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Peru: positive economic outlook

Country Report

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Peru is witnessing a recovery of economic growth, largely driven by increased mining production. Despite a widened twin deficit, prospects are positive. 

Strengths (+) and weaknesses (-)

(+) Sound fiscal position and economic management

Public debt remains low and the government maintains a reliable fiscal policy framework that will ensure the gradual narrowing of its deficits over the coming years.

(+) Potential for structural economic growth in the medium term

The economy has grown rapidly in the past decade and is likely to continue its growth path as high investment and savings ratio’s (one of the highest in the region) are supporting investment.

(-) Relatively high level of poverty and inequality

Despite a continued decline in the poverty levels, in 2015 21.8% of the population lived below the national poverty line. Regional inequality remains profound: poverty in rural areas is 3 times higher than in urban ones. Given such high social inequality, risk of increasing social tensions remains present.

(-) Partially dollarized economy

Despite the current de-dollarization efforts, the economy remains susceptible to exchange rate shocks. Furthermore, a substantial part of government debt is denominated in USD.

Key developments

1. Economic growth is picking up its pace

After a quick slowdown of GDP growth in Peru in 2014 due to the drop in commodity prices, economic activity slightly recovered in 2015 despite sluggish external conditions. A stronger recovery in 2015 was hampered by a decline in public investment after regional and local elections, and a delayed fishing season for anchovies due to the effects of the El Niño weather phenomenon. A planned rebound in public investments (large infrastructure projects), an increase in mining production volume (above all copper, iron ore, silver and gold) and capacity will boost economic growth in the next years (Figure 1). Growth is also supported by recovery in the fishing industry and associated manufacturing (mainly fishmeal production of anchovies). Although we do not expect growth figures exceeding levels seen before 2014 (more than 5,5% annually), Peru is likely to remain one of the fastest growing economies in the region.

Figure 1: Economic growth recovers
Figure 1: Economic growth recoversSource: EIU
Figure 2: Twin deficit widened
Figure 2: Twin deficit widenedSource: EIU

2. Positive economic outlook with new government

The neo-liberal Pedro Pablo Kuczynski, of the centre-right Peruanos Por el Kambio (PPK), was elected as president in the second round of the presidential elections held 5 June 2016, with a narrow victory (50.1% of the votes cast) against Keiko Fujimori (49.9%). Peru’s new government has taken office on 28 July. Kuczynski is an economist who aims to revive Peru’s economy mainly by increasing public investment, with the focus on road infrastructure in order to narrow Peru’s large infrastructure gap and support economic growth in the long term. His agenda to boost economic growth and further tackle poverty builds on past achievements. He assured to maintain the investor-friendly economic and investment policies that have been in place for over two decades. In addition, he vowed that he will continue to expand the so-called public-private-partnerships (PPP’s) into new segments, such as education and healthcare. The government and private sector are already collaborating on several transportation and energy projects. There will be continuing effort to support regional trade integration, such as the Pacific Alliance with Chile, Mexico and Colombia, and negotiate several bilateral free-trade agreements, mainly with Asian countries. Kuczynski will face challenges to push his political agenda, as Fujimori’s Popular Force party has a majority in congress (73 seats of 130 against the 18 seats of PPK). Yet, the economic programs of Fujimori and Kuczynski show many similarities, and Kuczynski has chosen a group of capable technocrats as members of his first cabinet, which makes it more likely that agreements will be achieved. Furthermore, social unrest related to protests against large mining projects remains a continuous challenge for the government.

3. Twin deficit widened, but current account deficit will likely recover

Despite the depreciation of the sol and an increase in mineral export volumes, the current account deficit has deteriorated to 4.1% of GDP in 2015 mainly due to a volatile external environment, and a drop in metal prices. Yet, the current account deficit was almost fully financed by foreign direct investments and is projected to decrease in the next years as mining production and export will increase. The government deficit has increased to 2.1% in 2015 as a result of loss of revenue from reduced tax rates and lower commodity prices. The fiscal deficit is expected to widen further under the new administration coming years as it aims to increase public investment. However, with Peru’s sound fiscal policy framework the fiscal deficit will likely narrow in the longer run.

4. Development of the food and agricultural sector

Peru has one of the most liberal trade regimes in the world, but Peru’s total trade is, despite strong progresses, low compared to other similar-income countries (total export of 21% of GDP in 2015 and an import of 23% of GDP in 2015), because of a large infrastructure gap and a narrow export diversification. Peru’s main export product are minerals and metals and their products, fish (mainly anchovies) and fishmeal and fish oil. These products account for more than 50% of total export in 2015. In terms of food and agricultural export, Peru is a net-exporter with a diversified basket. Other important exports products groups are fruits and nuts (approximately 15% of total food and agricultural export), vegetables, quinoa (more recently), and coffee, tea, cocoa and spices. The non-traditional exports have developed stronger than the traditional, as fruits and nuts (grapes, avocado, citrus and blueberries) was the fastest growing export category in 2015, followed by vegetables (asparagus and paprika) and quinoa. The export of coffee, tea, cocoa and spices (traditional exports) has declined, due to a lack of investment and infrastructure restrictions, but is expected to grow in the coming years. Furthermore, fishery was delayed by the el Niño weather phenomenon, but has recovered recently. Peru is strongly developing organic and speciality crops, such as quinoa and blueberries. The plans of the new government to improve infrastructure create opportunities for Peru to expand agricultural production. Furthermore, Peru continues to irrigate uncultivated land in order to enlarge the agricultural frontier, which the government has started in 1990. Three major irrigation schemes are currently under development. On the food and agricultural import side, Peru mainly imports cereals, consisting of particularly rice, corn and wheat, followed by vegetable oils and dairy products. As a result of the depreciation of the Argentine peso, Peru has benefited from cheaper food imports as Peru imports a large share of grains from Argentina.

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 the past decade Peru has become one of the fastest growing economies in Latin America. Both investment and consumption have grown rapidly, driven by strong commodity exports and appropriate economic policies. Despite a recent slump in GDP growth, investment in new mining projects is likely to continue supporting growth in the coming years. 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 rapid improvement realised in recent years. The macroeconomic position of Peru is relatively strong. Public debt is low and the fiscal deficit is manageable. 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 (32% of credit to the private sector in August 2016), even though it has substantially declined in recent years. Also, Peru primarily exports commodities, which makes the economy vulnerable to external 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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