Monetary Policy: A Key Driver for Long Term Macroeconomic Stability

Monetary Policy: A Key Driver for Long Term Macroeconomic Stability Julio Velarde Governor Central Bank of Peru March 2016

Agenda 1. Peru s growth is based on strong fundamentals 2. Recent economic developments and prospects 3. Monetary policy framework 4. Concluding remarks 2

China India Indonesia 4,3 4,1 3,9 3,5 3,4 3,3 3,1 3,1 3,0 2,8 2,8 2,5 1/ Emerging countries with a GDP higher than US $ 150 billion. Source: IMF, World Economic Outlook and BCRP Peru Poland Philippines Taiwan Colombia Malaysia Korea Chile Turkey Thailand Russia Egypt Czech Republic Brazil South Africa Hungary Mexico Qatar Greece UAE Peru s growth in the last decade ranks fourth place among emerging economies 9,1 Average GDP per capita growth: 2005-2015 1/ 6,0 2,0 2,0 1,7 1,4 1,3 1,2 0,1-1,9-4,7 3

After the 2008-2009 financial crisis, Peru reached an average growth of 5,3 percent, above the LATAM average of 2,6 percent GDP of selected countries (2007-2015) (Index 2007=100) 160 150 140 Pre Crisis Period Crisis Period Post Crisis Period Peru Colombia Average GDP Growth 2007-2015 130 120 Chile Brazil Brazil 2,2 Colombia 4,0 Chile 3,4 110 Mexico Mexico 1,9 Peru 5,3 100 Average LATAM 2,6 90 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: WEO (October 2015) and BCRP. 4

Peru s average Inflation is around 3,0 percent Average Inflation: 2005-2015 5,8 4,0 4,0 3,6 3,0 2,2 Brazil Mexico Colombia Chile Peru Peru (excludes food and energy) 5 Source: IMF, World Economic Outlook and BCRP

Taiwan Thailand Czech Republic Peru Malaysia China Russia Hungary Philippines Korea United Arab Emirates Qatar Brazil Poland Colombia Chile India Mexico South Africa Turkey Indonesia Egypt* Greece International reserves are equivalent to 32 percent of GDP 82 International Reserves: 2015 (% GDP) 42 36 32 30 30 30 28 27 26 23 20 20 20 17 16 16 15 14 13 12 6 3 * GDP to Egypt as of 2014 Source: IMF and Bloomberg 6

Public debt is equivalent to 23,3 percent of GDP Gross public debt: 2015 (% GDP) 197,0 90,0 75,3 69,9 65,3 55,6 52,0 51,1 50,9 48,4 43,5 43,2 40,6 38,5 38,2 35,9 32,1 29,9 26,5 23,3 20,4 18,9 18,1 7 Source: IMF and BCRP

The banking system has a low exposure to external liabilities Short-Term External Liabilities of the Banking Sector (% of GDP) 2,0 1,8 1,3 1,2 1,3 0,7 1,0 0,6 0,9 0,8 1,0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 *Up to December 2015 8

Long-Term Corporate Debt Total Long-Term Debt of Nonfinancial Firms (As % of GDP) 1) Firms oriented to exports 6,3 9,9 11,5 2) Firms oriented to domestic markets 5,2 8,4 6,2 4,7 4,9 2010 2011 2012 2013 2014 2015 9

The dollarization ratio dropped by more than half since 2005 Dollarization Ratio of Credit to the Private Sector (%) 62 57 55 50 46 46 45 43 41 38 30 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 10 * Up to December 2015

Agenda 1. Peru s growth is based on strong fundamentals 2. Recent economic developments and prospects 3. Monetary Policy Framework 4. Concluding Remarks 11

Growth is expected to recover over the next few years Peruvian Annual GDP Growth (in percentages) 8,5 9,1 8,5 7,5 5,5 4,2 5,0 6,3 6,5 6,0 5,8 4,0 4,8 3,3 2,4 1,0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* 2017* 12 * Forecast - Inflation Report, December 2015

Export growth and the recovery of investment will foster growth during the next two years GDP and Domestic Demand (Real % change) 2014 2015 2016* 2017* Private Consumption 4,1 3,4 3,5 3,8 Private Fixed Investment -2,1-4,3 0,0 4,0 Public Consumption 10,1 9,5 5,3 4,0 Public Investment -2,0-7,5 10,9 5,0 Exports -0,8 3,3 5,4 7,9 Imports -1,5 2,4 1,3 4,0 GDP 2,4 3,3 4,0 4,8 * Forecast - Inflation Report, December 2015 13 13

