## cr17166

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### Odebrecht Corruption Case
- Investigations revealed that Odebrecht paid approximately $29 million in corrupt payments to government officials in Peru to secure public work contracts during 2005–2014.
- Peru’s judicial system continued investigations, resulting in the incarceration of former government officials and an extradition request for former President Toledo.
- Project-level impacts:
  - Projects related to Odebrecht and other Brazilian construction companies have stalled.
  - The Peruvian Southern Gas Pipeline registered no investment in 2017Q1, compared with $405 million spent in 2016Q1.
  - Authorities estimate associated project delays will reduce growth by about 0.3 p.p. in 2017.
- Financial sector exposures to Brazilian construction companies (and related domestic companies) are assessed as moderate.
- Government and institutional responses:
  - Pre-existing measures: October 2016 law “Civil Death” extending bans for corrupt public officials.
  - Early December 2016: government received and shortly after approved a subset of the Presidential Commission of Integrity’s recommendations (e.g., declaration of interests by high-ranking government officials; introduction of anticorruption clauses in contracts for large public projects).
  - Post-revelation measures: designation of a special investigative team focused solely on the Odebrecht investigation; barring any company that has admitted/been convicted of corruption from new bids on government projects; ringfencing assets of such companies in Peru to safeguard the State’s interests.
- Short-term outlook implications:
  - Project delays tied to the Odebrecht case are factored into staff estimates of a growth slowdown to 2.7 percent in 2017.
  - A bounceback in 2018–19 is projected as delayed projects are resumed, contributing to private investment recovery and supporting a return to potential growth by around 2020.
- Risks:
  - Domestic risks prominent: additional delays in executing investment projects (including those affected by Odebrecht) or larger-than-expected flood-related damages could further weigh on growth in 2017.
  - Financial sector exposure assessed as moderate, limiting direct systemic risk, though project and confidence channels remain material.

### Fiscal Policy Stance, Reconstruction Spending, and Medium-Term Framework
- Fiscal space and stimulus:
  - Past prudent fiscal policy and low net public debt provide ample fiscal space to address flood-related reconstruction needs.
  - Fiscal package of 1.3 percent of GDP in 2017 targeted at reconstruction needs and public investment.
  - Fiscal stimulus plan raises the deficit to 3½ percent in 2018 before starting a process of gradual consolidation.
  - Exemption to employers from healthcare contributions (nine percent of monthly wages) for hiring new young entrants.
  - Initiatives to support affordable housing developments and easing SMEs’ access to financing.
- Fiscal framework and targets:
  - New fiscal rule envisages gradual consolidation towards the 1 percent deficit target by 2021.
  - Plan to use assets such as those in the Fiscal Stabilization Fund to maintain public debt comfortably below the 30 percent of GDP ceiling.
  - NFPS debt rule (2016): Gross debt of the NFPS shall not exceed 30 percent of GDP; temporary deviations up to four percentage points of GDP in cases of financial volatility if other rules are met.
  - Fiscal deficit rule (2016): The annual deficit of the NFPS shall not exceed 1 percent of GDP; transitory provisions apply with target by 2021.
  - Expenditure rule (2016): Dual expenditure rule with ceilings based on the average 20 year growth of real GDP.
  - Regional/local government debt and expenditure rules and savings rule as specified under the 2016 framework.
- Implementation and institutional improvements:
  - With IMF TA, moving towards establishing a medium term budgetary framework (MTBF) with 3-year expenditure envelopes coordinated at the Cabinet level.
  - Staff cautioned that the predetermined adjustment path in the new framework, combined with potential fiscal revenue volatility, could add procyclicality to fiscal accounts.
  - Staff recommended publishing an annual comprehensive fiscal risks statement covering contingent liabilities and risks associated with investment plans.
- Fiscal aggregates and projections (selected):
  - NFPS revenue (percent of GDP): 28.3 (2012), 28.4 (2013), 28.0 (2014), 25.1 (2015), 23.2 (2016), 23.1 (2017), projections: 23.2 (2018), 23.4 (2019), 23.8 (2020), 23.8 (2021), 23.8 (2022).
  - NFPS overall balance (percent of GDP): 2.4 (2012), 0.9 (2013), -0.2 (2014), -2.0 (2015), -2.6 (2016), -3.0 (2017), projections: -3.5 (2018), -2.9 (2019), -1.9 (2020), -1.0 (2021), -1.0 (2022).
  - Public gross debt (percent of GDP): 21.6 (2012), 20.8 (2013), 20.7 (2014), 24.0 (2015), 24.4 (2016), 25.2 (2017), projections: 26.4 (2018), 27.0 (2019), 26.8 (2020), 26.3 (2021), 25.7 (2022).
  - SPNF non-commodity structural balance (Table 2): -1.8 (2012), -2.5 (2013), -2.9 (2014), -2.8 (2015), -2.8 (2016), -3.7 (2017), projections: -4.3 (2018), -3.8 (2019), -2.8 (2020), -2.0 (2021), -1.0 (2022).

### Monetary Policy, Exchange Rate, and Financial Stability
- Monetary and FX measures:
  - BCRP reduced reserve requirements several times since December 2016; marginal reserve requirement rate reduced from 70 to 44 percent for FX liabilities and from 6½ to 5 percent for domestic liabilities.
  - Policy rate was cut by 25 basis points in May 2017 (the first cut in 15 months).
  - Staff supported BCRP’s recent reduction of the policy rate given widening output gap, temporary weather-related price pressures, and core inflation within target.
  - Staff welcomed increased exchange rate flexibility and unwinding of BCRP’s FX intervention instruments (swaps); future interventions should be limited to disorderly market conditions.
- Financial system soundness (selected):
  - Banks account for 90 percent of the system’s assets (excluding pensions and insurance), exhibit high profitability and capitalization, and low nonperforming loan ratios.
  - BCRP and SBS stress tests indicate largest risks stem from decelerating economic growth and a large and sudden depreciation of the currency, though buffers appear sufficiently strong to withstand a stress scenario.
  - Joint probability of distress for the seven largest banks has declined since its peak in 2010 and remains at a low level.
- FX vulnerabilities and dedollarization:
  - System FX exposure (SBS estimate): 11.4 percent at end-2016 (considering collateral and hedging).
  - Dollarization indicators (selected series): FX liabilities % (of total liabilities): 49.4, 49.6, 48.4, 48.8, 48.5, 49.5, 49.2, 48.2, 46.9, 45.5, 44.7, 44.7; FX loans % (of total loans): 39.9, 39.7, 38.2, 36.4, 33.7, 31.2, 30.1, 28.6, 28.5, 29.4, 28.7, 28.7.
  - Policies that reduced credit dollarization include targets on banks’ share of FX loans and higher reserve requirements when targets unmet.
  - Staff recommended future changes in FX reserve requirements be clearly tied to the dedollarization process or to stopping adverse macrofinancial feedback loops; repos used for dedollarization should remain temporary.
  - Consider increasing FX provisions for FX loans to unhedged borrowers.
- Financial soundness indicators (selected, Table 7 as of December):
  - Capital to risk-weighted assets: 14.4 (2012), 13.9 (2013), 14.2 (2014), 14.3 (2015), 15.1 (2016).
  - Nonperforming loans to total gross loans: 2.2 (2012), 2.6 (2013), 2.9 (2014), 2.9 (2015), 3.1 (2016).
  - Return on equity (ROE): 21.5 (2012), 20.0 (2013), 18.2 (2014), 21.1 (2015), 19.2 (2016).
  - Return on assets (ROA): 2.2 (2012), 2.0 (2013), 1.9 (2014), 2.1 (2015), 2.0 (2016).

### Corporate, Household, and Capital Market Developments
- Corporate sector vulnerability (sample of 54 firms):
  - Debt-at-risk rises to 15 percent when a 30 percent currency depreciation is applied (Scenario 1).
  - Assuming a 20 percent earnings fall in addition (Scenario 2), debt-at-risk rises by a further 6 percentage points.
  - Adding an increase in interest rate expenses of 30 percent (Scenario 3) increases debt-at-risk to a quarter of total debt.
  - In all three scenarios median interest coverage ratio falls but remains above 2 (without applying any natural or financial hedges).
- Household credit dollarization:
  - Dollarization of household credit portfolios fell to 12.7 percent by end-February 2017 (December 2015: 15.9 percent).
  - Mortgages represent 15 percent of total financial system credit; mortgage loans remain substantially dollarized at 21.4 in February 2017.
  - Mortgage NPL ratio in FX: 3.8 percent in February 2017; in local currency: 2.0 percent.
- Capital markets and issuance:
  - Companies increasingly issued bonds in local currency and domestic market in 2016 and early 2017.
  - Financial sector firms’ issuance growth: 217 percent over 2015; non-financial firms’ issuance growth: 12 percent.
  - Over 70 percent of total issuance was in soles.
  - International market issuance in 2016: three issuances totaling USD$797 million.
  - Bolsa de Valores de Lima (BVL) retained Emerging Market status in MSCI in June 2016; general index rose by 58 percent compared to 2015.

