Peru s fundamentals and economic outlook Julio Velarde Governor Central Bank of Peru. March 2015

Peru s fundamentals and economic outlook Julio Velarde Governor Central Bank of Peru March 2015

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

Peru s performance in the last 9 years Average GDP growth: 2006-2014 Average inflation: 2006-2014 Qatar 13,6 Poland 2,5 China 9,8 Malaysia 2,6 Nigeria 7,6 Thailand 2,7 India 7,1 Peru 3,0 Peru 6,3 China 3,1 Kazakhstan 6,1 Chile 3,5 Indonesia 5,8 Colombia 3,8 Saudi Arabia 5,8 United Arab Emirates 4,0 Philippines 5,4 Mexico 4,2 Malaysia 4,9 Philippines 4,3 3

Peru was the country with the fastest recovery and highest growth in the region after the 2008-2009 financial crisis GDP of selected countries (2007-2014) (Index 2007=100) 150 140 130 120 110 100 Peru Colombia Chile Brazil Mexico Average GDP Growth 2010-2014 Brazil 2,8 Colombia 4,8 Chile 4,6 Mexico 3,3 Peru 5,8 Average LATAM 3,5 90 2007 2008 2009 2010 2011 2012 2013 2014 Source: WEO (October 2014) and BCRP. 8

The current account deficit is financed by long-term private capital inflows CURRENT ACCOUNT AND LONG-TERM EXTERNAL FINANCING OF THE PRIVATE SECTOR: 2005-2014 1/ (Percentage of GDP) 10,4 8,3 7,0 9,3 7,2 10,8 9,5 6,9 1,6 4,5 3,3 4,9 1,5-4,3-0,5-2,4-1,9-3,3-4,5-4,1 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Current Account Long-term financing of the private sector 1/ Includes net foreign investment, portfolio investment and private sector's long-term disbursement. 5

International reserves are equivalent to 31 percent of GDP 30,5 International Reserves (% GDP, 2014) International Reserves: 2001-2014 (% GDP) 16,7 15,3 14,9 11,9 Peru Brazil Chile Mexico Colombia Source: BCRP, Bloomberg y FMI (WEO). 27 26 27 30 29 33 32 31 19 20 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 6

Banking system has a low exposure to external liabilities 9,5 Short Term External Liabilities of the Banking Sector (% of Credit) 7,0 6,6 5,3 4,0 3,9 2,6 3,2 2,7 3,2 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 7

Dollarization dropped 40 percent since 2005 Dollarization Ratio of Credit to the Private Sector 62 57 55 50 46 46 45 43 41 38 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 8

Greater financial deepening: Credit to GDP almost doubled since 2005 Credit to the private sector (as percentage of GDP) 36,7 33,4 27,6 26,9 29,0 31,1 23,7 19,3 18,7 20,2 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 9

Fiscal surplus has allowed to accumulate important resources during the period of high commodity prices Non-Financial Public Sector Balance (percentage of GDP) 3,1 2,5 2,5 2,0 2,3 0,9-0,4-0,2-0,1-1,4 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 10

Gross non-financial public sector debt has shown a downward trend in the last 10 years NON FINANCIAL PUBLIC SECTOR DEBT STOCK: GROSS AND NET DEBT (percentage of GDP) 41,7 33,3 33,9 29,9 25,1 18,0 26,9 27,2 24,3 22,1 20,4 19,6 20,1 14,1 14,3 12,2 8,6 5,0 3,7 3,9 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Gross Debt Net Debt 11

Public debt is among the lowest in the region Gross public debt: 2014 (% GDP) 65,8 56,6 54,8 48,0 47,9 36,3 35,4 34,0 26,2 19,3 13,9 Brazil Malaysia Vietnam Mexico Thailand Philippines Korea Colombia Indonesia Peru Chile Source: FMI (WEO). 12

Productivity improvements are expected to have a positive impact on potential output growth in the following years 9,0 Potential GDP (Percentage var.) 8,0 7,0 6,0 5,0 4,6 5,5 6,3 6,9 7,0 6,8 6,5 6,2 5,9 5,5 5,1 4,9 4,0 3,6 3,0 2,0 1,0 0,0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 13

Continuous increase in employment rates, even during the 2008-2009 financial crisis Urban Employment 1/ ( Percentage change) 7.2 8.3 8.3 5.4 4.2 4.0 1.3 2.8 1.9 2006 2007 2008 2009 2010 2011 2012 2013 2014 1/ Enterprises with 10 or more workers Source: Ministry of Labor and Promotion of Employment 14