Growth in 2016-2017 will be driven by mining and construction GDP by Economic Sectors (Real % change) 2014 2015 2016* 2017* Agriculture and Livestock 1,9 2,8 1,6 3,7 Fishing -27,9 15,9-1,2 27,9 Mining and hydrocarbons -0,8 9,3 10,6 10,4 Manufacturing -3,7-1,7 1,1 4,2 Electricity and water 4,9 6,2 6,0 5,5 Construction 1,6-5,9 2,5 3,5 Commerce and services 4,9 3,9 3,7 3,7 GDP 2,4 3,3 4,0 4,8 Memo: Primary-GDP -2,1 6,6 6,5 9,1 Non-primary GDP 3,6 2,4 3,4 3,6 * Forecast - Inflation Report, December 2015 14

According to Consensus Forecast, a recovery in economic activity is expected for most of the countries in the region for 2016-2017. 2016 GDP Growth in LatinAmerica Annual % change 2017 Peru Bolivia Paraguay Mexico Colombia Chile Uruguay Argentina Ecuador Brazil Venezuela -6,3-3,1-0,1-0,1 2,7 2,5 2,0 1,9 3,5 4,0 3,9 Peru Bolivia Argentina Paraguay Mexico Colombia Chile Uruguay Ecuador Venezuela Brazil 0,6 0,9 1,5 2,5 2,7 3,1 3,1 3,7 3,6 4,1 4,8 Source: Latin American Consensus Forecast (February, 2016) and BCRP. 15 15

Commodity Prices: The price of copper has fallen 52 percent since 2011 Cumulative Change of commodity prices respect to its highest level (Percentage change) Petroleum apr-11 Silver apr-11 Copper feb-11 Lead apr-11 Gold sep-11 Zinc feb-11-35% -30% -28% -52% -70% -65% Petroleum Silver Gold Copper Lead Zinc Highest Price Date Apr-11 Apr-11 Sep-11 Feb-11 Apr-11 Feb-11 Maximum Price 109,6 42,0 1772,7 447,6 124,3 111,8 Current Price* 33,0 14,8 1232,14 213,4 80,63 81,0 16 * As of February 29th

Peru has faced an external shock (a the decline in the terms of trade) since 2011. However, prices are still higher than in the previous decade. Terms of trade (% cumulative change) Terms of Trade (% cumulative change) 2000-2011 2012-2015 Export prices 278,5-26,9 Import prices 97,5-10,1 35% Terms of Trade 91,6-18,2 220 30% 25% 28,1% 21,0% 200 20% 15% 13,9% 180 10% 5% 0% -5% -10% -15% 6,7% 6,1% 7,2% 4,3% 1,6% -0,7% -2,4% -2,1% -5,7% -5,4% -6,3% -3,9% -10,9% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* ToT growth (left) ToT Index 2001=100 (right) 160 140 120 100 17 * Forecast - Inflation Report, December 2015

Since 2015, the mining sector has started to show higher growth rates Mining production 2015 Gold (f. kg.) 141 Cooper (FMT) 1523 Zinc (FMT) 1213 18

Copper production will increase by 95 percent in 2014-2018 COPPER PRODUCTION (million of tons) Las Bambas (Apurímac) Ampliación de Cerro Verde (Arequipa) Toquepala Expansion (Tacna) Toromocho (Junín) Constancia (Cusco) 1,6 1,9 2,3 2,5 1,1 1,2 1,3 1,3 2011 2012 2013 2014 2015 2016* 2017* 2018* 19 * Forecast - Inflation Report, December 2015

Peru s gross fixed investment is about 24,9 percent of GDP Total investment: 2015* (% of GDP) 17,4 17,8 18,0 19,4 19,7 20,0 22,1 22,3 24,0 24,9 Argentina Venezuela Brazil Uruguay Costa Rica Latin America Mexico Chile Colombia Peru * Forecast Source: IMF, World Economic Outlook and BCRP. 20

Non-primary exports in 2015 are three times the 2000 level 350 300 250 200 150 Exports of goods and services US$ (billion) 2015 % Total Copper 8,1 23,7 Gold 6,5 19,0 Agro business 4,3 12,6 Tourism 3,2 9,4 Zinc 1,5 4,4 Fishmeal 1,1 3,2 Textiles 1,3 3,8 Other 13,9 24,0 Total 34,2 100 Non-primary exports Exports Volume (Index 2000=100) Primary exports 300 163 309 168 Non-primary exports 2016: % change 3,0 Agro business 6,1 Fishing 11,7 Primary exports 2016: % change 3,1 Copper 16,9 100 50 Zinc 6,2 Coffee 9,9 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016* 21 21 * Forecast - Inflation Report, December 2015

