## 1perea2021001 - 2021. The outlook is highly uncertain and downside risks prevail, but policy buffers are ample. ## Source details **Canonical URL:** [1perea2021001 - 2021. The outlook is highly uncertain and downside risks prevail, but policy buffers are ample.](https://www.imf.org/-/media/files/publications/cr/2021/english/1perea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1perea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1perea2021001.pdf.json) --- ### Executive Board Assessment — summary findings - Peru entered the COVID-19 pandemic with "very strong economic fundamentals and policy frameworks." - The pandemic inflicted "a heavy human and economic toll." - Directors commended authorities for a "decisive response" to mitigate the crisis. - Key Board advice: - Avoid premature withdrawal of fiscal support to: contain the pandemic, mitigate its impact on poverty, and support recovery. - Once crisis abates, prioritize addressing fiscal risks and rising spending pressures and "anchor fiscal policy to a credible medium-term framework." - Revenue mobilization is "key to preserving fiscal sustainability"; Fund Technical Advice welcomed to identify measures to increase fiscal revenues. - Any recalibration of fiscal rules should "preserve debt sustainability, strengthen credibility, and be clearly communicated." - Monetary policy should "remain accommodative" while macroprudential policies should "encourage banks to focus on clients' viability." - Greater exchange rate flexibility would have benefits as "financial dollarization continues to decline." - Banking system considered "resilient"; progress on 2018 FSAP recommendations commended and remaining recommendations—especially legislative and regulatory reforms to strengthen supervision—encouraged. - Structural reform priorities: - (i) boost productivity via improving education, enhancing infrastructure, facilitating labor reallocation, and improving the business climate; - (ii) enhance social protection while reducing incentives to informality from the tax-benefit system, including through investment in health care and pension reform; - (iii) strengthen governance with additional transparency in the public sector and robust anti-corruption and AML/CFT frameworks. ### Key issues and outlook - Context: - IMF Executive Board approved a two-year FCL arrangement of US$11 billion (600 percent of quota) on May 28, 2020; the authorities expect to treat the arrangement as precautionary. - Political tensions intensified in 2020; presidential and parliamentary elections scheduled for April-June 2021. - Baseline macro assumptions and projections: - Baseline assumption: "the second wave of COVID-19 infections is brought under control by end-Q1." - Real GDP growth projections: - 2021: 8.5 percent - 2022: 5.2 percent - 2023: 4.8 percent - Activity projected to "recover steadily in 2021" and return to pre-pandemic output level in 2022, but the crisis will likely leave "significant scars in the medium term." - Outlook described as "highly uncertain" with "significant downside risks," notably evolution of the pandemic. ### Recent developments — economic and social impacts - Pandemic and containment: - Peru implemented one of the world's earliest and strictest lockdowns; health system capacity described as "low." - Second wave began January 2021; targeted lockdowns and curfews applied in 32 provinces in 17 regions for February. - Output and demand: - Real GDP changes (y-o-y): - Q1 2020: -3.7 percent - Q2 2020: -30 percent - 2020 annual: -11.1 percent - Industries representing 28 percent of GDP have reached pre-COVID production; another group representing 34 percent of GDP is "very close." - Labor market and poverty: - Employment contracted by 35.5 percent (y-o-y) in Q2 2020, narrowed to 17.1 percent in Q3 2020. - Informal worker share: 73.7 percent in 2020Q3, up from 71,6 percent one year before. - Poverty rate (total): 2018: 22.3; 2019: 21.7; 2020: 27.5. - Unemployment rate for Metropolitan Lima (period average): 2018: 6.7; 2019: 6.6; 2020: 13.6. - Prices and inflation: - Consumer Prices (end of period): 2018: 2.2; 2019: 1.9; 2020: 2.0; 2021–2023 projected: 2.0 each year. - External sector snapshots: - Exports (annual % change): 2018: 8.0; 2019: -2.8; 2020: -11.1; 2021: 27.5; 2022: 3.7; 2023: 3.7. - Imports (annual % change): 2018: 8.1; 2019: -1.9; 2020: -15.6; 2021: 19.9; 2022: 5.0; 2023: 4.8. - External current account balance (% of GDP): 2018: -1.7; 2019: -1.5; 2020: 0.5; 2021: -0.4; 2022: -0.7; 2023: -1.0. - Gross reserves (US$ billions): 2018: 60.3; 2019: 68.4; 2020: 74.9; 2021: 75.1; 2022: 75.1; 2023: 75.0. - Gross reserves as Percent of short-term external debt: 2018: 363.5; 2019: 432.6; 2020: 496.4; 2021: 518.7; 2022: 505.4; 2023: 494.2. - Financial sector and policy response: - Central bank lowered benchmark rate by 2 percentage points to 0.25 percent. - Reactiva Perú program and guaranteed-credit repo operations provided liquidity; reserve requirements lowered; repo maturities extended. - Sovereign issuance: April 2020 US$3 billion; November 2020 US$4 billion (including US$1 billion in century bonds). - Macroprudential easing: countercyclical capital buffer reduced; adjustments to loan terms allowed without changing loan classification. ### Fiscal response, outcomes, and projections - Fiscal response: - Total package (including non-fiscal measures) amounted to 26½ percent of GDP. - Non-fiscal measures: 7.6 percent of GDP. - Above-the-line fiscal measures: 7.4 percent of GDP, of which about 69 percent was implemented by year-end. - Implementation shortfalls and administrative constraints noted (outdated surveys, low financial inclusion, limited assistance to migrants and refugees). - Compensating measures: access to settlement payment and private pension funds withdrawals with limited relief to most vulnerable. - Reactiva Perú details: - Small firms constituted about 99 percent of beneficiaries. - Reactiva Perú credits by borrower size (Million of Soles; Percent; Units; Thousands): - Less than 10 employees: 23,857 (41.14 percent); 83,245 (96.2 percent); 1,089 (39.1 percent) - 11 to 50 employees: 14,938 (25.7 percent); 14,428 (2.9 percent); 292 (10.5 percent) - 51 to 100 employees: 5,495 (9.5 percent); 2,060 (0.4 percent); 147 (5.3 percent) - 101 to 500 employees: 9,901 (17.0 percent); 2,071 (0.4 percent); 714 (14.6 percent) - More than 500 employees: 3,903 (6.7 percent); 800 (0.1 percent); 483 (30.5 percent) - Total: 58,094 (100.0 percent); 502,284 (100.0 percent); 2,782 (100.0 percent) - Fiscal outcomes: - Fiscal deficit: widened from 1.6 percent of GDP in 2019 to 8.8 percent in 2020. - Public debt: increased from 27.1 percent of GDP in 2019 to 35.4 percent of GDP in 2020. - End-2020 international reserves: US$74.9 billion (up from US$68.4 billion at end-2019). - Staff baseline fiscal projections (NFPS, percent of GDP): - NFPS Revenue: 2018: 24.5; 2019: 24.8; 2020: 22.1; 2021: 22.4; 2022: 23.1; 2023: 23.1. - NFPS Primary Expenditure: 2018: 25.5; 2019: 