Gross fixed investment Total investment (as percentage of GDP) 22,2 17,0 21,9 25,0 20,0 Gross fixed investment (as percentage of GDP) Chile Brazil Mexico Colombia Latin America Source: FMI (WEO). 17,3 18,2 20,3 23,9 23,3 25,1 24,0 25,8 26,6 25,8 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Private investment Public Investment % GDP 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Private 14,3 15,0 16,8 19,4 17,6 19,2 19,2 20,4 20,8 20,3 Public 3,1 3,2 3,5 4,5 5,7 5,9 4,8 5,4 5,8 5,5

Copper production would increase 70 percent in 2018 COPPER PRODUCTION (million of tons) Toquepala (Tacna) Constancia (Cusco) Las Bambas (Apurímac) Cerro Verde (Arequipa) 2,3 2,4 1,8 1,3 1,3 1,4 2013 2014 2015* 2016* 2017* 2018* * Forecast 16

Agenda 1. Peru s growth is based on strong fundamentals 2. Recent economic developments and prospects 3. Policy Framework 17

Lower GDP growth due to negative supply schocks that affected primary sectors GDP: 2013-2015 (percentage variation and contribution) 7,0 6,0 5,8-1,6 5,0 4,0-0,5-1,4 +1,4 +0,1 +0,5 - +0,9 4,4-4,8 3,0 2,4 2,0 1,0 0,0 GDP % Var 2013 Primary GDP Construction Others GDP % Var 2014 Primary GDP Construction Others GDP % Var 2015 14

Negative shocks affected economic growth in 2014 Gross Domestic Product (yoy % var) 2013 Forecast Dic 2013 2014 2014 I. Supply shocks Rice 0,1 2,7-5,6 Anchovies 28,7 21,2-52,6 Fishmeal 44,3 37,5-63,0 Gold -3,3 1,4-10,4 Copper 7,4 17,3 0,7 Zinc 5,4 4,8-2,4 II. Demand shocks Construction 8,9 7,3 1,7 Inventories 1,3-0,1-0,6 III. GDP 5,8 6,0 2,4 Primary GDP 5,0 5,2-2,3 Non-Primary GDP 6,0 6,1 3,6 15

Economic recovery in 2015 would be based on mining, manufacturing and construction GDP BY ECONOMIC SECTOR (yoy % var) 2014 2015* 2016* Primary GDP -2,3 4,7 8,1 Agriculture 1,4 1,8 3,5 Fishing -27,9 17,2 18,6 Mining and oil -0,8 5,2 10,6 Manufacturing based on raw materials -9,7 6,3 4,5 Non-primary GDP 3,6 4,5 5,5 Non-primary manufacturing -1,0 2,6 4,5 Construction 1,7 3,7 7,0 Electricity and water 4,9 5,1 6,1 Commerce and services 4,8 4,9 5,5 GDP 2,4 4,4-4,8 5,5-6,0 *Forecast 20

Lower GDP growth in 2014 due to a reduction in private and public investment. GDP: 2013-2015 (percentage variation and contribution) 7,0 6,0 5,8-1,8 5,0 4,0-1,9 +0,5-0,2 +1,1 - +1,5 4,4-4,8 3,0 2,0-0,9 +1,2 2,4 +0,7 1,0 0,0 GDP % Var 2013 Private Investment Inventories Public Investment Others Var. % PBI 2014 Private Investment Public Investment Net Exports Others Var. % PBI 2015 17

Institutional and internal factors have restrained investment and have affected investor confidence 100,0 Terms of Trade, Investment and Investor Confidence Index 80,0 Investor Confidence Index (centered at 50) 60,0 40,0 Private investment (% var) 20,0 0,0-20,0 Terms of trade (% var) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Investment Terms of Trade Investor Confidence Index 22

Negative effect on investment due to lower regional and local government spending Gross capital formation (Real % var.) 2012 2013 2014 35.5 Gross capital formation 15,6 10,0-1,0 29.1 National government -16,5 11,0 18,1 Regional governments 38,2 4,5-17,0 15.9 22.8 18.0 20.1 Local governments 39,8 12,3-5,8 15.6 10.0-1.0-8.3 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 23

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1T.11 2T.11 3T.11 4T.11 1T.12 2T.12 3T.12 4T.12 1T.13 2T.13 3T.13 4T.13 1T.14 2T.14 3T.14 4T.14 Compared to the average price of 2012, export prices dropped 12,4 percent in 2014. However, they still remain above the 10-year average 160 140 120 Prices Cummulative percentage variation 2000-2011 2012-2014 Copper US$/lb. 461.1-15.5 Gold US$/oz.tr. 462.2-26.9 Silver US$/oz.tr. 569.7-45.9 Zinc US$/lb. 103.8 13.5 EXPORT PRICE INDEX (2007=100) Average 2012: 140.5 100 Average 2014: 123.1 80 60 Average (2001 2010): 73.9 40 20 24