### Structural Reforms, Informality, and Growth
- Key constraints: education, infrastructure, innovation, and institutions; anti-corruption legal framework and institutions prioritized in wake of Odebrecht scandal.
- Informality and labor market:
  - Productivity in the informal sector is "less than 50 percent" of productivity in the formal sector in all sectors, and in some much less.
  - Reform type A (allow formal sector productivity to grow faster than labor costs) could lead to informality declining "by around 30 percentage points by 2030, relative to a nonreform scenario."
  - Reform type B (reducing labor taxes and firing costs, and combining product and labor market reforms) could lead to a "significant positive impact on GDP in the long run."
  - Policy recommendations: relax policies that push labor costs above productivity growth; reduce labor taxes; reduce firing costs; implement product and labor market reforms together.
  - Mitigating short-run costs: combine reforms with social transfers and active labor market policies.
- Financial deepening determinants:
  - Peru’s private credit to GDP at around 40 percent of GDP is one of the lowest in the region and below the expected level for a country at Peru’s income and population.
  - Panel regression finds informality and illiteracy are barriers to financial deepening; regions with higher informality and illiteracy see less branch penetration.
  - Financial inclusion: about 30 percent of the Peruvian population aged over 15 has a bank account, below regional (51 percent) and income peers (58 percent).
  - Staff recommended supporting private mobile payment platforms (Billetera Móvil), ensuring supervisory perimeter keeps pace with innovation, reducing informality, increasing literacy and financial education, and studying deeper financial integration within the Pacific Alliance.

### Growth, External Sector, and Macroeconomic Projections (selected series)
- Real GDP (annual percent changes): 6.0 (2012), 5.8 (2013), 2.4 (2014), 3.3 (2015), 3.9 (2016), 2.7 (2017), projections: 3.8 (2018), 4.0 (2019), 3.9 (2020), 3.8 (2021), 3.8 (2022).
- Real domestic demand (annual percent changes): 7.3 (2012), 7.3 (2013), 2.2 (2014), 3.1 (2015), 0.9 (2016), 2.4 (2017), projections: 3.7 (2018), 4.7 (2019), 4.5 (2020), 4.2 (2021), 3.9 (2022).
- Unemployment rate: 6.8 (2012), 5.9 (2013), 5.9 (2014), 6.5 (2015), 6.7 (2016).
- Headline consumer prices (end of period): 2.6 (2012), 2.9 (2013), 3.2 (2014), 4.4 (2015), 3.2 (2016), 2.9 (2017), projections: 2.5 (2018), 2.5 (2019), 2.4 (2020), 2.2 (2021), 2.0 (2022).
- External sector (selected):
  - Current account balance (billions of U.S. dollars): -5.2 (2012), -8.8 (2013), -8.9 (2014), -9.2 (2015), -5.3 (2016), -4.4 (2017), projections: -4.6 (2018), -5.7 (2019), -6.8 (2020), -7.5 (2021), -7.8 (2022).
  - Exports (billions of U.S. dollars): 47.4 (2012), 42.9 (2013), 39.5 (2014), 34.4 (2015), 37.0 (2016), 41.8 (2017), projections: 43.7 (2018), 44.9 (2019), 46.3 (2020), 47.8 (2021), 49.3 (2022).
  - Gross reserves (in millions of U.S. dollars): 64,049 (2012), 65,710 (2013), 62,353 (2014), 61,530 (2015), 61,731 (2016), 61,731 (2017), projections: 62,931 (2018), 62,931 (2019), 63,431 (2020), 63,631 (2021), 63,831 (2022).
- Public debt DSA baseline (selected):
  - Nominal gross public debt: 21.6 (2015), 24.0 (2016), 24.4 (2017), 25.2 (2018), 26.4 (2019), 27.0 (2020), 26.8 (2021), 26.3 (2022).
  - Effective interest rate (in percent): 5.4 (2015), 5.3 (2016), 4.8 (2017), 5.5 (2018), 6.2 (2019), 6.1 (2020), 6.0 (2021), 6.1 (2022).

### Institutional Engagement, Data, and Technical Assistance
- Fund relations and institutional facts (as of April 30, 2017):
  - Quota: 1334.50 SDR Million (100.00 percent of Quota).
  - Fund holdings of currency: 1304.17 SDR Million (97.73 percent).
  - Reserve Tranche Position: 30.38 SDR Million (2.28 percent).
  - Peru maintains a unified, floating exchange rate; on December 29, 2016 the interbank rate average was 3.35 soles per U.S. dollar.
- Technical engagement:
  - Last Article IV Consultation concluded on June 20, 2016 (IMF Country Report No. 16/234).
  - Ongoing IMF TA across fiscal, monetary, and statistical issues; STA assistance on Housing Price Indexes and monetary/financial statistics.
- Statistical issues and data coverage:
  - Peru subscribes to the Special Data Dissemination Standard (SDDS).
  - Areas for improvement: coordination among agencies, expanding coverage of wholesale price index, finalizing migration to standardized report forms for monetary data, expanding data sources for financial flows of residents.
  - Peru started reporting financial soundness indicators with quarterly frequency in June 2011.
  - Table of Common Indicators Selected Dates: Exchange Rates latest observation 04/27/17; International Reserve Assets latest observation 02/28/17; Consumer Price Index latest observation 02/28/17; GDP/GNP latest observation Q4 2016.

*Source: International Monetary Fund staff report content (cr17166).*

### 1. Odebrecht Corruption Case _____________________________________________________________________ 8

### 1. Odebrecht Corruption Case

### Key findings from investigations
- Investigations by the Brazilian Federal Prosecution Service, the U.S. Department of Justice, and the Swiss Office of the Attorney General revealed that Odebrecht paid approximately $29 million in corrupt payments to government officials in Peru to secure public work contracts during 2005–2014.
- Peru’s judicial system continued investigations, resulting in the incarceration of former government officials and an extradition request for former President Toledo.

### Economic and project-level impacts
- Projects related to Odebrecht and other Brazilian construction companies have stalled; the Peruvian Southern Gas Pipeline registered no investment in 2017Q1, compared with $405 million spent in 2016Q1.
- The authorities estimate that the associated project delays will reduce growth by about 0.3 p.p. in 2017.
- Financial sector exposures to Brazilian construction companies (and related domestic companies) are assessed as moderate.

### Government and institutional responses
- Pre-existing measures:
  - In October 2016, a law dubbed “Civil Death” was passed, extending bans for corrupt public officials.
  - In early December 2016, the government received and shortly after approved a subset of the Presidential Commission of Integrity’s recommendations (e.g., declaration of interests by high-ranking government officials; introduction of anticorruption clauses in contracts for large public projects).
- Post-revelation measures:
  - Designation of a special investigative team focused solely on the Odebrecht investigation.
  - Barring any company that has admitted/been convicted of corruption from new bids on government projects.
  - Ringfencing assets of such companies in Peru to safeguard the State’s interests.

### Related macroeconomic and policy context (relevant measures that interact with the shock)
- The Ministry of Economy and Finance invoked the escape clause of the new fiscal rule and assembled a growth-support package including:
  - A fiscal package of 1.3 percent of GDP in 2017 targeted at reconstruction needs and public investment.
  - An exemption to employers from healthcare contributions (nine percent of monthly wages) when they hire new young entrants to the labor market.
  - Initiatives to support affordable housing developments and easing SMEs’ access to financing.
- Central bank and financial measures:
  - The BCRP reduced reserve requirements several times since December 2016; the marginal reserve requirement rate was reduced from 70 to 44 percent for FX liabilities and from 6½ to 5 percent for domestic liabilities.
  - The policy rate was cut by 25 basis points in May 2017 (the first cut in 15 months).

### Short-term outlook implications tied to the case
- Project delays tied to the Odebrecht case are factored into staff estimates of a growth slowdown to 2.7 percent in 2017.
- A bounceback in 2018–19 is projected as delayed projects are resumed, contributing to private investment recovery and supporting a return to potential growth by around 2020.

### Risks and balance-sheet considerations
- Domestic risks are prominent: additional delays in executing investment projects (including those affected by Odebrecht) or larger-than-expected flood-related damages could further weigh on growth in 2017.
- Financial sector exposure to the implicated construction firms is assessed as moderate, limiting direct systemic risk, though project and confidence channels remain material.

*Source: IMF staff estimates.*

### 12.      A moderate and temporary fiscal loosening is justified at the current juncture. Due to

### 12.      A moderate and temporary fiscal loosening is justified at the current juncture. Due to

### Fiscal policy stance and reconstruction spending
- Past prudent fiscal policy and low net public debt (Annex V) provide ample fiscal space to address flood-related reconstruction needs.
- The fiscal stimulus plan:
  - Raises the deficit to 3½ percent in 2018 before starting a process of gradual consolidation.
  - Is judged appropriate given the existing output gap and expected deterioration in domestic demand.
  - Relies on executing a high level of investment spending—an area with historical execution challenges in Peru.
- Staff welcomed government efforts to raise execution rates, including effecting annual transfers to subnational governments earlier in the year (by the end of the first quarter).

