Peru

Resilience amid political uncertainty

BB1

LOW RISK

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

GDP USD222.04bn (World ranking 50, World Bank 2018)
Population 31.389mn (World ranking 43, World Bank 2018)
Form of state Constitutional Republic
Head of Government Martín Vizcarra (President)
Next elections 2021, presidential and legislative
  • Natural resource rich (minerals: copper, silver, gold, zinc, energy, and fishing)
  • Agile macroeconomic policies, independent central bank
  • Low public debt
  • Strong FX reserve position and low external debt
  • Among Latin American countries, third best-ranked in in the 2016 World Bank’s Doing Business Survey
  • Vulnerability to climatic phenomena
  • Strong dependence on Chinese demand and commodity exports
  • Highly skewed income distribution and high, though shrinking poverty levels
  • Dollarization of the financial system
  • Rule of Law and control of corruption are below regional average

Outperforming regional peers despite political uncertainty


On 30 September 2019, President Vizcarra dissolved the parliament and called for early elections on 26 January 2020. The result of the elections shows no clear majority but the main opposition party (Popular Force) drastically weakened its position (from 72 seats to 12), increasing the President’s room of manoeuver. In addition, an enhanced presence of the centrist opposition party (Popular Action) could be in Vizcarra’s favor. Therefore, if the President is able to contend with this fragmented Congress, he will be able to push through a business-friendly program (mainly anti-corruption, social justice and infrastructure development reforms).

GDP growth is expected to have slowed in 2019 to +2.2% from +4% in 2018, as primary sectors (mining, fishing…) were drags, yet this remains well above most regional peers. 

After disappointing growth in in 2017 (+2.5%), Peru managed to attract significant investment flows and sustain high private consumption growth in 2018 despite political uncertainty. This resulted in the country growing +4%, ranking among the best performers in the region. Going forward, elections should provide some stability for companies at least until the next presidential elections in 2021. 

 

Low imbalances and sizable policy leeway

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.

 

No significant business environment risk

Peru’s business environment risk is good overall, as the country ranked 76th out of 190 countries in the 2020 World Bank Doing Business Survey. Yet it has lost twenty ranks since 2017, and lost 3 ranks in the Latin American region (now ranks 6th). While registering property (55th), dealing with construction permits (65th), getting credit (37th) and protecting investors (45th) are particularly positive, important shortcomings remain regarding the ease of starting a business, paying taxes and trading across borders. Rule of law and control of corruption are also important areas of concern.

 

Trade structure by destination/origin

(% of total)

Exports Rank Imports
China 23%
1
22% China
United States 14%
2
21% United States
Canada 7%
3
5% Brazil
Switzerland 7%
4
5% Mexico
Brazil 4%
5
5% Chile

Trade structure by product

(% of total)

Exports Rank Imports
Non Ferrous Ores 29%
1
6% Refined Petroleum Products
Non-monetary Gold 15%
2
5% Cars and Cycles
Other Edible Agricultural Prod 11%
3
5% Plastic Articles
Non Ferrous Metals 9%
4
5% Telecommunications Equipment
Refined Petroleum Products 5%
5
5% Crude Oil

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Country Risk Analyst:

       Daniela Ordóñez, Laura Mesbahi

                 daniela.ordonez@eulerhermes.com      

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