25.0; 2020: 29.3; 2021: 25.6; 2022: 24.7; 2023: 24.0. - NFPS Primary Balance: 2018: -1.0; 2019: -0.2; 2020: -7.2; 2021: -3.3; 2022: -1.6; 2023: -0.9. - NFPS Overall Balance: 2018: -2.3; 2019: -1.6; 2020: -8.8; 2021: -5.0; 2022: -3.4; 2023: -2.8. - NFPS Gross debt (including Rep. Certificates): 2018: 26.2; 2019: 27.1; 2020: 35.4; 2021: 35.4; 2022: 36.2; 2023: 36.7. - Fiscal scenarios (selected): - Baseline GDP growth (percent): 2019: 2.2; 2020: -11.1; 2021: 8.5; 2022: 5.2; 2023: 4.8; 2024: 3.4; 2025: 3.3; 2026: 3.3. - Alternative scenario with additional 2.5 percent of GDP fiscal spending in 2021: - 2021 GDP growth: 10.4 percent (vs 8.5 baseline). - NFPS debt peaks higher (e.g., 2021: 37.0 percent; 2022: 38.3 percent) and would peak at slightly above 39 percent of GDP over projection horizon. ### Financial system stability and vulnerabilities - End-2019 banking system indicators: - Tier-1 capital ratio: 11.6 percent. - Liquid assets: 21 percent of total assets. - Non-performing assets (NPLs): 3.4 percent, adequately provisioned (149 percent of NPLs). - Bank profitability: - ROE fell to 4.6 percent in November 2020 from 18.1 percent a year ago. - ROA fell to 0.5 percent from 2.3 percent. - NPLs: slight increases to 4 percent in November 2020, partly reflecting loan restructuring; additional voluntary provisions by banks. - Top-down stress tests: point to a resilient financial system and limited solvency problems even under adverse scenarios. - Expected deterioration concentrated in cooperative and microfinance sectors, which represent about 7 percent of system assets. - Selected Financial Soundness Indicators (series preserved as reported): - Deposit-to-loan ratio: 91.1; 90.2; 89.1; 88.0; 88.6; 91.0; 90.5; 91.7; 90.5; 92.0; 94.5; 94.5 - FX liabilities % (of total liabilities): 41.1; 40.2; 40.5; 39.3; 38.9; 38.3; 38.8; 39.9; 37.4; 38.3; 34.3; 34.3 - FX loans % (of total loans): 29.3; 29.0; 29.4; 28.5; 28.3; 28.0; 27.6; 27.4; 26.4; 27.0; 24.6; 24.6 - Leverage ratio (%): 12.1; 11.6; 12.0; 12.6; 12.5; 12.0; 12.3; 12.4; 12.9; 12.6; 11.0; 11.0 - ROA: 2.1; 2.0; 2.1; 2.2; 2.2; 2.2; 2.2; 2.3; 2.2; 2.1; 1.5; 1.5 - ROE: 17.7; 17.5; 17.6; 18.0; 17.8; 17.6; 17.8; 18.2; 17.9; 16.7; 12.6; 12.6 - NPL ratio: 4.7; 3.4; 3.4; 3.4; 3.3; 3.4; 3.4; 3.5; 3.4; 3.5; 3.5; 3.5 - NPL ratio change (%, annual): 9.4; -26.6; -27.7; -28.2; -30.3; 0.4; 1.4; 1.7; 2.9; 4.0; 0.9; 0.9 ### Corporate sector and external position - Corporate sector: profitability fell further in 2020 but remained robust by regional standards; leverage increased sharply in 2020 though not very high regionally; cash ratio and interest coverage are the highest in the region; share of debt at risk is not very high. - External position: - Current account: estimated surplus of 0.5 percent of GDP in 2020 (compared with a deficit of 1.5 percent in 2019). - FDI inflows: fell sharply; compensated by substantial public sector foreign borrowing. - International reserves at end-2020: US$74.9 billion (up from US$68.4 billion at end-2019). - Preliminary assessment: external position is moderately stronger than level predicted by fundamentals and desirable policies, with very large uncertainty. ### Outlook, scarring, and risks - Baseline macro assumptions: - Second wave brought under control by end-March; restrictions eased in Q2; supportive macro policies. - Staff projection: real GDP to grow by 8.5 percent in 2021. - Inflation: projected to stay within the target range of 2 +/-1 percent in the projection horizon. - Current account: after a small surplus in 2020, expected to gradually converge to a deficit of 1.6 percent of GDP in the medium term. - International reserves: expected to remain at comfortably high levels. - Medium-term scars and projections: - Output levels projected to be about 9 percent lower than in the pre-pandemic baseline. - Contact-intensive activities expected to recover fully only in the medium-to-long term. - Staff estimates potential growth decline from 3½ to 3¼ percent. - Negative output gap expected to close in 2024. - Risks: - Downside: more acute/protracted second wave, delays in vaccination, low health capacity, political uncertainty, external shocks, climate-related disasters. - Upside: stronger global growth or significant increase in public investment execution. ### Policy recommendations and priorities - Short-term fiscal policy: - Use available fiscal policy space to address the pandemic, including further support to households, limit impact on poverty, and safeguard against downside risks. - Avoid premature withdrawal of fiscal support. - Medium-term fiscal framework: - Develop a credible medium-term plan to return to fiscal targets once the crisis abates. - Mobilize revenue to preserve fiscal sustainability; Fund Technical Advice requested to identify revenue measures. - Any recalibration of fiscal rules should preserve debt sustainability, strengthen credibility, and be clearly communicated. - Monetary and financial policy: - Maintain accommodative monetary policy while extraordinary measures are gradually withdrawn due to muted inflationary pressures. - Macroprudential policy should encourage banks to focus on borrower viability. - Continue progress on 2018 FSAP recommendations, accelerate legislative and regulatory reforms to strengthen supervision. - Consider greater exchange rate flexibility as financial dollarization declines. - Structural reforms (priorities): - Boost productivity: improve education; enhance infrastructure; facilitate labor reallocation; improve business climate. - Strengthen social protection and reduce incentives to informality via tax-benefit reforms, investment in health care, and pension reform. - Strengthen governance: increase public sector transparency; enhance anti-corruption and AML/CFT frameworks; strengthen Offices of Institutional Integrity. ### Revenue mobilization and fiscal gap - Identified revenue measures: - Increased electronic invoicing, maturation of tax measures from 2017-2018, implementation of OECD/G20 Inclusive Framework on BEPS, expiration of some mining tax benefits, and revenue administration improvements would yield additional tax revenues of about 1 percentage point of GDP. - Staff baseline incorporates expected yields from identified measures; described as ambitious but achievable. - Remaining revenue shortfall: 0.7 percent of GDP; authorities requested Fund TA to help identify measures addressing this gap. ### Exchange rate, monetary stance, and macroprudential guidance - Monetary stance: - Easy monetary conditions should continue as extraordinary measures are withdrawn, given a substantial negative output gap until 2022 and subdued inflationary pressures. - BCRP forward-guidance: easy monetary conditions likely to persist for an extended period. - Exchange rate flexibility: - Greater exchange rate flexibility in the medium term would foster hedging instruments, strengthen monetary transmission, and reduce dollarization. - Recommendation: communications enhancements—explain rationale of past