Press Release No. 15/240

Press Release No.15/240
May 27, 2015

On May 20, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Peru.¹

Peru remains one of the best performing economies in Latin America, with solid macroeconomic policies and fundamentals and visible gains in poverty reduction. However, like most of the region, Peru faced a challenging external environment in 2014. Lower metal prices and weaker demand from trading partners were a major drag on private investment and exports. On the domestic front, an unexpected drop in subnational public investment level and temporary supply disruptions in mining, fishing, and agriculture compounded external shocks. Against this background, real GDP growth slowed to 2.4 percent in 2014, from 5.8 percent a year earlier. Headline inflation closed the year slightly above the upper band of the central bank’s target range due to supply shocks, but expectations remained well anchored. The high external current account deficit declined slightly despite lower commodity prices and sluggish external demand.

A strong policy framework and solid fundamentals allowed the authorities to loosen the macroeconomic policy stance. The authorities embarked on a series of fiscal and structural packages, including tax cuts, increases in fiscal spending, and structural measures to support investment, consumption, and growth. Monetary conditions were also eased against a widening negative output gap and stable inflation expectations, helping to lower lending rates and providing support to credit to the private sector. New de-dollarization measures were launched at the end of 2014.

Real GDP is projected to expand at about 3.75 percent this year, contingent on the reversal of last year’s supply shocks and policy stimulus. Growth is expected to rise in 2016−17, assuming new mines come on stream, large infrastructure projects are implemented, and terms of trade shocks fade, with the output gap closing by 2018. Inflation is projected to converge towards the mid-point of the target range by end-2015, and the current account deficit will narrow gradually over the medium term as mining exports gain ground. Important risks loom on the horizon, but ample buffers place Peru in a comfortable position to respond to future shocks.

Executive Board Assessment²

Executive Director commended the authorities for the country’s solid macroeconomic policies and fundamentals and visible gains in poverty reduction, which have made Peru one of the best performing economies in Latin America. While noting that risks to the outlook are tilted to the downside, Directors considered that Peru is in a comfortable position to respond to shocks, given the ample buffers in place. They concurred that if negative shocks materialize, exchange rate flexibility should be the main line of defense, and liquidity could be provided to avoid an undue contraction in credit, while acknowledging that Peru’s dollarized economy increases the risks from exchange rate volatility. Looking ahead, Directors encouraged the authorities to continue to implement ambitious structural reforms to sustain inclusive growth and diversify the economy, including through further de-dollarization.

Directors agreed that the 2015 fiscal stimulus was timely, and concurred that the immediate priority is executing the existing package with a focus on boosting investment, rather than developing new measures. Directors welcomed the authorities’ intention to gradually withdraw the stimulus from 2016. They encouraged the authorities to implement careful expenditure management and revenue mobilization to return to the original fiscal path by 2018. Directors emphasized that hikes in non-priority current spending should be avoided, given the need to finance structural reforms, carry through the civil service reform, increase allocations for physical and human capital investment, and protect social programs. They agreed that, over the medium term, targeting a small structural fiscal surplus would be advisable to preserve buffers. Continued strong political commitment remains essential to maintain the credibility of the new fiscal framework.

Directors supported the accommodative monetary policy stance that has kept inflation expectations well anchored. Looking ahead, they concurred that monetary policy should remain responsive to inflation expectations and external developments, while limited foreign exchange rate intervention could be necessary to smooth excessive volatility in a still highly dollarized economy.

Directors welcomed the new de-dollarization measures. They agreed that strengthening prudential requirements on dollar lending and encouraging the private sector to hedge its foreign currency exposure could further support the de-dollarization process, along with deepening financial and capital markets. Directors supported enhancing data collection and analysis of corporate and household balance sheets to better assess risks from currency mismatches.

Directors observed that the financial system remains stable, although the recent deterioration in the quality of the loan portfolio of non-bank financial institutions warrants close monitoring and supervision. A more effective use of existing programs to support small and medium-sized enterprises could help mitigate the impact of the growth slowdown.

