Growth dragged down by El Niño

After having grown by a strong +3.9% in 2016, Peru’s economic outlook has darkened in the aftermath of the Coastal El Niño phenomenon, which resulted in devastating floods and landslides during the rainy season. The government estimates that reconstruction efforts could cost up to USD9bn, since the natural disaster has devastated the country’s infrastructures and left hundreds of thousands of Peruvians homeless. Negative impacts are already seen in shrinking copper production while business confidence declined in March but recovered since. Base effects in the mining sector are also weighing on the investment dynamism, in a context of subdued commodity prices. Exports, of which more than a half comes from mining, will contribute to a lesser extent to economic growth. Yet brighter global demand will keep export growth on a stable footing. Finally, the corruption scandal involving Brazilian construction firm Odebrecht raised massive protests and delayed large infrastructure projects. Public and private consumption will however maintain growth resilience at +2.8% in 2017 – outperforming the Latin American average stands of +1.2% but far below the 2010-2015 average of +5.4% per year.

External risks remain low

The current account deficit should reach 2.8% in 2017 and remain rather stable thanks to the gradual recovery in commodity prices. Strong macroeconomic fundamentals and responsible management also guarantee the financing of this deficit. Peru still enjoys investor confidence and more than comfortable FX reserves levels (almost 20 months of imports). The external debt will increase temporarily in 2017 to 51.3% of GDP before softening next year to 47.5%. Fed tightening monetary policy is likely to trigger a depreciating trend for the PEN, but the impact on financial stability will be limited since the process of credit de-dollarization has well advanced.