Peru Central Bank Statement

Author: IFLR Correspondent | Published: 24 Sep 2019
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Over the last two decades, Peru's GDP has grown at an average annual rate of 5%, among the highest in Latin America and above the average for emerging economies. The Peruvian economy has experienced 20 years of continuous expansion, the longest since the turn of the 20th century (1895-1921). In 2018 growth accelerated to 4% from 2.5% in 2017. Inflation has been low and stable. In this century, since the adoption of the inflation targeting regime, average annual inflation has been 2.6%.

Peru and the other economies in the region face a challenging external environment characterised by a moderation in global growth, associated with US-China trade tensions and lower commodity prices. However, risks are contained, as the central banks of developed economies, particularly the UF Federal Reserve, are unwinding monetary stimulus more gradually in a context of lower inflationary pressures. Peruvian macroeconomic fundamentals also remain strong.

In the first quarter of 2019, Peru's growth rate was 2.3%, lower than in the last quarter of 2018 (4.8%). Indicators of primary economic activity show a negative performance as a consequence of transitory supply shocks (mining and fishing). Non-primary activities show signs of moderation, mainly resulting from a deceleration in public investment (due to the entry of new subnational authorities at the beginning of 2019), although this performance is expected to be reversed in the second half of the year.

Considering these developments and the international environment, growth forecasts for 2019 and 2020 are 3.4% and 4.0%, respectively (potential growth is estimated at 3.6%). The Central Reserve Bank of Peru (BCRP) maintains an expansionary stance, consistent with inflation expectations anchored to the target range, a negative output gap, and moderate imported inflation. As of June 2019, year-on-year inflation stood at 2.3%, with inflation expectations at a similar level. Both variables are expected to remain around the midpoint of the target range, as the output gap is expected to close and imported inflation will be contained.

Peru's strong macroeconomic fundamentals reinforce resilience against adverse external shocks. Peru's external position is strong, with a relatively small current account deficit (1.6% of GDP in 2018), stable long-term financing, and foreign reserves at around 30% of GDP, the highest among the six largest Latin American economies. Moreover, Peru's foreign reserves are four times the balance of short-term external debt.

Regarding fiscal accounts, the expected deficit reduction will likely increase national savings. Peru is the only one among the six largest Latin American economies whose risk rating and outlook have not changed in recent years. Additionally, Peru's gross and net public debt were 26% and 11% of GDP in 2018, respectively.

In recent years the BCRP has been implementing additional macro-prudential measures to promote the de-dollarization of credit to the private sector; dollarization declined from 80% at end-2000 to around 28% as of May 2019. This has considerably reduced vulnerability and enhanced financial resilience in the face of eventual external shocks and greater global uncertainty.