### Medium-term fiscal framework, transparency, and consolidation
- Authorities prioritize improving fiscal transparency and consolidation.
- New fiscal rule and targets:
  - Envisage gradual consolidation towards the 1 percent deficit target by 2021.
  - Plan to use assets such as those in the Fiscal Stabilization Fund to maintain public debt comfortably below the 30 percent of GDP ceiling.
- Institutional and technical improvements:
  - With IMF TA, the government is moving towards establishing a medium term budgetary framework (MTBF) with 3-year expenditure envelopes coordinated at the Cabinet level.
- Staff assessment of the rule change:
  - Move away from a structural balance rule departs from prior IMF advice but has advantages (greater headline transparency, retains Fiscal Council checks, remains informed by structural balance trends, contains escape clauses).
  - Staff cautioned that the predetermined adjustment path in the new framework, combined with potential fiscal revenue volatility, could add procyclicality to fiscal accounts.

### Infrastructure needs, public investment, and revenue mobilization
- Authorities’ infrastructure estimates:
  - Infrastructure spending gap for 2016–25 is about 25 percent of 2016 GDP, with main needs in transport, energy, telecommunications, health, and water.
- Public investment reform:
  - Creation of Invierte.pe (National System for the Multiannual Programming and Management of Investments) to cover investment cycle phases more completely.
  - Staff recommended continuing to enhance capacity to implement projects at the subnational level.
- Revenue mobilization:
  - Tax-to-GDP ratio has fallen to around 14 percent of GDP, below the regional average, due to lower commodity revenues.
  - Potential measures under active consideration include streamlining tax administration and reducing VAT exemptions and informality.
- PPPs and fiscal risks:
  - MTBF could improve consistency between the annual budget and macro-fiscal aggregates, enhancing fiscal discipline, policy costing, and predictability.
  - Peru’s PPP framework is relatively good but could be strengthened (e.g., procurement phase given high contract renegotiations and cost overruns; see Annex VI).
  - Staff recommended publishing an annual comprehensive fiscal risks statement covering contingent liabilities and risks associated with investment plans.

### Monetary policy balance and exchange rate flexibility
- Monetary policy stance:
  - With a widening output gap, temporary weather-related price pressures expected to abate quickly, and core inflation within the target range, staff supported the BCRP’s recent reduction of the policy rate.
  - Fiscal policy should be the first line of defense if flood damage is larger than expected; monetary policy could complement if demand conditions deteriorate further.
  - BCRP should remain data dependent and monitor inflation expectations closely; clear communication on the temporary nature of price shocks is essential.
- Exchange rate policy:
  - Staff welcomed increased exchange rate flexibility and unwinding of BCRP’s FX intervention instruments (swaps).
  - Future interventions should be limited to disorderly market conditions to foster market-determined exchange rates and hedging-market development.
  - Decline in credit dollarization over the last two years reduces balance-sheet channels of exchange rate shocks.

### Financial stability and development
- Corporate sector vulnerability analysis (limited sample of 54 firms):
  - Debt-at-risk rises to 15 percent when a 30 percent currency depreciation is applied (Scenario 1).
  - Assuming a 20 percent earnings fall in addition (Scenario 2), debt-at-risk rises by a further 6 percentage points.
  - Adding an increase in interest rate expenses of 30 percent (Scenario 3) increases debt-at-risk to a quarter of total debt.
  - In all three scenarios, the median interest coverage ratio falls but remains above 2 (without applying any natural or financial hedges).
- Financial system soundness:
  - Banks account for 90 percent of the system’s assets (excluding pensions and insurance), exhibit high profitability and capitalization, and low nonperforming loan ratios.
  - Smaller nonbank institutions are sound but show more variability; financial cooperatives are rapidly growing and require greater oversight.
  - BCRP and SBS stress tests indicate largest risks stem from decelerating economic growth and a large and sudden depreciation of the currency, though buffers appear sufficiently strong to withstand a stress scenario.
  - Joint probability of distress for the seven largest banks has declined since its peak in 2010 and remains at a low level.
- Policies to mitigate FX vulnerabilities and support dedollarization:
  - Targets on banks’ share of FX loans and higher reserve requirements when targets are unmet have helped reduce credit dollarization.
  - Staff recommended that future changes in FX reserve requirements be clearly tied to the dedollarization process or to stopping adverse macrofinancial feedback loops.
  - Repos used for dedollarization should remain temporary; BCRP should monitor impacts on reserves and the banking sector.
  - Consider increasing FX provisions for FX loans to unhedged borrowers.
  - Staff encouraged development and publication of a national house price index (IMF TA welcomed).
- Financial development and inclusion:
  - Branch penetration quadrupled over the last decade, but financial depth is low relative to fundamentals and the region.
  - Financial inclusion: about 30 percent of the Peruvian population aged over 15 has a bank account, below regional (51 percent) and income peers (58 percent).
  - Capital markets lack depth and liquidity despite recent reforms.
  - Staff recommendations: support private mobile payment platforms (Billetera Móvil), ensure supervisory perimeter keeps pace with innovation, reduce informality, increase literacy and financial education, and study deeper financial integration within the Pacific Alliance to increase capital market liquidity and pension fund investment options.
- Institutional recommendation:
  - Consider creating a formal Financial Stability Council (convert current informal BCRP–MEF–SBS meetings into a formal setup) with a clear mandate, accountability, and cooperation mechanisms while preserving operational autonomy of agencies. The upcoming FSAP would examine these issues further.

### Structural reforms to raise potential growth
- Key constraints and priorities:
  - Peru remains more competitive than many Latin American countries but lags trade rivals and OECD countries in several areas: education, infrastructure, innovation, and institutions.
  - Strengthening anti-corruption legal framework and institutions (notably in the wake of the Odebrecht scandal) and adopting international best practices for the Office of the Comptroller General in verifying asset declarations are priorities.
  - Implementing effective AML/CFT measures (e.g., enhanced due diligence for politically exposed persons) would help prevent misuse of the financial system by corrupt officials.
- Informality and labor market issues:
  - High informality is a key impediment; labor market regulations were cited as a serious problem in the GCR executive opinion survey.
  - Simulation exercises suggest growth gains from labor market reform can be significant.
  - The Social Protection Commission has an important mandate in addressing informality.
- Financial deepening determinants (Box 3 highlights):
  - Peru’s private credit to GDP at around 40 percent of GDP is one of the lowest in the region and below the expected level for a country at Peru’s income and population.
  - Panel regression analysis finds informality and illiteracy are barriers to financial deepening; regions with higher informality and illiteracy see less branch penetration.
  - Non-banks play an important role serving lower-end market segments.
  - High informality may be linked to stronger preference for cash and lack of documentation for know-your-customer requirements; lack of financial literacy and high cost of service delivery in remote areas are cited obstacles to financial inclusion.

*International Monetary Fund staff summary of chapter content*

### Box 4. Growth Gains from Labor Market Reforms

### Box 4. Growth Gains from Labor Market Reforms

### Productivity and informality in Peru
- Productivity in the informal sector is "less than 50 percent" of productivity in the formal sector in all sectors, and in some much less.
- Peru exhibits a relatively inefficient labor allocation across sectors, measured by the negative covariance between each sector’s employment share and labor productivity.
- Workers in the formal and informal sectors are not fully interchangeable (e.g., differences in human capital), but higher economies of scale and capital/labor ratios in the formal sector imply that labor reallocation toward the formal sector is likely growth enhancing.
- Figure context: "Peru. Informality and Productivity per Sector, 2014 (in percent)."

### Reform scenarios and modeled impacts
- Reform type A: Policies that allow labor productivity in the formal sector to grow faster than labor costs.
  - Modeled using the analytical framework in Loayza (2016): such a reform scenario could lead to informality in Peru declining "by around 30 percentage points by 2030, relative to a nonreform scenario."
- Reform type B: Reducing labor taxes and firing costs, and combining product and labor market reforms.
  - Adapting frameworks in Anand and Khera (2016) and Munkacsi and Saxegaard (2017) suggests that a combination of product and labor market reforms could lead to a "significant positive impact on GDP in the long run."
- Transitional dynamics:
  - The presence of some short-run job destruction argues for combining these reforms with social transfers and active labor market policies (see Munkacsi, Roch, and Rodriguez (2017, forthcoming)).

### Policy implications and recommendations
- Structural reforms are required to achieve significant reductions in informality; informality may decline gradually with rising GDP per capita, but substantive change likely requires policy action.
- Priority reform actions include:
  - Relaxing policies that push labor costs above productivity growth.
  - Reducing labor taxes.
  - Reducing firing costs.
  - Implementing product and labor market reforms together to maximize long-run GDP gains.
- Mitigating short-run costs:
  - Combine reforms with social transfers and active labor market policies to address short-run job destruction.

*Source: Box 4. Growth Gains from Labor Market Reforms (cr17166).*

### 36.      Staff would like to express their appreciation to the new administration for a

### cr17166 - 36.      Staff would like to express their appreciation to the new administration for a

### Engagement and procedural recommendation
- Staff expressed appreciation to the new administration for a constructive engagement.
- It is recommended that the next Article IV consultation take place on the 12-month cycle.