Directors underscored the importance of steadfast implementation of structural reforms to boost potential growth and foster social inclusion. They welcomed the authorities’ priority on streamlining legal requirements and red tape. Directors concurred on the need to pursue ambitious education reform and inclusion polices within the framework of fiscal discipline.

Peru: Selected Economic Indicators
					Prel.	Projections
	2010	2011	2012	2013	2014	2015	2016
Social Indicators
Life expectancy at birth (years)	73.9	74.2	74.5	...	…	…	...
Infant mortality (per thousand live births)	15.2	14.3	13.6	12.9	…	…	...
Adult literacy rate	89.6	...	93.8	...	…	…	...
Poverty rate (total)	30.8	27.8	25.8	23.9	22.7	…	...
Unemployment rate	7.9	7.7	6.8	5.9	5.9	...	...
	(Annual percentage change; unless otherwise indicated)
Production and prices
Real GDP	8.5	6.5	6.0	5.8	2.4	3.8	5.0
Real domestic demand	14.9	7.7	7.4	7.4	2.0	3.8	4.2
Consumer Prices (end of period)	2.1	4.7	2.6	2.9	3.2	2.2	2.0
Consumer Prices (period average)	1.5	3.4	3.7	2.8	3.2	2.5	2.0
External sector
Exports	32.3	29.5	2.2	-9.6	-7.8	-9.9	7.9
Imports	37.1	28.9	10.7	2.7	-3.4	-5.6	5.7
Terms of trade (deterioration -)	21.0	7.3	-2.1	-5.7	-5.4	-4.5	-0.8
Real effective exchange rate (depreciation -)	2.1	-1.4	8.1	-0.2	-1.5	...	...
Money and credit 1/ 2/
Broad money	21.7	15.1	12.1	14.8	8.4	13.6	13.5
Net credit to the private sector	16.7	21.6	13.3	18.4	13.5	13.6	13.5
	(In percent of GDP; unless otherwise indicated)
Public sector
NFPS Revenue	26.0	27.2	27.6	27.8	27.5	25.9	26.1
NFPS Primary Expenditure	25.0	23.9	24.3	25.8	26.6	26.8	26.7
NFPS Primary Balance	1.0	3.2	3.3	2.0	0.9	-0.9	-0.6
NFPS Overall Balance	-0.2	2.0	2.3	0.9	-0.2	-2.0	-1.7
External Sector
External current account balance	-2.4	-1.9	-2.7	-4.2	-4.0	-4.5	-4.2
Gross reserves
In millions of U.S. dollars	44,150	48,859	64,049	65,710	62,353	61,353	61,553
Percent of short-term external debt 3/	342	559	494	539	514	449	507
Percent of foreign currency deposits at banks	241	228	301	275	262	259	245
Debt
Total external debt	27.2	25.6	27.2	27.4	30.2	32.5	31.6
NFPS Gross debt (including Repayment Certificates)	25.4	23.0	21.2	20.3	20.7	21.5	22.3
External	13.2	11.4	9.8	8.8	8.7	8.8	8.8
Domestic	12.2	11.6	11.4	11.5	12.0	12.7	13.5
Savings and investment
Gross domestic investment	25.2	25.7	26.2	28.2	26.8	26.6	26.1
Public sector 4/	5.9	4.8	5.4	5.8	5.5	5.8	5.8
Private sector	19.2	19.2	20.4	20.8	20.3	19.9	19.7
National savings	22.8	23.9	23.5	24.0	22.8	22.1	21.9
Public sector 5/	6.3	7.4	8.0	7.1	5.6	4.0	4.4
Private sector	16.5	16.4	15.5	16.9	17.2	18.0	17.5
Memorandum items
Nominal GDP (S/. billions)	419.7	469.9	508.3	546.9	576.1	608.9	647.3
GDP per capita (in US$)	5,027	5,685	6,324	6,540	6,458	5,962	6,242
Sources: National Authorities; UNDP Human Development Indicators; and IMF staff estimates/projections.
1/ Corresponds to depository corporations.
2/ Foreign currency stocks are valued at end-of-period exchange rates.
3/ Short-term debt is defined on a residual maturity basis, and includes amortization of medium- and long-term debt.
4/ Includes Repayment Certificates (CRPAOs).
5/ Excludes privatization receipts.