interventions in quarterly inflation reports to guide expectations. - Macroprudential policy: - Shift to encourage banks to emphasize borrower viability as conditions allow. - Pandemic-era measures: SBS reduced the countercyclical capital buffer and allowed loan-term adjustments without changing loan classification. - As of November 2020, 28 percent of total loans had been modified, highest shares in consumer lending and lending to SMEs. ### Structural reforms for resilient and inclusive growth - Staff estimate: GDP could increase by up to 8 percent six years after implementation of reforms in governance, labor market, and domestic finance. - Pandemic-exposed fragilities to prioritize: a. Productivity: improve education; enhance infrastructure; facilitate labor reallocation; improve business climate; align with National Plan for Competitiveness and Productivity launched in 2019. b. Social protection: reduce incentives to informality; invest in health care and a more adequate SSN including pensions; accompany moves toward universal health care with measures to reduce adverse incentive effects; deepen financial development and inclusion. c. Governance: additional transparency at all government levels; robust anti-corruption and AML/CFT enforcement; strengthen Offices of Institutional Integrity; improve public investment planning and implementation; move toward digital methods for tax and business procedures. ### Governance, safeguards, and authorities’ views - Governance and anti-corruption progress: - 2019 referendum institutional reforms implemented; Offices of Institutional Integrity created in more than 200 public sector entities; whistleblower complaint platform launched; integrity index developed; Comptroller’s Office monitors emergency spending. - AML/CFT regulations issued for customer due diligence on politically exposed persons; asset declaration requirements cover high-level public officials and are publicly available. - Safeguards: - KPMG Peru issued an unmodified audit opinion on the BCRP’s 2019 financial statements; staff completed safeguards procedures for Peru's FCL arrangement with no significant issues. - Authorities’ views: - Authorities were more optimistic on growth, expecting double-digit growth in 2021 and noting strong fundamentals and favorable terms of trade. - Authorities agreed with staff’s fiscal policy advice and noted Reactiva Perú prevented the loss of 2.8 million jobs. - Authorities view pandemic-related measures as temporary with limited impact on debt; a new MTMF transition path to fiscal targets will be announced in August. - Authorities agreed with monetary thrust but disagreed on additional transparency on FX intervention, citing real-time announcements and same-day ex-post publication of FX operations. ### Labor market, social support, and poverty (Annex III & IV highlights) - Employment shock: - Employment fell by 41 percent in Q2 relative to 2019Q4; employment contraction in Q2 2020: 39.5 percent y-o-y (alternate series noted); Q3 rebound left employment some 20 percent below pre-pandemic level. - Informality share rose from 71.6 percent in 2019Q3 to 73.7 percent in 2020Q3. - Household impacts: - Q2 2020: almost 40 percent of households reported at least one member had lost their job and had not yet returned to work; 18 percent of households reported receiving no income from any source (pre-pandemic average: 2 percent). - Q3 2020: households with job losses fell to 25 percent; households with no income fell to 5 percent. - Poverty projections and policy simulations (Annex IV): - Moderate poverty (US$5.5/day) in 2020 increased by about 6 percentage points; counterfactual without bonos: 10 percentage points. - Without universal cash transfers across all regions in 2021, poverty expected to remain 4.8 percentage points above pre-crisis levels. - Simulation of most generous bono: - Equivalent to about 2.3 percent of GDP; amount per household: S/.2,760 (US$767). - Impact: reduce poverty by almost 6.4 percentage points (versus baseline without emergency transfers); increase monthly income for bottom decile by almost 35 percent; reduce Gini coefficient by 3 points (2019 Gini: 42.82). - Bono equivalent to 1.3 percent of GDP (S/.1,530 / US$425) could reduce poverty by more than 3.6 percentage points. - Bono of S/.600 for regions in lockdown expected to reduce poverty by less than 1 percentage point. - ONP-targeted measures and ONP withdrawals would have minimal poverty-reducing impacts; fiscal cost of ONP withdrawal estimated at least 1.3 percent of GDP (Fiscal Council estimate cited 2.3 percent of GDP). ### Health preparedness (Annex II) - Pre-pandemic health capacity gaps: - Peru invested a smaller part of GDP in public health than peers; large proportion of health spending from out-of-pocket or private sources. - Fewer doctors and ICU beds than peers; reports suggested Peru had just 100 ICU beds available for COVID-19 patients when the pandemic struck. - Peru underperforms peers in access to basic sanitation and drinking water. - System fragmentation and surveillance: - Health system highly fragmented across five main insurers and decentralized management; vertical and horizontal fragmentation reduced quality and responsiveness. - Early detection and reporting capacity underperformed peers; early reliance on rapid antibody tests produced many false positives/negatives. ### External sector, IIP, and reserves (selected highlights) - International Investment Position (end-2019): - External assets: 57.1 percent of GDP, including central bank foreign assets of 29.6 percent of GDP. - FDI liabilities: 50 percent of GDP. - Public and private external debt: 35 percent of GDP. - Gross international reserves: - US$74.9 billion at end-2020; estimated 37.4 percent of GDP. - Reserves equal 307 percent of the ARA metric (well above 100–150 percent adequacy range). - BCRP FX actions in 2020: - Sold US$4 billion (about 2 percent of GDP) in non-spot market instruments; spot interventions limited. - External position assessment: - EBA current account norm: -2.4 percent of GDP; cyclically adjusted CA: -1 percent of GDP; overall CA gap: 1.4 percent of GDP, indicating a 2020 external position moderately stronger than fundamentals. ### Debt sustainability, stress tests, and risk assessment - Recent fiscal/debt developments: - NFPS deficit: 8.8 percent of GDP in 2020 (from 1.6 percent in 2019). - Public debt rose by about 8.3 percentage points to 35.4 percent of GDP in 2020. - Staff projection: debt-to-GDP ratio peak about 38 percent of GDP in 2025 under baseline, then decline gradually. - Stress-test highlights: - Real GDP growth shock (one standard deviation for 2 years): public debt could approach 55 percent of GDP and public gross financing needs about 7 percent of GDP over medium term. - Real interest rate shock (200bp) or 20 percent real depreciation: each could take debt to about 44 percent of GDP in 2026; gross financing needs about 5.1 percent of GDP through 2026. - Primary balance shock: cumulative