RaboResearch - Economic Research

Country Report Peru

Country Report


Economic growth has slowed down strongly in the first half of this year, but is likely to pick-up in the second half of 2014 and afterwards. Meanwhile, the well-regarded Finance Minister Luis Miguel Castilla was replaced in September 2014.  

Strengths (+) and weaknesses (-)

(+)      Sound fiscal position and economic management

Public debt is low and the government has a fiscal surplus. Both are partially thanks to the establishment of the Fiscal Responsibility and Transparency Law.

(+)      High structural growth rate in the medium term

The economy has grown rapidly and is likely to continue to do so, as investment growth is expected to remain high.

(-)       Relatively high level of poverty and inequality

Despite a strong decline in the number of poor in recent years, 23.9% of the population lived below the national poverty line in 2013. Partially as a result, social tensions are high.

(-)       Partially dollarized economy

The financial sector is partially dollarized, which makes the economy vulnerable to exchange rate shocks. Furthermore, a substantial part of government debt is in denominated in USD.

Key developments

1. Growth slows down quickly

GDP growth in Peru has slowed down quickly in the first half of 2014. After four years of above 5.5% growth per year, economic growth fell to 0.3% y-o-y in June 2014, the lowest rate since 2009. The weakness seems to be related to several factors. First, mining exports have fallen. This was caused by disappointing production levels at new mines and efforts to regularise illegal gold production, which had a negative impact on gold production. Weaker external conditions, reflected by a decline of gold and copper prices, also played an important role. Second, mining investment declined, as some large-scale mining projects have been almost completed. Third, manufacturing and construction sector data have also been relatively weak recently.

Growth picked up somewhat to 1.2% y-o-y in July and in the rest of the second half of 2014 economic growth is likely to gain further strength. First, mining production is likely to increase in the remaining part of the year. Second, a recently launched fiscal stimulus program of 0.3% of GDP will also boost economic growth. As a result, the economy may still grow by about 4% in 2014 as a whole. Growth in the following years will be boosted by new mining project that will be brought into production. In addition, public investment is targeted to increase to 7% of GDP in 2017, particularly in the form of infrastructure investment, such as the construction of new metro lines in Lima. While infrastructure should boost the growth potential of the country, Peru needs to diversify its economy in order to be able to continue the economic development of the country in the longer-run.

2. Minister of finance steps down ruling party loses support in congress

In September 2014, Finance Minister Luis Miguel Castilla stepped down to be replaced by Alonso Segura, who used to be chief of staff at the finance ministry. Castilla indicated that he stepped down strictly for personal reasons, although we note that criticism on the government grew due to the economic slowdown in the first half of 2014. Castilla was widely considered to be the most powerful minister within president Humala’s government and was able to implement important mining, tax and capital markets reforms. Segura is a well-respected economist and has a lot of experience in policy making and it seems unlikely that he will radically alter Peru’s orthodox macroeconomic policies. Segura has stated that his first priority is jump-starting economic growth after the slowdown in the first half of 2014. The fact that six cabinet reshuffles have taken place since the Humala government was appointed in July 2011 and that Castilla was the last serving main minister of the original Humala cabinet illustrates the volatile nature of Peru’s political scene.

Meanwhile, Humala’s party Gana Peru (GP) lost 7 of its congress members after a bitter internal fight over the selection of a new president of congress. When Humala indicated that he wanted Ana María Solórzano to become the next president of congress, 22 members of GP strongly criticized her nomination, as Solórzano was considered to be too close to Humala’s wife Nadine Heredia, who is a very controversial figure in the Peruvian political scene. They wanted the vice-president of congress Marisol Espinoza Cruz to become president of congress. When it became clear that Solórzano remained the GP candidate, 7 members left the GP, leaving it with only 36 out of 130 congress members. This has left the government even more reliant on support of Peru Posible (PP), the party of former president Alejandro Toledo. Given that Humala is rather unpopular, the PP may not want to align itself too closely with the government. This may constrain the ability of the government to introduce new reforms. However, given the high level of political apathy on the street, the developments in congress are unlikely to lead to deeper political instability. 

Figure 1: Growth performance
Figure 1: Growth performanceSource: EIU
Figure 2: Current account
Figure 2: Current accountSource: EIU


3. Current account deficit widens, despite growth slowdown

Peru’s current account deficit is likely to continue to widen in 2014, even as economic growth is slowing down. This is partially related to relatively weak mining production and lower commodity prices. As several mining projects will come into production in the near term, the current account balance is likely to improve. While the current account deficit is no longer fully matched by foreign direct investment (FDI) inflows, FDI continues to cover most of the deficit. As the country has a large stock of foreign exchange reserves, overall balance of payments risk remains relatively modest. . 

Factsheet of Peru
Factsheet of PeruSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Peru has a turbulent macroeconomic and political history. In the late 1980s, Peru suffered a deep economic crisis and experienced hyperinflation. Furthermore, there was a guerrilla war between the government and the Maoist Shining Path in the 1980s and 1990s. In recent years, Peru has become one of the fastest growing economies in Latin America. Both investment and consumption have grown rapidly and strong investment in new metals mining projects is likely to continue to support growth in the years ahead. However, some mining projects remain highly controversial and face public opposition. This is partially related to Peru’s high level of (income) inequality, which has both a geographical and an ethnic character. The number of people that have an income below the national poverty line remains substantial, in spite of a rapid improvement in recent years. The macroeconomic position of Peru is relatively strong. Public debt is very low and the government posted fiscal surpluses in recent years, partially thanks to the Fiscal Responsibility and Transparency Law, which sets a deficit target of 1% of GDP and put constraints on increases of real expenditure and debt for the non-financial public sector. Balance of payments risk is limited in spite of a sizeable current account deficit, as this deficit is still almost fully covered by FDI inflows. The country has a large stock of foreign exchange reserves. However, the level of dollarization of the economy remains substantial (50% of bank deposits in 2013), even as it has declined in recent years. Also, Peru primarily exports primary products. This makes the economy vulnerable to commodity price shocks. More diversification of the economy is needed to allow the economic and social development of the country to continue in the long term.   

Economic indicators of Peru
Economic indicators of PeruSource: EIU



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