Diversification by destination Total exports by destination (Share in total exports) 24 24 22 18 7 6 Latin America Europe USA and Canada China Japan and South Korea Other 25 24 Primary exports (share in primary exports) 40 Non- primary exports (share in Non-primary exports) 20 18 26 22 9 Europe China USA and Canada Latin America Japan and South Korea 5 Other Latin America USA and Canada 4 Europe China Japan and South Korea 2 6 Other 22

The current account deficit is financed by long-term private capital inflows CURRENT ACCOUNT AND LONG-TERM EXTERNAL FINANCING OF THE PRIVATE SECTOR: 2005-2017 1/ (% of GDP) 8,3 7,0 9,3 7,2 10,8 9,5 7,2 5,3 3,9 4,0-4,3-0,5-2,4-1,9-2,7-4,2-4,0-4,4-3,6-2,6 2008 2009 2010 2011 2012 2013 2014 2015 2016* 2017* * Forecast-Inflation Report, December 2015 Current Account Long-term financing of the private sector 23 1/ Includes net foreign investment, portfolio investment and private sector's long-term disbursement.

An expansionary fiscal stance is expected for the next two years Fiscal Surplus (% of GDP) 3,1 2,5 2,5 2,0 2,3 0,9-0,4-0,2-0,3-1,4-2,1-2,9-2,7 2005 2006 2007 2008 2009 2010 2011 2012 2013 2 014 2015 2016* 2017* 24 * Forecast - Inflation Report, December 2015

Agenda 1. Peru s growth is based on strong fundamentals 2. Recent economic developments and prospects 3. Monetary Policy Framework 4. Concluding Remarks 25

12-month inflation will converge to the target range in 2016 10,0 CPI inflation (yoy %) 9,0 8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0 6,7 4,7 4,4 2,7 3,2 2,9 3,1 2,5 2,1 0,3 2008 2009 2010 2011 2012 2013 2014 2015 2016* 2017* 3.0 1.0 26 * Forecast - Inflation Report, December 2015

Jan/08 Apr/08 Jul/08 Oct/08 Jan/09 Apr/09 Jul/09 Oct/09 Jan/10 Apr/10 Jul/10 Oct/10 Jan/11 Apr/11 Jul/11 Oct/11 Jan/12 Apr/12 Jul/12 Oct/12 Jan/13 Apr/13 Jul/13 Oct/13 Jan/14 Apr/14 Jul/14 Oct/14 Jan/15 Apr/15 Jul/15 Oct/15 Jan/16 The BCRP raised the policy rate twice in 2015 and in January and February 2016 (from 4,0 to 4,25 percent) to anchor inflation expectations. 7,0 Monetary Policy Interest Rate and Inflation Expectations (%) 6,0 Nominal Rate Expectations 5,0 4,25 4,0 3,0 2,0 1,0 0,0 * Deflacted using Inflation Expectations 27

feb-02 jun-02 oct-02 feb-03 jun-03 oct-03 feb-04 jun-04 oct-04 feb-05 jun-05 oct-05 feb-06 jun-06 oct-06 feb-07 jun-07 oct-07 feb-08 jun-08 oct-08 feb-09 jun-09 oct-09 feb-10 jun-10 oct-10 feb-11 jun-11 oct-11 feb-12 jun-12 oct-12 feb-13 jun-13 oct-13 feb-14 jun-14 oct-14 feb-15 jun-15 oct-15 Macro-prudential policies have the purpose of ensuring the sustained credit growth % Reserve Requirements Rate (as % of Total Deposits) 80,0 70,0 70 60,0 50,0 49,0 40,0 Foreign currency 30,0 20,0 Domestic Currency 30,0 25,0 10,0 0,0 6,0 6,5 28

Peru s inflation is expected to remain within the target range for the next two years Inflation rate: 2016 Inflation rate: 2017 Ecuador Peru Mexico 3,0 3,1 3,4 Inflation Targeting: 1% 3% Peru Chile Ecuador 2,5 3,1 3,4 Chile 3,6 Mexico 3,4 Paraguay 4,2 Colombia 3,5 Bolivia 4,8 Paraguay 4,4 Colombia 4,9 Bolivia 4,6 Brazil 7,2 Brazil 5,7 Uruguay 8,2 Uruguay 7,7 Argentina 31,7 Argentina 20,0 Venezuela 239,0 Venezuela 155,1 29 Source: Latin American Consensus Forecast (February 2016) and BCRP