deterioration of 3 percent of GDP over 2021-26 could take debt to about 46 percent of GDP in 2026; gross financing needs about 6.1 percent of GDP. - Combined macro-fiscal shock could take debt to about 60 percent of GDP by 2026. - COVID-19 contingent liabilities shock (e.g., fifth of Reactiva Perú guarantees called = 1.8 percent of GDP during 2021-23) plus lower growth could keep public debt over 46 percent of GDP by 2025. - Overall DSA conclusion: public debt expected to remain sustainable under baseline; negative growth shocks remain a major risk. ### Implementation of past Fund advice (Annex I & X high-level status) - Fiscal: increase public investment execution, introduce greater flexibility in fiscal framework, raise revenue mobilization capacity — status: in progress. - Monetary/exchange rate: data-dependent easing implemented; greater exchange rate flexibility — status: implemented/in progress. - Financial policies: reinforce legal protection of supervisors and consolidated supervision — status: not implemented / in progress. - FSAP recommendations: many measures implemented or in progress (expanded oversight of financial co-operatives; monitoring off-balance-sheet exposures; risk-monitoring tools; risk-based supervision for insurers; crisis preparedness); outstanding items include some legislative reforms and strengthening supervisor legal protection. *Source: PERU STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION (March 2, 2021).* ### 2021. The outlook is highly uncertain and downside risks prevail, but policy buffers are ample. ### 1perea2021001 - 2021. The outlook is highly uncertain and downside risks prevail, but policy buffers are ample. ### Executive Board Assessment — summary findings - Peru entered the COVID-19 pandemic with "very strong economic fundamentals and policy frameworks." - The pandemic inflicted "a heavy human and economic toll." - Directors commended authorities for a "decisive response" to mitigate the crisis. - Key Board advice: - Avoid premature withdrawal of fiscal support to: contain the pandemic, mitigate its impact on poverty, and support recovery. - Once crisis abates, prioritize addressing fiscal risks and rising spending pressures and "anchor fiscal policy to a credible medium-term framework." - Revenue mobilization is "key to preserving fiscal sustainability"; Fund Technical Advice welcomed to identify measures to increase fiscal revenues. - Any recalibration of fiscal rules should "preserve debt sustainability, strengthen credibility, and be clearly communicated." - Monetary policy should "remain accommodative" while macroprudential policies should "encourage banks to focus on clients' viability." - Greater exchange rate flexibility would have benefits as "financial dollarization continues to decline." - Banking system considered "resilient"; progress on 2018 FSAP recommendations commended and remaining recommendations—especially legislative and regulatory reforms to strengthen supervision—encouraged. - Structural reform priorities: - (i) boost productivity via improving education, enhancing infrastructure, facilitating labor reallocation, and improving the business climate; - (ii) enhance social protection while reducing incentives to informality from the tax-benefit system, including through investment in health care and pension reform; - (iii) strengthen governance with additional transparency in the public sector and robust anti-corruption and AML/CFT frameworks. ### Key issues and outlook - Context: - Peru had a sustained track record of very strong policies and institutional frameworks before the pandemic. - The IMF Executive Board approved a two-year FCL arrangement of US$11 billion (600 percent of quota) on May 28, 2020; the authorities expect to treat the arrangement as precautionary. - Political tensions intensified in 2020; presidential and parliamentary elections scheduled for April-June 2021. - Outlook and risks: - Baseline assumption: "the second wave of COVID-19 infections is brought under control by end-Q1." - Real GDP growth projections: - 2021: 8.5 percent - 2022: 5.2 percent - 2023: 4.8 percent - Projection notes: activity projected to "recover steadily in 2021" and return to pre-pandemic output level in 2022, but the crisis will likely leave "significant scars in the medium term." - The outlook is "highly uncertain" with "significant downside risks," notably evolution of the pandemic. ### Recent developments — economic and social impacts - Pandemic and containment: - Peru implemented one of the world's earliest and strictest lockdowns; health system capacity described as "low" (see Annex II). - Second wave began January 2021; targeted lockdowns and curfews applied in 32 provinces in 17 regions for February. - Output and demand: - Real GDP changes: - Q1 2020: -3.7 percent (y-o-y) - Q2 2020: -30 percent (y-o-y) - 2020 annual: -11.1 percent - Sectors: industries representing 28 percent of GDP have reached pre-COVID production; another group representing 34 percent of GDP is "very close." - Labor market and poverty: - Employment contracted by 35.5 percent (y-o-y) in Q2 2020, narrowed to 17.1 percent in Q3 2020. - Informal worker share: 73.7 percent in 2020Q3, up from 71,6 percent one year before. - Poverty rate (total): 2018: 22.3; 2019: 21.7; 2020: 27.5. - Unemployment rate for Metropolitan Lima (period average): 2018: 6.7; 2019: 6.6; 2020: 13.6. - Prices and inflation: - Consumer Prices (end of period): 2018: 2.2; 2019: 1.9; 2020: 2.0; 2021–2023 projected: 2.0 each year. - External sector: - Exports (annual % change): 2018: 8.0; 2019: -2.8; 2020: -11.1; 2021: 27.5; 2022: 3.7; 2023: 3.7. - Imports (annual % change): 2018: 8.1; 2019: -1.9; 2020: -15.6; 2021: 19.9; 2022: 5.0; 2023: 4.8. - External current account balance (% of GDP): 2018: -1.7; 2019: -1.5; 2020: 0.5; 2021: -0.4; 2022: -0.7; 2023: -1.0. - Gross reserves (In billions of U.S. dollars): 2018: 60.3; 2019: 68.4; 2020: 74.9; 2021: 75.1; 2022: 75.1; 2023: 75.0. - Gross reserves as Percent of short-term external debt: 2018: 363.5; 2019: 432.6; 2020: 496.4; 2021: 518.7; 2022: 505.4; 2023: 494.2. - Financial sector and policy response: - Central bank lowered benchmark rate by 2 percentage points to 0.25 percent. - Reactiva Perú program and guaranteed-credit repo operations provided liquidity; reserve requirements lowered; repo maturities extended. - Sovereign issuance: April 2020 US$3 billion; November 2020 US$4 billion (including US$1 billion in century bonds). - Macroprudential easing: countercyclical capital buffer reduced; adjustments to loan terms allowed without changing loan classification. - CFM/MPM measures: thresholds for foreign exchange derivatives and short positions were increased in December 2019 and March 2020 (details in text). ### Fiscal and debt positions (selected indicators) - NFPS Revenue (% of GDP): 2018: 24.5; 2019: 24.8; 2020: 22.1; 2021: 22.4; 2022: 23.1; 2023: 23.1. - NFPS Primary Expenditure (% of GDP): 2018: 25.5; 2019: 25.0; 2020: 29.3; 2021: 25.6; 2022: 24.7; 