Peru: Selected Economic Indicators             Prel. Projections   2010 2011 2012 2013 2014 2015 2016   Social Indicators               Life expectancy at birth (years) 73.9 74.2 74.5 ... … … ... Infant mortality (per thousand live births) 15.2 14.3 13.6 12.9 … … ... Adult literacy rate 89.6 ... 93.8 ... … … ... Poverty rate (total) 30.8 27.8 25.8 23.9 22.7 … ... Unemployment rate 7.9 7.7 6.8 5.9 5.9 ... ...   (Annual percentage change; unless otherwise indicated) Production and prices               Real GDP 8.5 6.5 6.0 5.8 2.4 3.8 5.0 Real domestic demand 14.9 7.7 7.4 7.4 2.0 3.8 4.2 Consumer Prices (end of period) 2.1 4.7 2.6 2.9 3.2 2.2 2.0 Consumer Prices (period average) 1.5 3.4 3.7 2.8 3.2 2.5 2.0 External sector               Exports 32.3 29.5 2.2 -9.6 -7.8 -9.9 7.9 Imports 37.1 28.9 10.7 2.7 -3.4 -5.6 5.7 Terms of trade (deterioration -) 21.0 7.3 -2.1 -5.7 -5.4 -4.5 -0.8 Real effective exchange rate (depreciation -) 2.1 -1.4 8.1 -0.2 -1.5 ... ... Money and credit 1/ 2/               Broad money 21.7 15.1 12.1 14.8 8.4 13.6 13.5 Net credit to the private sector 16.7 21.6 13.3 18.4 13.5 13.6 13.5   (In percent of GDP; unless otherwise indicated) Public sector               NFPS Revenue 26.0 27.2 27.6 27.8 27.5 25.9 26.1 NFPS Primary Expenditure 25.0 23.9 24.3 25.8 26.6 26.8 26.7 NFPS Primary Balance 1.0 3.2 3.3 2.0 0.9 -0.9 -0.6 NFPS Overall Balance -0.2 2.0 2.3 0.9 -0.2 -2.0 -1.7 External Sector               External current account balance -2.4 -1.9 -2.7 -4.2 -4.0 -4.5 -4.2 Gross reserves               In millions of U.S. dollars 44,150 48,859 64,049 65,710 62,353 61,353 61,553 Percent of short-term external debt 3/ 342 559 494 539 514 449 507 Percent of foreign currency deposits at banks 241 228 301 275 262 259 245 Debt               Total external debt 27.2 25.6 27.2 27.4 30.2 32.5 31.6 NFPS Gross debt (including Repayment Certificates) 25.4 23.0 21.2 20.3 20.7 21.5 22.3 External 13.2 11.4 9.8 8.8 8.7 8.8 8.8 Domestic 12.2 11.6 11.4 11.5 12.0 12.7 13.5 Savings and investment               Gross domestic investment 25.2 25.7 26.2 28.2 26.8 26.6 26.1 Public sector 4/ 5.9 4.8 5.4 5.8 5.5 5.8 5.8 Private sector 19.2 19.2 20.4 20.8 20.3 19.9 19.7 National savings 22.8 23.9 23.5 24.0 22.8 22.1 21.9 Public sector 5/ 6.3 7.4 8.0 7.1 5.6 4.0 4.4 Private sector 16.5 16.4 15.5 16.9 17.2 18.0 17.5 Memorandum items               Nominal GDP (S/. billions) 419.7 469.9 508.3 546.9 576.1 608.9 647.3 GDP per capita (in US$) 5,027 5,685 6,324 6,540 6,458 5,962 6,242                   Sources: National Authorities; UNDP Human Development Indicators; and IMF staff estimates/projections. 1/ Corresponds to depository corporations. 2/ Foreign currency stocks are valued at end-of-period exchange rates. 3/ Short-term debt is defined on a residual maturity basis, and includes amortization of medium- and long-term debt. 4/ Includes Repayment Certificates (CRPAOs). 5/ Excludes privatization receipts. 1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. 2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.