### Real sector developments
- Economic growth strengthened in 2016, as supply shocks unwound and copper production increased.
- Contribution to GDP growth (percent change, year-on-year) series shown across components: Private investment, Private consumption, Net exports, Public investment, Public consumption, Change in inventory.
- Output gap (percent of potential GDP) series: examples include 0.7 (2012), 1.7 (2013), -0.2 (2014), -0.8 (2015), -0.8 (2016), -1.1 (2017 prel. shown in tables).
- Real GDP (annual percent changes) in Table 1: 6.0 (2012), 5.8 (2013), 2.4 (2014), 3.3 (2015), 3.9 (2016), 2.7 (2017), projections: 3.8 (2018), 4.0 (2019), 3.9 (2020), 3.8 (2021), 3.8 (2022).
- Real domestic demand (annual percent changes) in Table 1: 7.3 (2012), 7.3 (2013), 2.2 (2014), 3.1 (2015), 0.9 (2016), 2.4 (2017), projections: 3.7 (2018), 4.7 (2019), 4.5 (2020), 4.2 (2021), 3.9 (2022).
- Unemployment rate (Table 1): 6.8 (2012), 5.9 (2013), 5.9 (2014), 6.5 (2015), 6.7 (2016).

### Inflation and monetary policy
- Headline consumer prices (end of period) in Table 1: 2.6 (2012), 2.9 (2013), 3.2 (2014), 4.4 (2015), 3.2 (2016), 2.9 (2017), projections: 2.5 (2018), 2.5 (2019), 2.4 (2020), 2.2 (2021), 2.0 (2022).
- Inflation remained above the upper limit of the central bank's target band; food and energy price inflation picked up, and exchange rate depreciation passed through to prices.

### External sector and U.S. exposures
- Exports and consumption helped sustain growth in 2016, while private investment continued to be a drag.
- Goods exports to the United States about 2.5 percent of GDP (noted in figure caption).
- Imports from the United States slightly over 4 percent of GDP (figure caption).
- Direct Investment from the United States, 2015: chart shows country comparisons with Peru among them; FDI exposures described as limited.
- Remittances channel described as small.
- With higher commodity prices, sovereign spreads declined after the U.S. election.
- Recommendation: maintain a flexible exchange rate regime given its role as shock absorber.

### Financial sector developments and soundness
- Private sector credit growth slowed following rapid growth in the previous year; charts show total credit and split between local currency (LC) and foreign currency (FC).
- Share of corporate loans in dollars has stabilized recently; dollarization of consumer loans remains low; share of dollar-denominated mortgage loans has continued to decline.
- Financial soundness indicators (Table 7, as of December):
  - Capital to risk-weighted assets: 14.4 (2012), 13.9 (2013), 14.2 (2014), 14.3 (2015), 15.1 (2016).
  - Nonperforming loans to total gross loans: 2.2 (2012), 2.6 (2013), 2.9 (2014), 2.9 (2015), 3.1 (2016).
  - Provisions to nonperforming loans: 202.0 (2012), 175.2 (2013), 157.7 (2014), 161.8 (2015), 157.1 (2016).
  - Return on equity (ROE): 21.5 (2012), 20.0 (2013), 18.2 (2014), 21.1 (2015), 19.2 (2016).
  - Return on assets (ROA): 2.2 (2012), 2.0 (2013), 1.9 (2014), 2.1 (2015), 2.0 (2016).
- Deposit-taking institutions are well-capitalized and provisioned, with adequate liquidity and comfortable profitability ratios (figure annotations).
- Data note: Financial soundness indicators correspond to depository corporations; last data available is for June-2016 for some series.

### FX and capital market developments
- The sol stabilized in 2016 (Exchange Rates index Jan. 2008 =100).
- Bond and equity flows recovered; equity prices rebounded but remain below levels earlier in the decade.
- Market capitalization recovered after three years of decline.
- Spreads declined after peaking early in the year; sovereign bond yield curve shifted downward.

### Balance sheet and sectoral positions
- Peru's net international investment position weakened in 2016.
- Foreign bank liabilities and claims on Peru stabilized.
- Deposit dollarization declined during the year.
- Non-residents' holding of government securities have declined from previous highs.
- Credit card NPL ratios increased after a decline in 2015.
- Apartment prices in residential areas of Lima rose in recent years but remain close to fundamentals (price series in soles per square meter shown).

### External debt sustainability (Figures and Tables 8–10)
- Total external debt (Table 8, percent of GDP): 27.8 (2012), 27.2 (2013), 30.6 (2014), 34.6 (2015), 33.5 (2016), projections: 30.0 (2017), 28.8 (2018), 26.4 (2019), 25.1 (2020), 23.8 (2021), 22.4 (2022).
- Gross external financing need (Table 10): in billions of U.S. dollars: 20.4 (2014), 20.5 (2015), 18.7 (2016), 19.8 (2017), 15.4 (2018), 16.9 (2019), 16.7 (2020), 16.9 (2021), 17.1 (2022). In percent of GDP: 10.1 (2014), 10.6 (2015), 9.6 (2016), 9.5 (2017), 7.0 (2018), 7.2 (2019), 6.7 (2020), 6.4 (2021), 6.1 (2022).
- Debt-stabilizing non-interest current account in Table 10: baseline external debt and changes illustrated; baseline real GDP growth assumptions: 2.4 (2014), 3.3 (2015), 3.9 (2016), 2.7 (2017), 3.8 (2018), 4.0 (2019), 3.9 (2020), 3.8 (2021), 3.8 (2022).
- Scenario with key variables at historical averages provided: example baseline and scenario levels: 34.6, 33.5, 27.6, 23.6, 18.3, 13.7, 9.1, 4.6, -4.3 (row labeled "Scenario with key variables at their historical averages").

### Fiscal sector: main aggregates and projections
- NFPS (non-financial public sector) revenue (percent of GDP, Table 1): 28.3 (2012), 28.4 (2013), 28.0 (2014), 25.1 (2015), 23.2 (2016), 23.1 (2017), projections: 23.2 (2018), 23.4 (2019), 23.8 (2020), 23.8 (2021), 23.8 (2022).
- NFPS primary expenditure (percent of GDP, Table 1): 24.8 (2012), 26.4 (2013), 27.1 (2014), 26.0 (2015), 24.7 (2016), 24.8 (2017), projections: 25.3 (2018), 24.9 (2019), 24.1 (2020), 23.5 (2021), 23.3 (2022).
- NFPS primary balance (percent of GDP, Table 1): 3.5 (2012), 2.0 (2013), 0.9 (2014), -1.0 (2015), -1.5 (2016), -1.7 (2017), projections: -2.1 (2018), -1.5 (2019), -0.5 (2020), 0.3 (2021), 0.4 (2022).
- NFPS overall balance (percent of GDP, Table 1): 2.4 (2012), 0.9 (2013), -0.2 (2014), -2.0 (2015), -2.6 (2016), -3.0 (2017), projections: -3.5 (2018), -2.9 (2019), -1.9 (2020), -1.0 (2021), -1.0 (2022).
- Public gross debt (percent of GDP, Table 2): 21.6 (2012), 20.8 (2013), 20.7 (2014), 24.0 (2015), 24.4 (2016), 25.2 (2017), projections: 26.4 (2018), 27.0 (2019), 26.8 (2020), 26.3 (2021), 25.7 (2022).
- SPNF non-commodity structural balance (Table 2): -1.8 (2012), -2.5 (2013), -2.9 (2014), -2.8 (2015), -2.8 (2016), -3.7 (2017), projections: -4.3 (2018), -3.8 (2019), -2.8 (2020), -2.0 (2021), -1.0 (2022).
- NFPS structural primary balance (Table 2): 2.0 (2012), 0.8 (2013), 0.1 (2014), -0.5 (2015), -1.2 (2016), -1.3 (2017), projections: -1.9 (2018), -1.4 (2019), -0.5 (2020), 0.3 (2021), 0.4 (2022).

### Balance of payments highlights
- Current account balance (Table 5, in billions of U.S. dollars): -5.2 (2012), -8.8 (2013), -8.9 (2014), -9.2 (2015), -5.3 (2016), -4.4 (2017), projections: -4.6 (2018), -5.7 (2019), -6.8 (2020), -7.5 (2021), -7.8 (2022).
- Exports (billions of U.S. dollars, Table 5): 47.4 (2012), 42.9 (2013), 39.5 (2014), 34.4 (2015), 37.0 (2016), 41.8 (2017), projections: 43.7 (2018), 44.9 (2019), 46.3 (2020), 47.8 (2021), 49.3 (2022).
- Gross reserves (in millions of U.S. dollars, Table 1 & 5): 64,049 (2012), 65,710 (2013), 62,353 (2014), 61,530 (2015), 61,731 (2016), 61,731 (2017), projections: 62,931 (2018), 62,931 (2019), 63,431 (2020), 63,631 (2021), 63,831 (2022).
- Current account balance (percent of GDP, Table 9): -2.7 (2012), -4.4 (2013), -4.4 (2014), -4.8 (2015), -2.7 (2016), -2.1 (2017), projections: -2.1 (2018), -2.4 (2019), -2.7 (2020), -2.8 (2021), -2.8 (2022).

