millions) 70,000 60,000 50,000 40,000 30,000 20,000 Non-residents 70,000 60,000 50,000 40,000 30,000 Series1 Series1 Series2 Series2 Residents 30,000 30000 28,000 26000 26,000 24,000 22000 22,000 20,000 18000 18,000 30,000 28,000 26,000 24,000 22,000 20,000 18,000 16,000 Non-residents holdings of Sovereign Bonds* (S/. millions and %) Series1 S/. millions Series1 Series2 Series2 Proportion (%) Right axis. 20,000 14000 16,000 14,000 25 10,000 2 12,000 14,000 10,000-10,000 20 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 10000 1 12,000 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Ene-16 Mar-16 May-16 Jul-16 Set-16 Nov-16 Ene-17 Mar-17 0 10,000 Ene-16 Mar-16 Ene-16May-16 Mar-16 Jul-16 May-16 Set-16 Jul-16 Nov-16 Set-16 Ene-17 Nov-16Ene-16 Mar-17 Ene-17 Mar-16 Mar-17 May-16 Jul-16 Set-16 Nov-16 Ene-17 Mar-17 45 40 35 30 4 4 3 3 2 Source: MEF (*) So far this year issues have totalled S/. 5.3 billion Source: MEF 27
Exchange rate (soles to the dollar) Currency interventions (US$ millions) Title Presentation Also, the PEN has shown a slight tendency to appreciate Exchange rate and currency interventions of the BCRP* Exports and imports (cumul., 12 mths, US$ billions) 3.6 700 Exports Exportaciones Imports Importaciones 3.5 500 46 3.4 3.3 300 100 42 Surplus US$3.2 billion 3.2 3.1 3-100 -300-500 Deficit US$2.5 billion 37 34 39 36 2.9 Ene-16 Mar-16 May-16 Jul-16 Set-16 Nov-16 Ene-17 Mar-17 Jan-16 Mar-16 May-16 Jul-16 Set-16 Nov -16 Jan-17 Mar-17-700 * Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 (*) So far this year the central bank has bought US$1.54 billion Source: Bloomberg and BCRP (*) Estimated Source: Central Bank of Peru 28
Going forward, slight depreciation due to reduction in interest rate differential, mitigated by lower external financing requirements Title Presentation Exchange rate (PEN/USD) Balance of payments on current account (% of GDP) Projection Projection 3.60 1 3.55 0 3.50 3.45 3.40 3.35 3.36 3.46-1 -2-3 3.30-4 3.25 3.20 3.15 3.10 3.05 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18-5 -6-7 1Q 15 3Q 15 1Q 16 3Q 16 1Q 17 3Q 17 Source: Central Bank of Peru Source: Central Bank of Peru 29
Inflation Title Presentation
Dec-97 Nov-98 Oct-99 Sep-00 Aug-01 Jul-02 Jun-03 May-04 Apr-05 Mar-06 Feb-07 Jan-08 Dec-08 Nov-09 Oct-10 Sep-11 Aug-12 Jul-13 Jun-14 May-15 Apr-16 Mar-17 Title Presentation In March, inflation rose due to increases in food prices. The evidence points to the shock being temporary. Inflation* (change % YoY) Var. % m/m mar-17 mar-17 Core Inflation 0.74 0.00 2.6 Goods 0.18 3.0 Services 1.09 2.4 Transport 0.09 2.1 Comunications 0.03 0.2 Education 3.93 4.9 Rental 0.22 0.5 Other services 0.02 1.0 Non core inflation 1.85 5.5 Food 0.35 3.9 Food (underlying) 4.94 8.4 Fuel -0.15 7.8 Electricity -0.08 1.2 Inflation 1.30 4.0 Var. % m/m mar-17 Var. % y/y Var. % y/y mar-17 Core Inflation 0.74 2.6 0.00 Goods Source: INEI, Central Bank of Peru and BBVA Research 0.18 3.0 Services 1.09 2.4 CPI for food and beverages (chge. % MoM) 12 10 8 6 5.6 4 2 0-2 -4 Source: INEI, Central Bank of Peru and BBVA Research 31
Inflation will tend to decrease in the second half of the year, creating room for an easing of monetary policy. Inflationary expectations (chge. % YoY expected of CPI) Inflation (chge. % YoY in CPI) 5 4,6 Projection 3,3 4 2,9 Upper limit of target range, 3% 2,8 2,9 3,1 2,9 3 2 2,8 BCRP target range Rango meta del BCRP 3,0 2,7 2,8 1 May-16 Jul-16 Set-16 Nov-16 Jan-17 Ene-17 Mar-17 One Un año year adelante ahead Two Dos year años ahead adelante 0 Jun-12 May-13 Apr-14 Abr-14 Mar-15 Feb-16 Jan-17 Ene-17 Dec-17 Dic-17 Source: INEI, Central Bank of Peru and BBVA Research Source: INEI, Central Bank of Peru and BBVA Research increase in expectations will Reversal of food A catch price of hikes, 4.3 but million metric make the fall in inflation more tons is projected for the year gradual. Absence of demand pressures and limited depreciation in the remainder of the year 32
Monetary policy rate Title Presentation
Monetary policy adopts a more dovish stance 34
As inflation starts to ease, we foresee a cut of 50 bps in the base rate in the remainder of the year Monetary policy reference rate (%) Reference Tasa de referencia rate Tasa Ex post de interest interés rate real expost 5 4 3 2 4,25 4,00 3,75 Reduction in the reference rate will support private demand. We also expect greater monetary easing in 1Q2018 1 0,7 0 0,3-1 -2 2014 2015 2016 2017 Source: Central Bank of Peru and BBVA Research 35
Main messages 1. World growth continues apace, accompanied by a certain clarification regarding US policy. Overall, global risk remains a concern. 2. Economic activity. We have cut back our growth projection for 2017 from 3.5% to 2,5% in view of weak data in 1Q2017 and the El Niño Costero weather phenomenon. 3. Exchange rate. The PEN has depreciated due to the reduction in the interest rate differential between soles and dollars. Improving trade figures and capital inflows will limit the depreciation. 4. Inflation. Temporary uptick due to supply shocks. It will start to come down from the second half of this year 5. Monetary Policy Rate. The central bank has hinted at a more dovish stance. We are projecting two rate cuts of 25 bps each in the remainder of 2017.
Macroeconomic projections for 2017 Main macroeconomic variables 2014 2015 2016 2017 (p) GDP (chge. % YoY) 2.4 3.3 3.9 2.5 Inflation (eop, chge. % YoY) 3.2 4.4 3.2 3.0 Exchange rate (per US$, eop) 2.96 3.38 3.40 3.36 Policy interest rate (%, eop) 3.50 3.75 4.25 3.75 Private consumption (chge. % YoY) 4.1 3.4 3.4 2.7 Public consumption (chge. % YoY) 9.7 9.3-0.5 5.4 Investment (chge. % YoY) -2.1-5.0-5.0 0.4 Fiscal result (% of GDP) -0.3-2.1-2.6-2.9 Current Account (% of GDP) -4.0-4.8-2.7-2.0 Source: BCRP (Central Reserve Bank of Peru), INEI (National Statistics and IT Institute) and BBVA Research Peru 37
Peru Economic Outlook Second quarter 2017 April 2017