2023: 24.0. - NFPS Primary Balance (% of GDP): 2018: -1.0; 2019: -0.2; 2020: -7.2; 2021: -3.3; 2022: -1.6; 2023: -0.9. - NFPS Overall Balance (% of GDP): 2018: -2.3; 2019: -1.6; 2020: -8.8; 2021: -5.0; 2022: -3.4; 2023: -2.8. - NFPS Gross debt (including Rep. Certificates) (% of GDP): 2018: 26.2; 2019: 27.1; 2020: 35.4; 2021: 35.4; 2022: 36.2; 2023: 36.7. - External (% of GDP): 2018: 8.9; 2019: 8.5; 2020: 15.0; 2021: 14.1; 2022: 13.9; 2023: 13.4. - Domestic (% of GDP): 2018: 17.3; 2019: 18.6; 2020: 20.3; 2021: 21.3; 2022: 22.3; 2023: 23.2. - Total external debt (% of GDP): 2018: 34.6; 2019: 34.7; 2020: 43.1; 2021: 39.0; 2022: 36.6; 2023: 34.2. - Savings and investment: - Gross domestic investment (% of GDP): 2018: 21.7; 2019: 21.5; 2020: 18.8; 2021: 21.1; 2022: 22.0; 2023: 22.3. - National savings (% of GDP): 2018: 20.0; 2019: 19.9; 2020: 19.3; 2021: 20.7; 2022: 21.3; 2023: 21.3. - Memorandum: - Nominal GDP (S/. billions): 2018: 740; 2019: 770; 2020: 712; 2021: 815; 2022: 872; 2023: 929. - GDP per capita (in US$): 2018: 7,000; 2019: 6,958; 2020: 6,084; 2021: 6,678; 2022: 7,051; 2023: 7,389. ### Policy advice and recommendations - Short-term fiscal policy: - Use available fiscal policy space to address the pandemic, including further support to households, limit impact on poverty, and safeguard against downside risks. - Avoid premature withdrawal of fiscal support. - Medium-term fiscal framework: - Develop a credible medium-term plan to return to fiscal targets once the crisis abates. - Mobilize revenue to preserve fiscal sustainability; Fund Technical Advice requested to identify revenue measures. - Any recalibration of fiscal rules should preserve debt sustainability, strengthen credibility, and be clearly communicated. - Monetary and financial policy: - Maintain accommodative monetary policy while extraordinary measures are gradually withdrawn due to muted inflationary pressures. - Macroprudential policy should encourage banks to focus on borrower viability. - Continue progress on 2018 FSAP recommendations, accelerate legislative and regulatory reforms to strengthen supervision. - Consider greater exchange rate flexibility as financial dollarization declines. - Structural reforms: - Focus on fragilities exposed by the pandemic to promote stronger and inclusive growth: - Boost productivity: improve education; enhance infrastructure; facilitate labor reallocation; improve business climate. - Strengthen social protection and reduce incentives to informality via tax-benefit reforms, investment in health care, and pension reform. - Strengthen governance: increase public sector transparency; enhance anti-corruption and AML/CFT frameworks. *Source: PERU STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION (March 2, 2021).* ### 8. The large and broad-based fiscal policy response was essential in containing the ### 8. The large and broad-based fiscal policy response was essential in containing the ### Fiscal response and implementation - Total package (including non-fiscal measures) amounted to 26½ percent of GDP. - Non-fiscal measures: 7.6 percent of GDP. - Above-the-line fiscal measures: 7.4 percent of GDP, of which about 69 percent was implemented by year-end. - Implementation problems: restrictions on construction activity delayed public investment; early difficulties delivering direct cash transfers to households. - Administrative constraints affecting transfers: use of outdated surveys (ENAHO uses 2007 census; SISFOH uses 2005 census), low financial inclusion, and limited assistance to migrants and refugees. - Compensating measures: opening access to settlement payment and private pension funds, which did not provide relief to most vulnerable workers and had adverse implications for the pension system’s integrity. ### Support measures and Reactiva Perú - Package included direct support to the health system, households, businesses, and a sizable credit-guarantee program (Reactiva Perú). - Reactiva Perú: ended in 2020; successfully provided lifeline to many businesses, with small firms constituting about 99 percent of beneficiaries. - Reactiva Perú credits by borrower size (Million of Soles; Percent; Units; Thousands): - Less than 10 employees: 23,857 (41.14 percent); 83,245 (96.2 percent); 1,089 (39.1 percent) - 11 to 50 employees: 14,938 (25.7 percent); 14,428 (2.9 percent); 292 (10.5 percent) - 51 to 100 employees: 5,495 (9.5 percent); 2,060 (0.4 percent); 147 (5.3 percent) - 101 to 500 employees: 9,901 (17.0 percent); 2,071 (0.4 percent); 714 (14.6 percent) - More than 500 employees: 3,903 (6.7 percent); 800 (0.1 percent); 483 (30.5 percent) - Total: 58,094 (100.0 percent); 502,284 (100.0 percent); 2,782 (100.0 percent) - Summary of Policy Measures – 2020 (In percent of GDP): - Total: 26.6 announced; 19.2 implemented - Fiscal Measures: 19.0 announced; 14.0 implemented - Above the line: 7.4 announced; 5.1 implemented - Revenue: 2.3 announced; 1.0 implemented - Deferred revenue: 1.7 (of which) - Spending: 5.1 announced; 4.2 implemented - Health: 0.9 announced; 0.8 implemented - Non-health: 4.2 announced; 3.3 implemented - Households: 2.8 announced; 2.4 implemented (includes cash transfers, subsidies, and in-kind transfers) - Firms: 0.2 announced; 0.2 implemented (wage subsidies) - Public works (Arranca Perú): 1.1 announced; 0.6 implemented - Other (purchases from SMEs, support to agriculture, and other measures): 0.2 announced; 0.1 implemented - Below the line: 11.6 announced; 8.8 implemented - Of which: Credit guarantees: 9.6 announced; 8.2 implemented (Reactiva Perú and Fondo de Apoyo Empresarial MYPE) - Other (CTS and private pension funds withdrawals): 7.6 announced; 5.2 implemented - Of which: Congress-mandated: 5.6 announced; 3.9 implemented ### Fiscal outcomes and public debt - Fiscal deficit: widened from 1.6 percent of GDP in 2019 to 8.8 percent in 2020. - Public debt: increased from 27.1 percent of GDP in 2019 to 35.4 percent of GDP in 2020. - End-2020 international reserves: US$74.9 billion (up from US$68.4 billion at end-2019). - Fiscal projections and scenarios (In percent of GDP unless otherwise specified): - Baseline scenario (Prelim. 