### Key macroeconomic projections and memorandum items
- Nominal GDP (S/. billions, Table 9 memorandum): 498.5 (2012), 534.7 (2013), 576.3 (2014), 612.8 (2015), 658.7 (2016), 703.9 (2017), projections: 747.8 (2018), 796.0 (2019), 845.9 (2020), 897.6 (2021), 952.3 (2022).
- GDP per capita (in US$, Table 1 memorandum): 6,396 (2012), 6,629 (2013), 6,586 (2014), 6,168 (2015), 6,199 (2016), 6,568 (2017), projections: 6,872 (2018), 7,218 (2019), 7,566 (2020), 7,920 (2021), 8,305 (2022).

*Source: IMF staff estimates and national authorities, as presented in the supplied chapter content.*

### Annex I. Implementation of Past Fund Advice

### Annex I. Implementation of Past Fund Advice

### Overview of implementation
- The authorities’ policies have largely been in line with past Fund advice.
- Most of the 2011 FSAP recommendations have been implemented—particularly in the areas of banking oversight, insurance, and pensions.
- Significant collaboration via technical assistance has continued across a wide range of areas, with current focus on fiscal, monetary, and statistical issues.
- More recently, authorities’ policies have been consistent with the main recommendations of the 2016 Article IV Consultations.

### Fiscal policy: implementation and developments
- 2016 Article IV advice: advised a gradual fiscal consolidation, along with the creation of fiscal space to accommodate higher capital spending.
- Government actions aligned with advice:
  - The government’s 2017 budget and reform package envisaged consolidation of the fiscal accounts, while boosting public investment.
  - Reforms introduced to improve the PPP framework and the system of public investment.
  - Authorities receptive to staff’s recommendation of being cautious with planned reductions in the VAT rate.
- Recent modification of the fiscal framework departs from past Fund advice:
  - 2013 fiscal framework (anchored on a structural deficit rule for the overall balance of the Nonfinancial Public Sector (NFPS)) injected countercyclicality and included benchmarks for NFPS gross debt and rules for local and regional governments.
  - 2016 framework retains similar numerical parameters but replaces main anchors with ceilings on the headline deficit and gross debt stock of the NFPS.
  - The new framework maintains other dispositions of its predecessor, such as the role of the independent fiscal council, and will continue to calculate and publish the structural fiscal balance.

- Key numerical features of the 2016 framework (as compared to 2013):
  - NFPS debt rule (2016): Gross debt of the NFPS shall not exceed 30 percent of GDP. In cases of financial volatility, and if the other rules are met, the debt could experience temporary deviations of at most four percentage points of GDP.
  - NFPS corrective-action provision (2013): If the debt surpassed 30 percent of GDP, or if it is expected to surpass that limit in the next three years, then corrective actions should be taken to bring debt below 30 percent of GDP in a period of at most seven years.
  - Fiscal deficit rule (2016): The annual deficit of the NFPS shall not exceed 1 percent of GDP. Transitory provisions apply to transition from the current state to the new target, which is set to be achieved by 2021.
  - Fiscal deficit rule (2013): Within 90 days of taking office, the new administration shall issue a strategy of macro fiscal policy for the whole presidential term. This strategy shall provide ex ante guidance on the structural deficit of the NFPS, which shall not exceed 1 percent of GDP.
  - Expenditure rule (2016): Dual expenditure rule imposing a ceiling in the growth of: (i) the real non-interest expenditure of the general government, and (ii) the real current expenditure of the general government. The ceiling is determined using as reference the average 20 year growth of real GDP (with the 20 years including, the past 15 years, the estimated growth of the year in which the Multiannual Macroeconomic Framework is elaborated, and the projected growth of the next four years).
  - Expenditure rule (2013): The non interest expenditure of the national government shall not exceed the limit established under the strategy for the ex ante attainment of the structural deficit rule.
  - Regional/local government debt rule (2016): The ratio between total debt and the average of current revenues for the past four years, or the ratio between total debt and a limit established in a complementary law (whichever is lower), cannot exceed 100 percent.
  - Regional/local government debt rule (2013): The ratio between total debt and the average of current revenues for the past four years cannot exceed 100 percent.
  - Regional/local expenditure rule (2016): Expenditure needs to be consistent with savings rule.
  - Regional/local expenditure rule (2013): The percent change in nonfinancial expenditures cannot exceed the four-year moving average of total revenues (counted from the second year before every fiscal year).
  - Savings rule (2016): The difference between total current revenues and nonfinancial current expenditures shall not be negative.
  - Savings rule (2013): N.A.
  - Credit rating exception (2016): Regional or local governments with a crdit rating of BBB+ or higher, may conduct financing operations even though those may result in a breach of the previous fiscal rules or of the corrective actions to achieve them.
  - Credit rating exception (2013): N.A.

### Monetary and exchange rate policy
- The BCRP has continued to implement a flexible exchange rate regime.
- The BCRP’s wait-and-see policy rate stance during the past year and the cut in the policy rate in May 2017 have been consistent with Fund advice.

### Structural reforms
- Government introduced structural reforms to reduce informality and cut red tape (e.g., modifications to the income tax regime to small and medium enterprises).
- Fund advice to introduce labor market reforms aimed at lowering the costs of hiring and firing workers remains an area the authorities are exploring carefully.

*Source: Fund staff estimates.*

### 30.1 percent) in the same period.

### cr17166 - 30.1 percent) in the same period.

### Financial Sector: Dollarization, Deposits, and Cooperatives
- Deposit dollarization declined; drivers noted:
  - Lower expectations of depreciation.
  - Change in composition of AFP deposits towards local currency deposits, likely in anticipation of withdrawals related to the change in the pension law in 2016.
- FX credit to corporates:
  - Has started growing again (mainly trade credit).
  - Dedollarization targets have kept the credit dollarization ratio stable.
  - Some repos used by authorities in the credit dedollarization program in 2015 will mature in 2017 and 2018. Repos that have matured in early 2017 have not been rolled over, but authorities are prepared to do so if there is demand.
- System FX exposure (SBS estimate): 11.4 percent at end-2016 (considering collateral and hedging).
- Pension law withdrawals (new laws):
  - Pensioners over 65 years old can withdraw up to 95.5 percent from their accounts.
  - All affiliates can withdraw up to 25 percent for a down-payment or to amortize their mortgages for their first home purchase.
- Financial cooperatives sector:
  - Rapidly growing; several cooperatives have grown to be as big as small banks.
  - Supervision currently under FENACREP, an umbrella body supervised by the SBS.
  - SBS is seeking to bring larger cooperatives under its direct purview to improve supervision and systemic risk identification.

Key financial sector indicators (selected, as presented):
- Deposit-to-loan ratio: 94.9, 91.6, 89.6, 89.4, 88.3, 89.4, 91.6, 90.9, 88.2, 88.8, 88.1, 88.1
- FX liabilities % (of total liabilities): 49.4, 49.6, 48.4, 48.8, 48.5, 49.5, 49.2, 48.2, 46.9, 45.5, 44.7, 44.7
- FX loans % (of total loans): 39.9, 39.7, 38.2, 36.4, 33.7, 31.2, 30.1, 28.6, 28.5, 29.4, 28.7, 28.7
- Leverage ratio (%): 10.3, 10.4, 10.7, 9.9, 10.1, 9.9, 10.1, 9.9, 10.6, 10.9, 11.4, 11.4
- ROA: 1.9, 1.9, 1.9, 2.0, 2.1, 2.1, 2.1, 2.0, 2.0, 2.0, 2.0, 2.0
- ROE: 18.5, 18.5, 18.2, 19.4, 20.5, 20.7, 21.1, 20.3, 19.6, 19.1, 19.2, 19.2
- NPL ratio: 3.8, 3.9, 4.0, 4.0, 4.1, 4.0, 3.9, 4.1, 4.3, 4.4, 4.3, 4.3
- NPL ratio change (%, annual): 8.0, 10.6, 12.9, 8.9, 7.9, 1.9, -0.7, 1.8, 6.1, 0.2, 9.3, 9.3

### Impact of Pension Law Change and Insurance Sector
- Near-term market disruption from pension law change: not large.
- Portfolio shifts: Private pension funds shifted portfolios toward more liquid assets in anticipation of withdrawals.
- Flows: Flow patterns stabilized; inflows seem to sufficiently compensate for outflows.
- Longer-term implications:
  - Sustainability of the public system could be affected as more people opt into the more flexible private system.
  - Underdeveloped insurance sector impacted—insurance companies have received less premiums, affecting the annuity market.