Central Bank has promoted a reduction in dollars loans through additional reserve requirements and providing local currency through FX repos Growth of banking credit (YoY % Chg.) 50,0 40,0 30,0 Soles US Dollar Total 27,8 20,0 10,0 9,5 - -10,0-20,0-30,0-20,7 30

BCRP FX repos have increased the average maturity of private banks liabilities. 14 12 10 8 Repos Average Banks Liabilities Duration (in months) Deposits with maturity larger than one year Deposits with maturity shorter than one year 7 7 9 1 11 6 6 4 5 5 6 4 2 0 2 2 2 2 2012 2013 2014 2015 31

jan-2012 feb-2012 mar-2012 apr-2012 may-2012 jun-2012 jul-2012 aug-2012 sep-2012 oct-2012 nov-2012 dec-2012 jan-2013 feb-2013 mar-2013 apr-2013 may-2013 jun-2013 jul-2013 aug-2013 sep-2013 oct-2013 nov-2013 dec-2013 jan-2014 feb-2014 mar-2014 apr-2014 may-2014 jun-2014 jul-2014 aug-2014 sep-2014 oct-2014 nov-2014 dec-2014 jan-2015 feb-2015 mar-2015 apr-2015 may-2015 jun-2015 jul-2015 aug-2015 sep-2015 oct-2015 nov-2015 dec-2015 jan-2016 feb-2016 Exchange Rate (S/ per US$) Net Purchases of US$ FX intervention aims at reducing volatility. The BCRP purchased US$ 25 874 million in 2010-2012 and sold US$ 13 407 million in the period 2013-2016. 3,70 Exchange Rate and Forex Exchange Intervention 600 3,50 3,30 Net purchases (US$ million) 2010 8 963 2011 3 637 2012 13 274 2013-2016* -13 407 400 200 3,10 0 2,90-200 2,70-400 2,50-600 32 * As of March 2nd Net Purchases of US$ Exchange Rate

Real Equilibrium Exchange Rate 115 115 110 110 105 105 100 100 95 95 90 85 Actual RER 90 85 80 80 75 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 75 33 The Equilibrium Real Exchange Rate takes into account the Peruvian relative productivity with respect to its trade partners, the terms of trade, the net foreign assets, the openness degree and the fiscal position.

The BCRP carried out a precautionary accumulation of international reserves during the period of high commodity prices and capital inflows INTERNATIONAL RESERVES (USD billions) NET INTERNATIONAL RESERVES INDICATORS As a % of: 2015 GDP 32 Short-term external debt 1/ 575 Short-term external debt plus current account déficit 335 1/ Includes short-term debt balance plus redemption (1-year) of private and public sector 64,0 65,7 62,3 61,5 60 50 40 44,1 48,8 30 27,7 31,2 33,1 20 14,1 17,3 10 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 34 *Up to December 31, 2015

BCRP balance sheet December 2015 (US$ billion) 8,8 Credit 24,8 Monetary Base & Certificates 61,4 Net International Reserves 22,4 FX Reserve Requirement 23,0 Government Deposits ASSETS LIABILITIES 35

Peru: Yield curve for the Treasury Bonds in Local Currency 9,0 8,0 8,1 8,0 7,0 7,2 7,0 6,7 6,0 5,0 4,0 5,1 4,5 3,9 5,4 Sep. 15 Dec. 14 Feb. 16 3,0 1 year 2 years 5 years 10 years 15 years 20 years 25 years 30 years 40 years 36 Source: Bloomberg

Non-resident Treasury bond holdings remained stable since the end of 2014 37,8 36,8 35,6 Non-resident Treasury Bond holdings (%) 39,0 37,7 37,2 36,9 36,9 37,1 36,4 36,4 36,2 35,4 Current holdings: US$ 5,0 billion Ratio Non-resident Treasury Bond Holding regard Public Deposits: 16,7 % Dec.14 Jan.15 Feb.15 Mar.15 Apr.15 May.15 Jun.15 Jul.15 Aug.15 Sep.15 Oct.15 Nov.15 Dec.15 37

Agenda 1. Peru s growth is based on strong fundamentals 2. Recent economic developments and prospects 3. Monetary Policy Framework 4. Concluding Remarks 38

Concluding Remarks Exogenous factors have been affecting the economic cycle; however, the Peruvian economy maintains strong fundamentals. Because of higher inflation expectations, the BCRP started raising its monetary policy rate to 4,25 percent in February. It is necessary to deepen structural measures to strengthen the recovery of potential growth. 39

Monetary Policy: A Key driver for long term Macroeconomic Stability Julio Velarde Governor Central Bank of Peru March 2016