2019, 2020, 2021, 2022, 2023, 2024, 2025, 2026): - GDP growth rate (percent): 2.2; -11.1; 8.5; 5.2; 4.8; 3.4; 3.3; 3.3 - Output gap (% of potential GDP): -1.7; -7.2; -3.0; -1.4; -0.1; 0.0; 0.0; 0.0 - Primary NFPS spending: 25.0; 29.3; 25.6; 24.7; 24.0; 23.7; 23.6; 23.3 - NFPS fiscal balance: -1.6; -8.8; -5.0; -3.4; -2.8; -2.4; -2.1; -1.8 - NFPS debt: 27.1; 35.4; 35.4; 36.2; 36.7; 37.2; 37.5; 37.4 - Poverty rate (percent): 21.7; 27.5; 27.2; ............... - Alternative scenario (based on additional fiscal spending of 2.5 percent of GDP in 2021 as advised by IMF staff): - GDP growth rate (percent): 2.2; -11.1; 10.4; 3.6; 4.8; 3.4; 3.3; 3.3 - Output gap (% of potential GDP): -1.7; -7.2; -1.4; -1.2; 0.0; 0.0; 0.0; 0.0 - Primary NFPS spending: 25.0; 29.3; 27.7; 24.7; 24.0; 23.7; 23.5; 23.3 - NFPS fiscal balance: -1.6; -8.8; -7.1; -3.4; -2.8; -2.4; -2.1; -1.8 - NFPS debt: 27.1; 35.4; 37.0; 38.3; 38.6; 39.1; 39.3; 39.2 - Poverty rate (percent): 21.7; 27.5; 20.8; ............... - Difference between output (alternative/baseline; in percent): ......1.7; 0.3; 0.3; 0.3; 0.3; 0.3 - Staff view: fiscal deficit expected to fall from 8.8 percent of GDP in 2020 to 5 percent of GDP in 2021 as transitory relief measures are phased out. - Public debt projected to peak at about 37.5 percent of GDP in 2025 before declining toward the 30-percent-of-GDP target beyond the forecast horizon. - Under the alternative scenario with additional 2½ percent of GDP stimulus in 2021, public debt would peak at slightly above 39 percent of GDP. ### Financial system stability and vulnerabilities - End-2019 banking system indicators: - Tier-1 capital ratio: 11.6 percent. - Liquid assets: 21 percent of total assets. - Non-performing assets (NPLs): 3.4 percent, adequately provisioned (149 percent of NPLs). - Bank profitability declined: ROE fell to 4.6 percent in November 2020 from 18.1 percent a year ago; ROA fell to 0.5 percent from 2.3 percent. - NPLs: slight increases to 4 percent in November 2020, partly reflecting loan restructuring; additional voluntary provisions by banks. - Top-down stress tests: point to a resilient financial system and limited solvency problems even under adverse scenarios. - Expected deterioration: default rates expected to rise significantly in cooperative and microfinance sectors, which represent about 7 percent of system assets. - Financial Soundness Indicators (selected series): - Deposit-to-loan ratio: 91.1; 90.2; 89.1; 88.0; 88.6; 91.0; 90.5; 91.7; 90.5; 92.0; 94.5; 94.5 - FX liabilities % (of total liabilities): 41.1; 40.2; 40.5; 39.3; 38.9; 38.3; 38.8; 39.9; 37.4; 38.3; 34.3; 34.3 - FX loans % (of total loans): 29.3; 29.0; 29.4; 28.5; 28.3; 28.0; 27.6; 27.4; 26.4; 27.0; 24.6; 24.6 - Leverage ratio (%): 12.1; 11.6; 12.0; 12.6; 12.5; 12.0; 12.3; 12.4; 12.9; 12.6; 11.0; 11.0 - ROA: 2.1; 2.0; 2.1; 2.2; 2.2; 2.2; 2.2; 2.3; 2.2; 2.1; 1.5; 1.5 - ROE: 17.7; 17.5; 17.6; 18.0; 17.8; 17.6; 17.8; 18.2; 17.9; 16.7; 12.6; 12.6 - NPL ratio: 4.7; 3.4; 3.4; 3.4; 3.3; 3.4; 3.4; 3.5; 3.4; 3.5; 3.5; 3.5 - NPL ratio change (%, annual): 9.4; -26.6; -27.7; -28.2; -30.3; 0.4; 1.4; 1.7; 2.9; 4.0; 0.9; 0.9 ### Corporate sector and external position - Corporate sector: profitability fell further in 2020 but remained robust by regional standards; leverage increased sharply in 2020 though not very high regionally; cash ratio and interest coverage are the highest in the region; share of debt at risk is not very high. - External position: - Current account: estimated surplus of 0.5 percent of GDP in 2020 (compared with a deficit of 1.5 percent in 2019), reflecting plummeting imports, lower repatriation of profits from mining, and a one-off income tax payment. - FDI inflows: fell sharply; compensated by substantial public sector foreign borrowing. - International reserves at end-2020: US$74.9 billion (up from US$68.4 billion at end-2019). - Based on preliminary estimates, the external position is moderately stronger than the level predicted by fundamentals and desirable policies, with very large uncertainty. ### Outlook, scarring, and risks - Baseline macro outlook assumptions: - Second wave brought under control by end-March; recently introduced restrictions gradually eased in Q2; macroeconomic policies remain supportive. - Economic activity: expected to slow in Q1 2021 then regain momentum, led by domestic demand and historically high commodity prices and favorable terms of trade. - Staff projection: real GDP to grow by 8.5 percent in 2021. - Inflation: projected to stay within the target range of 2 +/-1 percent in the projection horizon. - Current account: after a small surplus in 2020, expected to gradually converge to a deficit of 1.6 percent of GDP in the medium term. - International reserves: expected to remain at comfortably high levels. - Medium-term scars and projections: - Output levels projected to be about 9 percent lower than in the pre-pandemic baseline. - Contact-intensive activities (e.g., accommodation and restaurants, which halved in 2020) expected to recover fully only in the medium-to-long term. - Long-lasting effects from firm closures, permanent loss of dislocated workers, reduced human capital accumulation due to school closures. - Staff estimates potential growth decline from 3½ to 3¼ percent. - Growth projected to converge gradually toward potential, with the negative output gap closing in 2024. - Downside risks: - More acute and protracted second wave, delays in vaccination, low health system capacity could require broader and stricter containment measures. - Further political uncertainty and social unrest could depress investment. - External risks: global reversal in trade integration, sudden change in foreign investor sentiment, intensification of natural disasters due to climate change. - Upside risks: - Stronger global growth from unexpected shifts in the pandemic. - Significant increase in public investment execution. ### Policy recommendations and priorities - Short-term policy: - Use available space to address the new health emergency and sustain household incomes to reduce poverty, limit scarring, and insure against downside risks to growth. - Monetary conditions: remain accommodative in the absence of inflationary pressures. - Fiscal stance: - More policy support warranted in the short term; staff sees merit in considering a fourth round of the Bono Universal in the amount of about 2½ percent of GDP. - A more gradual withdrawal of fiscal stimulus recommended to address pandemic, limit poverty impact, and guard against downside growth risks. - Authorities’ plans to return to fiscal targets (1-percent-of-GDP fiscal deficit in 2026 per 2020 MTMF) should be revisited given uncertainty and higher spending needs. - Available fiscal space would allow a more gradual return to pre-pandemic fiscal targets than currently envisioned. - Medium-term priorities: - Address capacity bottlenecks in the public healthcare system. - Strengthen social safety net adequacy (coverage is in line with regional median; adequacy looks worse than comparators). - Provide training programs and income support to displaced workers to reduce scarring. - Reform pension system in light of depletion of private pension fund accounts and projected declines in replacement rates. - Invest in infrastructure to boost productivity, resilience to climate change, and digitalization. - Manage contingent liabilities related to guaranteed-lending programs. - Buffer and market-access considerations: - Despite higher debt, public debt remains low; gross debt and debt burden indicators are well below emerging-economy benchmarks. - Sizable international reserves (about 34 percent of GDP), access to the two-year FCL arrangement and other funding sources, and a robust financial sector mitigate macroeconomic risks and support capacity to cope with additional shocks. - Authorities’ goal to broaden investor base and raise domestic currency share of public debt to mitigate investor concentration risks. *Source: IMF staff calculations and Peruvian authorities as presented in the provided content.