### Non-Financial Sector Risk Assessment: Corporates and FX Effects
- Corporate leverage and debt risk:
  - Based on a sample of 54 firms, corporate leverage increased in 2015, particularly for large firms.
  - Despite a slight fall in median interest coverage ratio, debt-at-risk (interest coverage ratio below 1.5) and percentage of firms-at-risk declined compared to 2014.
  - Rise in leverage consistent with the LA5 regional average; regional debt-at-risk is much higher.
  - BCRP study (sample of 99 enterprises: 70 industrial, 16 mining, 13 utilities) showed leverage ratios were stable in H1 2016 and below 1.5, with improved profitability due to cost reductions.
  - Estimates of one-year ahead probability of default for firms have trended downward in the past year.
- Exchange rate movements in 2016:
  - Resulted in slight FX losses equal to 0.4 percent of total earnings.
  - Overall ratio of FX assets to FX liabilities was 1.15.
  - Sectoral variation: mining and manufacturing (larger FX assets relative to FX liabilities) made FX losses; other non-financial sectors had the opposite outcome. These reflect balance sheet effects only.
- Household credit dollarization and vulnerabilities:
  - Dollarization of household credit portfolios fell to 12.7 percent by end-February 2017 (December 2015: 15.9 percent).
  - Mortgages: represent 15 percent of total financial system credit but mortgage loans remain significantly dollarized at 21.4 in February 2017.
  - Mortgage NPL ratio in FX: 3.8 percent in February 2017; in local currency: 2.0 percent.
  - Estimated debt-to-income ratio is below 30 percent, though large uncertainty exists due to high informality affecting income measurement.

### Capital Markets: Bond Issuance and Stock Market
- Bond issuance trends:
  - Companies increasingly issued bonds in local currency and domestic market in 2016 and early 2017.
  - Financial sector firms issued much more: growth of 217 percent over 2015.
  - Non-financial firms’ issuance growth: 12 percent.
  - Over 70 percent of total issuance was in soles.
  - International market issuance muted in 2016 vs 2015 and 2014: only three issuances totaling USD$797 million.
- Bolsa de Valores de Lima (BVL) performance:
  - Retained Emerging Market status in MSCI in June 2016.
  - General index rose by 58 percent compared to 2015.
  - Price-earnings ratio increased from 2015, comparable to regional peers.
  - Reforms accelerated by potential downgrade included algorithmic trading introduction and incentives for market makers.
  - Market size remains small but liquidity indicators improving.
  - Alternative Securities Market for SMEs has limited issuance due to competition from banks.
- Financial integration:
  - Peru is part of MILA with Chile, Colombia, and Mexico; intraregional trades minimal.
  - Constraints include restrictions treating pension funds’ cross-border MILA securities as non-domestic.
  - Recommendation: remove restrictions and harmonize tax and operational procedures across PA countries to improve integration.
- Capital market product reforms:
  - BVL clarifying tax rules related to FIBRA (modelled after Mexican REITs).
  - Considering secondary trading for factor receivables market.
  - New products expected to increase investment vehicle diversity and support domestic capital market growth.

### Housing Market
- Property sector growth:
  - Rapid growth over the decade in tandem with economic expansion.
  - Q2 2016: growth in median apartment prices in Lima softened compared to Q2 2015 but remained well above the 5-year average.
  - Valuation indicators: Peru’s property market on an average footing compared to regional peers.
  - Country faces a housing deficit, particularly in lower-income segments; buying patterns do not appear speculative.
  - Property price indices only reflect Lima; Lima has higher population growth and urbanization than rest of country.
  - Authorities collect property price information for other major cities, but not publicly available; IMF technical assistance is helping to expand coverage nationwide.

### Risk Assessment Matrix — Selected External and Country-Specific Risks and Policy Advice
- Protracted period of weak domestic investment (Likelihood: MM (↓)):
  - Impact: Investment could be affected by external uncertainties, spillovers from Odebrecht corruption investigation, and El Niño legacy.
  - Policy advice: Persevere with structural reforms to increase investment potential and improve PPP framework; strengthen anticorruption institutions and seek synergies between anticorruption and AML tools.
- Slow implementation of reconstruction efforts (Likelihood: MM (↓)):
  - Impact: Economic activity affected as key infrastructure damaged.
  - Policy advice: Improve coordination across line ministries (including via new medium term budget framework); provide support to local and regional governments to expedite capital expenditure implementation.
- Policy uncertainty and divergence in major economies (Likelihood: HM (↓)):
  - Impact: Peru's exports could be adversely affected; financial conditions could tighten; higher public sector financing needs possible.
  - Policy advice: Exchange rate flexibility and use of fiscal buffers; countercyclical monetary policy instruments could be used.
- Significant further strengthening of the US dollar and/or higher interest rates (Likelihood: HH (↓)):
  - Impact: Balance sheets strained for dollar debtors.
  - Policy advice: Exchange rate flexibility, intervene to smooth excessive volatility, develop hedging instruments market, use countercyclical macroprudential instruments.
- Structural slowdown in key economies/China slowdown (Likelihood: H/LM/M (↓)):
  - Impact: Weaker global demand would worsen current account deficit and growth via lower export prices and volumes.
  - Policy advice: Exchange rate flexibility as first line of defense; use liquidity buffers; use policy space (fiscal and/or monetary if inflation anchored) as countercyclical measures; accelerate structural reforms.

### Public Sector Debt Sustainability Analysis (DSA) — Baseline and Scenarios
- Baseline projections (percent of GDP unless otherwise indicated; Prel. as of December 30, 2016):
  - Nominal gross public debt: 21.6 (2015), 24.0 (2016), 24.4 (2017), 25.2 (2018), 26.4 (2019), 27.0 (2020), 26.8 (2021), 26.3 (2022), 25.7 (projection)
  - Spread (bp): 175
  - CDS (bp): 108
  - Real GDP growth (in percent): 5.2 (2015), 3.3 (2016), 3.9 (2017), 2.7 (2018), 3.8 (2019), 4.0 (2020), 3.9 (2021), 3.8 (2022), 3.8 (projection)
  - Inflation (GDP deflator, in percent): 3.3 (2015), 3.5 (2016), 3.6 (2017), 3.1 (2018), 2.6 (2019), 2.5 (2020), 2.4 (2021), 2.3 (2022), 2.3 (projection)
  - Nominal GDP growth (in percent): 8.4, 6.3, 7.5, 6.9, 6.2, 6.5, 6.3, 6.1, 6.1
  - Effective interest rate (in percent): 5.4 (2015), 5.3 (2016), 4.8 (2017), 5.5 (2018), 6.2 (2019), 6.1 (2020), 6.0 (2021), 6.1 (2022), 6.2 (projection)
- Contribution to changes in public debt (selected lines):
  - Change in gross public sector debt: -1.2 (2015), 3.3 (2016), 0.4 (2017), 0.8 (2018), 1.2 (2019), 0.7 (2020), -0.3 (2021), -0.5 (2022), -0.5 (cumulative), 1.3 (projection)
  - Identified debt-creating flows: -2.9 (2015), 2.0 (2016), 0.8 (2017), 1.8 (2018), 2.2 (2019), 1.5 (2020), 0.5 (2021), -0.3 (2022), -0.3 (cumulative), 5.4 (projection)
  - Primary deficit: -2.3 (2015), 1.1 (2016), 1.6 (2017), 1.8 (2018), 2.2 (2019), 1.6 (2020), 0.6 (2021), -0.3 (2022), -0.3 (cumulative), 5.7 (projection)
  - Primary (noninterest) revenue and grants: 27.9 (2015), 24.9 (2016), 23.1 (2017), 23.0 (2018), 23.1 (2019), 23.3 (2020), 23.5 (2021), 23.8 (2022), 23.7 (projection)
  - Primary (noninterest) expenditure: 25.6 (2015), 26.0 (2016), 24.7 (2017), 24.8 (2018), 25.3 (2019), 24.9 (2020), 24.1 (2021), 23.5 (2022), 23.3 (projection)
  - Automatic debt dynamics: -0.6 (2015), 0.9 (2016), -0.8 (2017), 0.0 (2018), 0.0 (2019), -0.1 (2020), -0.1 (2021), 0.0 (2022), -0.2 (projection)
  - Interest rate/growth differential: -0.7 (2015), -0.4 (2016), -0.6 (2017), -0.1 (2018), -0.1 (2019), -0.1 (2020), -0.1 (2021), 0.0 (2022), 0.0 (projection)
  - Residual, including asset changes: 1.7 (2015), 1.3 (2016), -0.4 (2017), -1.0 (2018), -1.0 (2019), -0.8 (2020), -0.8 (2021), -0.2 (2022), -0.2 (projection), -4.0 (cumulative)
- Alternative scenarios shown: Baseline, Historical, Constant Primary Balance.
  - Historical scenario real GDP growth: 2.7, 5.5, 5.5, 5.5, 5.5, 5.5 (2017–2022)
  - Constant Primary Balance scenario primary balance: -1.8 across 2017–2022.

