PERU

Medium-term GDP growth and GDP per capita have been supported by high commodity prices, but also underpinned by prudent macroeconomic policies. Annual growth over the past 10 years averaged +5.5%. While this contributed to a reduction in poverty levels, incomes remain highly skewed geographically as well as across income groups. Despite a low unemployment rate (6.7%), urban-rural inequalities remain and some mining and oil projects face violent opposition.  The country is highly sensitive to commodity prices and their fall in 2014-2015 triggered a sharp slowdown in exports and investments. Peru’s economy is also highly vulnerable to the El Niño and La Niña climate phenomenon. Public accounts are sound, thanks to a fiscal rule framework, while public and external-debt ratios are low/moderate. FX reserves are high (covering more than 15 months of imports) and key external liquidity indicators strong. The policy mix is healthy and effective. External vulnerability is low, as external debt is only 33% of GDP, while the current account (-2.4% of GDP) is largely financed by Foreign Direct Investment.

After bottoming out in March 2018 (+0.4%), inflation has gone back to the central bank’s target (+2% +/- 1pp) and stood at +1.9% in November 2019. After two rate cuts in 2019 (from 2.75% to 2.25%), we still see room for an additional cut in the policy rate, given lower than expected economic activity, low inflationary pressures and the worldwide dovish momentum. Fiscal leeway remains as well, as Peru’s public finances remain sound, with a low fiscal deficit (-1.5% of GDP) and debt-to-GDP ratio (27% of GDP). The Vizcarra administration indeed implemented measures to ‘rebuild fiscal buffers’. The new target is to reach a primary fiscal balance by 2021.