Higher GDP growth in 2015 would be associated with a recovery of private investment and exports. Gross Domestic Product (Real % change) 2014 2015* 2016* Private spending 1,8 3,9 5,0 Private consumption 4,1 4,4 4,8 Private fixed investment -1,6 1,6 5,1 Public spending 3,0 6,0 8,2 public consumption 6,4 5,7 6,1 Public investment -3,6 6,5 12,6 Exports -0,3 3,0 3,0 Imports -1,4 2,1 6,0 GDP 2,4 4,4-4,8 5,5-6,0 *Forecast 25

Peru s growth expectation is one of the highest in the region, whereas inflation is expected to be the lowest GDP: 2015 (yoy % var) Inflation: 2015 (percentage) Bolivia 4,6 Peru 2,7 Peru 4,4 Chile 2,7 Paraguay 4,2 Mexico 3,2 Colombia 3,7 Colombia 3,3 Uruguay 3,3 Ecuador 3,5 Mexico 3,0 Paraguay 3,8 Ecuador 2,7 Bolivia 5,3 Chile 2,7 Brazil 7,0 Brazil -0,3 Uruguay 7,5 Argentina -0,3 Argentina 22,6 Venezuela -5,3 Venezuela 93,9 Source: Latin American Consensus Forecast (February 2015). 22

J.11 F M A M J J A S O N D J.12 F M A M J J A S O N D J.13 F M A M J J A S O N D J.14 F M A M J J A S O N D Investor confidence also remains in the optimistic region. 80 Investor Confidence 75 70 + 65 60 58 55 50 45 40-35 Source: Apoyo Consultoría 24

Recovery in currency growth rates due to higher purchases of mass consumption products and smaller firms 20,0 Currency in Circulation (YoY % Var.) 18,0 16,0 14,0 12,0 10,0 8,0 10,1 9,4 8,8 9,0 7,5 7,4 7,6 8,4 11,3 10,4 9,9 10,7 11,7 6,0 4,0 2,0 0,0 28

Production of electricity showed a steady growth rate throughout the year 9,0 Production of Electricity: 2012 2015 (YoY % var.) 8,0 7,0 6,0 5,0 5.1 5.2 5.3 5.1 4.8 5.2 5.2 4.8 4.7 5.0 5,0 4,0 3.3 3,0 2,0 1,0 0,0 J.12 F M A M J J A S O N D J.13 F M A M J J A S O N D J.14 F M A M J J A S O N D J.15* F M* * Preliminary Source: COES 29

Announced private investment projects amount to US$ 67.6 billion PRIVATE INVESTMENT PROJECT STOCK (Billion of US$) 67.5 67.6 CONCESSIONS (Million of US$) 10.0 37.9 3.8 1.5 2010 2010 Set. 2013 2013 Set. 2014 2014 Set. 2010 2013 2014 30

The onset of new mining projects will contribute to improve in the trade balance in the coming years 0,3 Trade Balance: 2011-2016 (Billion of US$) CURRENT ACCOUNT AND LONG-TERM EXTERNAL FINANCING OF THE PRIVATE SECTOR: 2005-2014 1/ (Percentage of GDP) 9,5 6,9 5,8 5,0-0,9 *Forecast -1,5-1,4 2013 2014 2015* 2016* -4,5-4,1-3,7-3,1 2013 2014 2015* 2016* Current Account Long-term financing of the private sector 1/ Includes net foreign investment, portfolio investment and private sector's long-term disbursement. *Forecast 31

Non-Financial Public Sector Balance and Gross non-financial public sector debt Non-Financial Public Sector Balance (percentage of GDP) GROSS NON-FINANCIAL PUBLIC SECTOR DEBT STOCK (percentage of GDP) 0,9 19,7 19,6 19,6-0,1 19,3-2,0-2,0 2013 2014 2015* 2016* * Forecast 2013 2014 2015* 2016* * Forecast 32

Agenda 1. Peru s growth is based on strong fundamentals 2. Recent economic developments and prospects 3. Policy Framework 33