### Road Ahead for PPPs
- Assessment of PPP framework:
  - World Bank Benchmarking Public-Private Partnerships Procurement, 2017 (framework as of March 2016) assigns high marks to Peru’s framework on PPP preparation, unsolicited proposals processes, and contract management.
  - Largest room for improvement: procurement/tendering process—strengthen evaluation committee, expand bidder dialogue, manage sole proposals, and address use of exceptions or fast-track regimes.
  - 2017 Infrascope (Economist Intelligence Unit and IDB) rates Peru’s environment as developed and ranks it fifth among 19 countries.
  - Main improvement areas: coordination and clarity of jurisdictions and competencies among agencies, renegotiation processes and bureaucratic delays, standardization of contracts, prioritization, industry concentration, and support to regional and local governments.
- New government PPP reforms (two main pillars):
  - Optimization of Proinversion role to increase autonomy, strengthen transparency and accountability, and expand support to regional and local governments.
  - Make investment promotion more efficient and agile by simplifying bureaucratic procedures and improving project and contract design and proposal assessments.
- Rationale and expected gains:
  - New government expects meaningful efficiency gains, citing previous framework/practice led to numerous renegotiations: out of 30 PPP projects awarded by Proinversion during 2012–15, there was a total of 157 contract versions (average of 5.2 versions per project contract).
  - Further improvement should focus on risk reporting, mitigation, and management.

*Italic source: IMF staff report content (cr17166 - 30.1 percent) in the same period.).*

### 3.      Given the expansion of investment that is envisaged for the coming years, it will be

### cr17166 - 3.      Given the expansion of investment that is envisaged for the coming years, it will be

### Public-Private Partnerships (PPPs): risks and institutional responsibilities
- Given the expansion of investment envisaged for the coming years, it will be important for the government to maintain a clear assessment of risks related to PPPs.
- It would be important to strengthen the gateway role of the Ministry of Economy and Finance (through the General Directorate for Promotion of Public Investment, DGPIP) during all the stages of the PPP process.
- The new separation of functions between Proinversion and the Ministry of Economy and Finance must not result in a weakening of the capacity of the Ministry of Economy and Finance to monitor and control risks.

### Benchmarking PPPs
- Benchmarking PPPs (ranking 0-100) presented, source: World Bank (Benchmarking Public-Private Partnerships Procurement, 2017).
- Visual comparisons include categories labeled: PPP Preparation, PPP Procurement, Process for Unsolicited PPP Proposals, PPP Contract Management, and an overall average scale shown from 0 to 120.
- Countries shown in the benchmarking figures include (as listed): Australia, Brazil, Bulgaria, Canada, Chile, China, Colombia, Costa Rica, Dom. Rep., Ecuador, France, India, Indonesia, Italy, Jamaica, Jordan, Kazakhstan, Kenya, Korea, Rep., Lithuania, Malaysia, Mauritius, Mexico, Morocco, Mozambique, Nigeria, Pakistan, Peru, Philippines, Poland, Portugal, Romania, Russian Fed., Senegal, Singapore, South Africa, Tanzania, Thailand, Turkey, United Kingdom, United States, Uruguay, Vietnam, Zambia.

### Fund relations — key institutional and financial figures (as of April 30, 2017)
- Membership Status: Joined 12/31/1945; accepted the obligations of Article VIII, Sections 2(a), 3, and 4 on 2/15/1961.
- General Resources Account: SDR Million Percent of Quota
  - Quota  1334.50                          100.00
  - Fund holdings of currency  1304.17                            97.73
  - Reserve Tranche Position  30.38                              2.28
- SDR Department: SDR Million Percent of Allocation
  - Net cumulative allocation  609.89                           100.00
  - Holdings  531.15                             87.09
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements (Stand-By):
  - Jan. 26, 2007–Feb. 28, 2009 172.37 0.00
  - Jun. 09, 2004–Aug. 16, 2006 287.28 0.00
  - Feb. 01, 2002–Feb. 29, 2004 255.00 0.00
- Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Forthcoming 2017 0.26  2018 0.39  2019 0.39  2020 0.39  2021 0.39
  - Principal 0.00 0.00 0.00 0.00 0.00
  - Charges/Interest 0.26 0.39 0.39 0.39 0.39
  - Total 0.26 0.39 0.39 0.39 0.39
- Exchange Arrangements:
  - Peru maintains a unified, floating exchange rate.
  - On December 29, 2016, the average of interbank buying and selling rates was 3.35 soles per U.S. dollar.

### Fund technical engagement and recent activities
- Last Article IV Consultation: The 2016 Article IV consultation was concluded on June 20, 2016 (IMF Country Report No. 16/234).
- FSAP and ROSCs: FSAP missions visited Lima September 2000–January 2001; FSSA discussed March 12, 2001; follow-up FSAP mission February 2005; Executive Board noted FSAP-Update analysis on April 20, 2011. Fiscal ROSC (October 2002) and Data ROSC (February 2003) were conducted.
- Technical Assistance by department and purpose (listed):
  - FAD: Medium Term Budgeting; Treasury management; Macro-fiscal framework and fiscal rules; Tax policy and administration; Fiscal Transparency Evaluation; General Tax Policy
  - MCM: Developing fixed income swap markets
  - LEG: Risk based supervision of securities markets
  - STA: Housing Price Indexes; Monetary and Financial Sector Statistics

### World Bank relations and portfolio (as of May 2, 2017 / as of April 30, 2017)
- Country Partnership Framework (FY17–FY21) aligned with Government of Peru National Plan for 2016–2021; structured across three pillars: (i) Productivity for growth; (ii) Services for citizens across the territory; and (iii) Natural resource and climate risk management.
- WB portfolio includes 15 investment projects and a GEF grant totaling US$960 million.
- Peru has access to four contingent lines of credit for US$3 billion, including two DPF–DDOs and two Catastrophe Deferred Drawdown Option (CAT–DDO).
- Indicative WB financing for FY17–FY18 is around US$500 million (focused exclusively towards IPF projects).
- World Bank ongoing support to PPPs: help strengthen institutional framework to distribute risks and returns to avoid excessive fiscal pressures and support development of domestic capital markets.
- World Bank portfolio table (summary line):
  - Overall Result 3,954.5 0.0 8.9 0.2 3,712.1 115.7 75.0
- Selected active projects and amounts (Original Amount in US$ Millions, Fiscal Year shown where provided):
  - P156250 Peru Innovation 2017 45.0 0.3
  - P147342 PE Enhancement of Env. Quality Services 2017 40.0 0.0
  - P155902 PE Fisheries and Aquaculture Innovation 2017 40.0 0.1
  - P156858 PE Boost. Hum. Cap. and Productivity DPL 2016 1,250.0 0.0
  - P154981 Pub. Exp. and Fiscal Risk Mgmt DPL-DDO 2016 1,250.0 0.0
  - P145610 PE Lima Metro Line 2 Project 2016 300.0 260.0 97.5
  - P132515 PE Support to the Subnational Transport 2016 50.0 50.0 8.8
  - P149831 PE CAT DDO II 2015 400.0 400.0 0.0
  - P132505 PE Cuzco Transport Improvement 2014 120.0 118.6 28.6 12.7 undisbursed
  - (Additional project lines appear in the portfolio table with original amounts, disbursements, and undisbursed figures as shown in the source.)

### International Financial Corporation (IFC) portfolio (as of April 30, 2017)
- Total IFC-related portfolio line summary presented in the source showing various commitments and outstandings across named institutions and projects.
- Aggregate totals presented: 419.5 279.9 113.5 34.9 42.7 8.5 619.2 188.5 (as tabulated in the source).

### Relations with the Inter-American Development Bank (IDB) (as of April 30, 2017)
- Country Strategy: period 2017–2021 focused on (i) productivity; (ii) institutional strengthening and basic service delivery; and (ii) environmental sustainability and climate change.
- Approval scenario of US$1,500 million estimated; disbursements with sovereign guarantee estimated at US$1,250 million.
- Lending:
  - As of April 2017, Bank’s portfolio of active public sector operations: 22 loans for a total amount of US$1,266 million, including one policy-based loan with deferred disbursement modality for US$300 million.
  - The active portfolio consists of 21 loans for US$966 million, of which US$347.6 million (27 percent) have been disbursed.
  - Public sector lending program for 2016 comprised two operations for a total of US$120 million.
  - Public sector lending program for 2017 comprises seven investment loans for a total amount of US$400 million.
- IDB private sector lending (as of March 2017, IIC):
  - Active portfolio of 23 operations for a total approved amount of US$904.9 million and a total net exposure of US$621.18 million.
  - IIC’s active portfolio exposure by sector: Oil and Gas, 44 percent; Energy, 25 percent; Financial Intermediaries, 19 percent; Agribusiness, 6 percent; Education, 5 percent; others, 1 percent.
- Peru: IDB Sovereign Guaranteed Loan Portfolio by Sector (As of April, 2017; In millions of U.S. dollars)
  - Agriculture 95.0 4.2 4
  - Science, Technology and Competitiveness 75 26.4 35
  - Social Investment 355.0 22.0 6
  - Modernization of the State 102.5 75.2 73
  - Integration and Trade 200 0
  - Water and Sanitation 115.0 55.2 48
  - Transportation 503.9 164.5 33
  - Total 1,266.6 347.5 27