* ### 21. Revenue mobilization will be key to preserving fiscal sustainability while ### 21. Revenue mobilization will be key to preserving fiscal sustainability while accommodating additional spending. ### Revenue mobilization and fiscal gap - Increased use of electronic invoicing, maturation of tax measures introduced in 2017-2018 (including changes to the excise schedules), implementation of the OECD/G20 Inclusive Framework on BEPS, expiration of tax benefits of some large mining projects, and other revenue administration efforts (including streamlining of tax auditing processes) would yield additional tax revenues of about 1 percentage point of GDP. - Staff’s baseline incorporates the expected yields from the identified measures; these yields are described as ambitious but achievable. - Remaining revenue shortfall of 0.7-percent-of-GDP; the authorities have asked for Fund TA to help identify measures addressing this gap. ### Anchoring policy to a medium-term framework - Continuing to anchor policy to a credible medium-term plan will help navigate uncertainty. - Guiding adoption of the 2022 budget with a new MTMF underpinned by conservative growth projections and adequate measures will help maintain confidence. - The new MTMF should identify contingent policy measures in case downside risks materialize. ### Monetary accommodation and preserving financial stability - Extraordinary easing of monetary conditions by the BCRP, combined with relaxation of macroprudential policies and government-guaranteed lending programs, stimulated credit growth at low interest rates and averted widespread bankruptcies and business closures. - Credit outcomes and liquidity: - Credit to businesses in domestic currency increased by 21.6 percent (y-o-y) in October. - Excluding loans under Reactiva Perú, credit to businesses in domestic currency fell by 3.9 percent. - A significant part of injected liquidity returned to the central bank as commercial bank deposits and other claims on the BCRP, reflecting low demand for investment. - Reactiva Perú expired in 2020; another guaranteed-lending program could be considered if downside risks materialize. ### Monetary stance and instruments - Easy monetary conditions should continue as extraordinary measures are withdrawn, given a substantial negative output gap until 2022 and subdued inflationary pressures. - The BCRP’s February forward-guidance highlighted that easy monetary conditions are likely to persist for an extended period. - The BCRP created new security repos conditional on expansion of long-term lending to enhance monetary transmission and allow further easing if necessary. ### Exchange rate flexibility and communication - In the medium term, greater exchange rate flexibility would: - Foster development of hedging instruments. - Strengthen transmission of monetary policy. - Further reduce dollarization by inducing agents to internalize exchange rate risk. - The BCRP has intervened on both sides of the market since the pandemic began, without preventing exchange rate depreciation; depreciation has been larger than some regional comparators but volatility has been less pronounced. - Higher risk weights for FX loans (a 2018 FSAP recommendation) would help reduce dollarization. - Communications enhancements recommended: - Go beyond reporting factual FX interventions. - Explain rationale of past interventions in quarterly inflation reports by linking them to structural characteristics and policy trade-offs to guide expectations and facilitate transition to more exchange rate flexibility. - Staff and authorities will continue work on better understanding multi-instrument framework trade-offs. ### Macroprudential policy and financial sector support - As conditions allow, macroprudential policies may shift to encourage banks to emphasize borrower viability. - Pandemic-era measures: - SBS reduced the countercyclical capital buffer and allowed loan-term adjustments without changing loan classification. - As of November 2020, 28 percent of total loans had been modified, with highest shares in consumer lending and lending to SMEs. - Policy focus: - Direct resources to viable but illiquid firms. - For unviable firms, improve bankruptcy frameworks, reduce lengthy administrative proceedings, and encourage out-of-court restructurings. ### Regulatory and supervisory strengthening - Reforms implemented or partially implemented following 2018 FSAP recommendations include: - Expanding oversight of financial co-operatives by SBS. - Monitoring banks’ off-balance-sheet exposures. - Introducing new risk-monitoring tools. - Implementing risk-based supervision for all insurers. - Strengthening crisis preparedness and management. - Enhancing emergency liquidity assistance framework. - Measures being prepared include: - Higher capital surcharges for systemically important banks. - Enhanced supervision of financial groups. - Requirements for recovery and resolution planning for domestic systemically important banks and financial groups. ### Structural reforms for resilient and inclusive growth - Reforms remain essential to remove structural bottlenecks and boost sustainable growth. - Staff estimate that GDP could increase by up to 8 percent six years after implementation of reforms in governance, labor market, and domestic finance. - Pandemic-exposed fragilities to prioritize: a. Boosting productivity via improving education, enhancing infrastructure, facilitating labor reallocation, and improving the business climate; align with the National Plan for Competitiveness and Productivity launched in 2019. The new agriculture promotion law should preserve flexibility in labor contracts important to the agro-export sector. b. Enhancing social protection while reducing incentives to informality from the tax-benefit system; invest in health care and a more adequate SSN, including pensions; ensure moves toward universal health care are accompanied by measures to reduce adverse incentive effects. Efforts to deepen financial development and inclusion should be intensified. c. Further strengthening governance through additional transparency in the public sector (including local levels), robust anti-corruption and AML/CFT enforcement, enhancing effectiveness of anti-corruption institutions (including resourcing and training for Offices of Institutional Integrity), strengthening planning and implementation of public investment, and moving toward digital methods for tax and business-related procedures. ### Governance, safeguards, and authorities’ views - Governance and anti-corruption progress: - 2019 referendum institutional reforms have been implemented. - Creation of Offices of Institutional Integrity in more than 200 public sector entities. - Launch of a whistleblower complaint platform. - Development of an integrity index by the Integrity