The Central Bank of Peru lowered its monetary policy interest rate 4 times since November 2013 Monetary policy and real interest rate (As Percentage) % % 34

ene-09 mar-09 may-09 jul-09 sep-09 nov-09 ene-10 mar-10 may-10 jul-10 sep-10 nov-10 ene-11 mar-11 may-11 jul-11 sep-11 nov-11 ene-12 mar-12 may-12 jul-12 sep-12 nov-12 ene-13 mar-13 may-13 jul-13 sep-13 nov-13 ene-14 mar-14 may-14 jul-14 sep-14 nov-14 ene-15 mar-15** Macro-prudential measures aim at securing sustainable credit growth and contributing to de-dollarization % 35,0 30,0 25,0 Domestic currency reserve requirement rate (As percentage Tasa of total de encaje obligations en moneda subject to nacional reserve requirements) Encaje Marginal en MN Encaje Medio en MN (Como porcentaje de las obligaciones sujetas al encaje) 20,0 16,0 15,0 10,0 8,0 5,0 0,0 ** Proyectado Marginal rate Average rate Liquidity injection by reducing the rate of reserve requirements in domestic currency (Millions of S/.) Month Liquidity Jun-13 480 Aug-13 567 Sep-13 2 026 Oct-13 1 064 Dec-13 1 086 Jan-14 1 091 Feb-14 1 086 Mar-14 533 Apr-14 540 Jul-14 543 Sep-14 562 Oct-14 561 Nov-14 349 Dec-14 555 Jan-15 565 Feb-15 576 Mar-15 572 Total 12 756 35

ene-09 mar-09 may-09 jul-09 sep-09 nov-09 ene-10 mar-10 may-10 jul-10 sep-10 nov-10 ene-11 mar-11 may-11 jul-11 sep-11 nov-11 ene-12 mar-12 may-12 jul-12 sep-12 nov-12 ene-13 mar-13 may-13 jul-13 sep-13 nov-13 ene-14 mar-14 may-14 jul-14 sep-14 nov-14 ene-15 mar-15** Macro-prudential measures aim at securing sustainable credit growth and contributing to de-dollarization % 80,0 70,0 Foreign currency reserve requirement rate (As (Como percentage porcentaje of total de las obligations obligaciones subject sujetas to al reserve encaje) requirements) Encaje Marginal Marginal rate en ME Tasa de encaje en moneda extranjera 70,0 60,0 Encaje Average Medio rateen ME 60,0 50,0 50,0 40,0 45,4 30,0 20,0 10,0 0,0 ** Proyectado 36

Higher preference for credit in domestic currency since the second quarter of 2013 Credit to the private sector (yoy % var) Credit growth rates Jan.15 / Jan.14 Domestic Currency Foreign Currency Dollarization (%) Domestic Currency December 2013 January 2014 22.3 18.5 Foreign Currency 2.1-0.7 Total 12.9 10.4 1. Credit to enterprises 20.5-0.1 48.7 2. Credit to households 16.3-3.5 20.1 a.consumer loans 13.0 0.8 9.6 Car loans 38.7-5.0 68.2 Credit cards 16.1 4.8 6.7 Other loans 10.8 5.0 6.0 b. Mortgage loans 22.9-5.0 34.0 Total 18.6-0.7 37.9 30,0 25,0 Soles Dollars Total CREDIT TO THE PRIVATE SECTOR (YoY % var) 20,0 18,5 15,0 10,0 10,4 5,0 0,0-5,0-0,7 37

fev/11 abr/11 jun/11 ago/11 out/11 dez/11 fev/12 abr/12 jun/12 ago/12 out/12 dez/12 fev/13 abr/13 jun/13 ago/13 out/13 dez/13 fev/14 abr/14 jun/14 ago/14 out/14 dez/14 Long term interest rates are consistent with recent developments in the world economy and with macroeconomic fundamentals. Yield (%) Mar.15 - Dec. 13 Country Dec. 13 Mar.15 (in bps) Policy Rate Brazil 2023 13,21 13,23 2 12,25 Colombia 2024 6,79 6,91 12 4,50 Mexico 2023 6,53 6,14-39 3,00 Peru 2023 5,60 5,55-5 3,25 Yield (%) 13,8 10 year Sovereign Bond Yield 12,8 Brazil 11,8 10,8 9,8 8,8 Tapering announcement Tapering begins 7,8 6,8 5,8 4,8 Colombia Mexico Peru 3,8 Source: Bloomberg 38

Non-resident agents have reduced their holdings of domestic bonds, but bond yields have not increased 39

Inflation returned to the inflation target range in February 7 Inflation: February 2015 (YoY % var.) INFLATION AND INFLATION TARGET (yoy % var) Average inflation 2001 2014 6 5 Inflation 2.77 Inflation excluding food and energy 2.45 Inflation 2.6 Inflation excluding food and energy 2.0 4 3 2 1 Inflation Inflation excluding food and energy Maximum Inflation target range Minimum 0-1 -2 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 40

Peru s fundamentals and economic outlook Julio Velarde Governor Central Bank of Peru March 2015