### Statistical issues — coverage, strengths, and areas for improvement
- General: Macroeconomic statistics are broadly adequate for policy formulation, surveillance, and monitoring. Peru subscribes to the Special Data Dissemination Standard (SDDS). A data ROSC was prepared and published in 2003.
- Scope for improvement identified in:
  - (i) coordination among agencies that compile official statistics to avoid duplication of efforts;
  - (ii) expanding the coverage of the wholesale price index to include mining, oil and gas extraction, electricity and water, public transportation, and communication;
  - (iii) finalizing the migration to the standardized report forms for monetary data with the introduction of report forms for the central bank, other depository corporations, and other financial corporations;
  - (iv) expanding the scope of data sources for compiling financial flows of individual residents.
- National accounts: In 2014, the National Statistics Office (INEI) released a new national account series implementing the 1993 SNA and using 2007 as the base year.
- Price statistics:
  - Official measure of inflation: CPI for Metropolitan Lima compiled and published by INEI.
  - On December 29, 2016, interbank rate average was 3.35 soles per U.S. dollar (exchange context reiterated).
  - New national level CPI starting with January 2012 index was disseminated since February 2012 (the WPI); statistical techniques generally follow international standards; base year for weights is 2013.
- Labor market statistics:
  - Authorities monitor four indicators: open unemployment, underemployment, employment, and remunerations.
  - Monthly unemployment, employment and income data for metropolitan area of Lima from INEI are timely.
  - Only urban employment indexes are available from the Ministry of Labor for other areas and with some delays.
  - Monthly remuneration data for the government are timely but monthly remuneration data for the private sector are no longer available.
  - Nationwide unemployment and underemployment situation is surveyed quarterly; INEI publishes broader regional coverage based on ENAHO.
  - Recommendation: develop competitiveness indicators such as productivity and unit labor cost indexes.
- Government financial statistics:
  - Central Bank (BCRP) compiles government finance statistics (GFS) following GFSM2001 for general government and subsectors.
  - Data for all subsectors are reported on a cash basis for revenues and on accrual basis for expenditures; financial assets and liabilities reported at face value.
  - Authorities have not yet sent to the Fund information on components of expenditures by function.
  - Coverage of published national budget data is narrower than fiscal statistics prepared for the combined public sector.
  - Authorities report data for GFSY using GFSM 2001.
  - No high frequency data published in the IFS, but available from weekly report of the BCRP.
- Monetary statistics:
  - BCRP compiles analytical accounts of central bank, depository corporations, and financial corporations broadly in line with Monetary and Financial Statistics Manual.
  - Main divergences: exclusion of deposits of other financial corporations, state and local governments, and public nonfinancial corporations from the definition of broad money; valuation of some held-to-maturity assets at cost rather than market.
  - A mission visited in January 2007 to assist migration to standardized report forms (SRFs) for monetary data; SRF for the central bank was finalized with recommended classification and sectorization improvements.

*Prepared by the Western Hemisphere Department (In consultation with other departments); June 1, 2017.*

### 2008. The mission completed the work on the SRF for the central bank and developed a bridge table

### 2008. The mission completed the work on the SRF for the central bank and developed a bridge table linking the source data reported by banks to the BCRP to the report form 2SR (other depository corporations).

### Strengthening of source data reporting framework (SRF) and database management
- The mission completed the work on the SRF for the central bank and developed a bridge table linking the source data reported by banks to the BCRP to the report form 2SR (other depository corporations).
- The mission identified shortcomings in the management of the database that generate the accounts of the other depository corporations sector at the BCRP.
- After the completion of the two technical assistant missions the BCRP sent a first version of the SRFs in October 2016.
- The IMF is reviewing them prior to publication and a follow up technical assistance mission is scheduled in 2017.

### Financial soundness indicators (FSIs)
- Peru started reporting data and metadata for financial soundness indicators (FSIs) with a quarterly frequency in June 2011.

### External sector statistics: coverage and reporting practices
- The BCRP prepares quarterly data on the balance of payments and international investment position largely in line with the recommendations of the fifth edition of the Balance of Payments Manual (BPM5).
- Data are reported to the Fund for publication in the IFS and the Balance of Payments Statistics Yearbook.
- Documented departures from BPM5:
  - lack of coverage of assets held abroad and land acquisition abroad by residents;
  - not recording on an accrual basis some external debt transactions.
- The BCRP has been reporting since August 2001 weekly data on international reserves in accordance with the Operational Guidelines for Data Template on International Reserves and Foreign Currency Liquidity.
- Since August 2006, the BCRP is including the full amount of the liquidity requirements in the reserve template both under official reserve assets and as a contingent net drain (as specified in Section III of the Data Template).
- Peru disseminates quarterly data on external debt with an eight week lag on the National Summary Data Page with a hyperlink to the Fund’s website.

### Table of Common Indicators Required for Surveillance (As of April 30, 2017) — selected data points and metadata
- Exchange Rates
  - Date of Latest Observation: 04/27/17
  - Date Received: 04/28/17
  - Frequency of data: D
  - Frequency of Reporting: M
  - Frequency of Publication: D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities
  - Date of Latest Observation: 02/28/17
  - Date Received: 03/31/17
  - Frequency of data: D
  - Frequency of Reporting: M
  - Frequency of Publication: W
- Reserve/Base Money
  - Date of Latest Observation: 02/28/17
  - Date Received: 03/31/17
  - Frequency of data: W
  - Frequency of Reporting: M
  - Frequency of Publication: W
  - Data Quality – Methodological Soundness: O, LO, LO, LO
  - Data Quality Accuracy and Reliability: O, O, O, O, O
- Broad Money
  - Date of Latest Observation: 02/28/17
  - Date Received: 03/31/17
  - Frequency of data: W
  - Frequency of Reporting: M
  - Frequency of Publication: W
- Central Bank Balance Sheet
  - Date of Latest Observation: 02/28/17
  - Date Received: 03/31/17
  - Frequency of data: W
  - Frequency of Reporting: M
  - Frequency of Publication: W
- Consolidated Balance Sheet of the Banking System
  - Date of Latest Observation: 02/28/17
  - Date Received: 03/31/17
  - Frequency of data: W
  - Frequency of Reporting: M
  - Frequency of Publication: W
- Interest Rates
  - Date of Latest Observation: 02/28/17
  - Date Received: 03/31/17
  - Frequency of data: D
  - Frequency of Reporting: M
  - Frequency of Publication: D
- Consumer Price Index
  - Date of Latest Observation: 02/28/17
  - Date Received: 03/31/17
  - Frequency of data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
  - Data Quality – Methodological Soundness: O, LO, LO, LO
  - Data Quality Accuracy and Reliability: LO, LO, O, O, O
- Revenue, Expenditure, Balance and Composition of Financing – CG and GG
  - Date of Latest Observation: Q4 2016
  - Date Received: 03/17/17
  - Frequency of data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
  - Data Quality – Methodological Soundness: O, LO, O, O
  - Data Quality Accuracy and Reliability: O, O, O, LO, O
- Stocks of CG Debt
  - Date of Latest Observation: Q4 2016
  - Date Received: 03/17/17
  - Frequency of data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- International Investment Position
  - Date of Latest Observation: Q4 2016
  - Date Received: 03/17/17
  - Frequency of data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- External Current Account Balance
  - Date of Latest Observation: Q4 2016
  - Date Received: 03/17/17
  - Frequency of data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
  - Data Quality – Methodological Soundness: O, LO, LO, LO
  - Data Quality Accuracy and Reliability: LO, LO, O, O, O
- Exports and Imports of Goods and Services
  - Date of Latest Observation: M2 2017
  - Date Received: 04/30/17
  - Frequency of data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- GDP/GNP
  - Date of Latest Observation: Q4 2016
  - Date Received: 03/17/17
  - Frequency of data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
  - Data Quality – Methodological Soundness: LO, LO, LO, LO
  - Data Quality Accuracy and Reliability: LNO, LNO, LNO, LO, LO
- Gross External Debt
  - Date of Latest Observation: Q4 2016
  - Date Received: 03/17/17
  - Frequency of data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q

### Footnote summaries (as presented)
- Every Friday the central bank disseminates daily net international reserves, and weekly International Reserve Assets and Reserve Liabilities.
- Interest rates include both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
- Central government (CG) and general government (GG) revenue and expenditure data are available monthly; and the composition of financing are available quarterly. Financing comprises of foreign, domestic bank, and domestic nonbank financing.
- The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
- Stocks of CG debt include type of instrument, maturity and type of creditor.
- International Investment Position includes external gross financial asset and liability positions vis-à-vis nonresidents.
- Frequency codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA).
- Data quality coding basis: O (fully observed), LO (largely observed), LNO (largely not observed), NO (not observed), NA (not available), as assessed in the data ROSC published in October 2003 and based on the mission during February 12–26, 2003.

*Content derived from the IMF staff report text provided in the source content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17166.pdf_