Secretariat. - Comptroller’s Office monitors emergency-related spending and published regular reports. - Efforts ongoing to ensure accuracy of beneficial ownership information collected by SUNAT. - Several AML/CFT regulations issued for customer due diligence on politically exposed persons; asset declaration requirements cover high-level public officials and are publicly available. - Safeguards: - KPMG Peru issued an unmodified audit opinion on the BCRP’s 2019 financial statements; staff completed safeguards procedures for Peru's FCL arrangement with no significant issues. - Authorities’ views: - Authorities were more optimistic on growth, expecting double-digit growth in 2021 and noting strong fundamentals (exceptionally favorable terms of trade, continued policy support, contained damage to production capacity, recovering public and private investment). - Authorities agreed with staff’s fiscal policy advice and noted strong 2020 measures; Reactiva Perú prevented the loss of 2.8 million jobs. - The authorities view pandemic-related measures as temporary with limited impact on debt, financed via budget reallocations and public assets; a new MTMF transition path to fiscal targets will be announced in August. - Authorities agreed with monetary policy thrust but disagreed with staff on additional transparency on foreign exchange intervention, noting real-time announcements and same-day ex-post publication of FX operations in official publications. - Authorities underscored steps taken to strengthen financial sector oversight and noted some FSAP recommendations were delayed due to political support needs for Banking Law amendments; they consider the financial sector stable and microfinance risks non-systemic. *Source: IMF staff report excerpt.* ### 37. The authorities concurred on the importance of reorienting the structural reform ### 37. The authorities concurred on the importance of reorienting the structural reform agenda to address the needs exposed by the pandemic ### Pandemic impact and outlook - Low capacity in the health care system required stringent containment measures in the first half of 2020, leading to a sharp fall in economic activity and employment while fatalities mounted. - Activity rebounded rapidly in the second half of 2020, helped by a very strong policy response and rising commodity prices, but the second wave of infections that started in early 2021 is jeopardizing the recovery. - Scenario assumption and projection: - Assuming infections are brought under control by end-Q1, growth could rise to 8.5 percent in 2021 from a contraction of 11.1 percent in 2020. - Downside risks include a more acute and prolonged second wave. ### Policy response and buffers - Large buffers allowed the authorities to adopt sizable monetary, fiscal, and financial policy packages to fight the adverse effects of the pandemic and prevent even worse economic outcomes. - As a result, the public deficit increased sharply, but debt remains sustainable even under further shocks, and more fiscal space is available. - With the policy rate close to the zero-lower bound, monetary policy is experimenting with the use of forward guidance and unconventional policies. - The current account balance has improved significantly, and reserves are above standard reserve adequacy metrics. - Very strong economic fundamentals and institutional policy frameworks continue to provide the basis for a sustained track record of very strong policies, including across multiple electoral cycles and governments. ### Fiscal policy guidance - The second wave and large downside risks argue against a premature withdrawal of the fiscal stimulus. - The government is already responding to the second wave with additional measures, but more is needed to compensate for the pandemic's impact on most vulnerable groups. - Recommended contingency actions: - Prepare contingency measures in the event potential downside risks to growth materialize. - Further accelerate the execution of special projects in the health sector. - Consider similar vehicles for public investments in water, sanitation, and housing. - Anchoring fiscal policy to a credible medium-term framework remains essential: - Converging back to fiscal targets will take time in a situation characterized by extreme uncertainty and rising spending needs. - The new MTMF, which will guide the adoption of the 2022 budget, should be underpinned by conservative growth projections and adequate revenue measures to address identified revenue gaps. - The MTMF should also identify contingent measures based on the analysis of risks. - Any recalibration of the fiscal rules, which might be considered when uncertainty has dissipated, should preserve debt sustainability, strengthen credibility, and be clearly communicated. ### Monetary and macroprudential policy - Easy monetary conditions should continue while macroprudential policies should encourage banks to focus on clients' viability if conditions allow. - Rationale: - A substantially negative output gap until 2022 and well-anchored inflation expectations imply monetary policy stimulus should not be withdrawn. - Exchange rate and external policy notes: - As dollarization declines, the central bank could allow greater exchange rate flexibility to absorb external shocks and promote financial development. - Foreign exchange intervention has been two-way, and the external position is moderately stronger than the level predicted by fundamentals and desirable policies. - Financial sector measures: - Loan restructuring in 2020 helped contain bankruptcies. - As the economy recovers, macroprudential policies could initiate a gradual return to normal conditions, encouraging banks to focus on borrowers’ viability and direct resources to viable but illiquid firms. - Unviable enterprises should be resolved promptly. ### Financial stability and regulatory reform - Heightened financial stability risks highlight the importance of completing the legislative and regulatory reform agenda. - Authorities have taken significant measures to maintain financial stability and strengthen financial sector oversight, but additional steps are needed, including: - Implementing requirements for recovery and resolution planning for domestic systemically important banks and financial groups. - Reinforcing the legal protection of supervisors. - Bringing some regulations in line with Basel III, including those regarding risk weights for foreign currency loans and capital surcharges for systemic banks. ### Structural reform priorities - Priorities should be informed by the important structural fragilities exposed by the pandemic. - A multi-pronged strategy should focus on: - Boosting productivity by improving education, enhancing infrastructure, facilitating labor reallocation, and improving the business climate. - Enhancing social protection while reducing incentives to informality from the tax-benefit system, including through investment in health care and pension reform. - Strengthening governance with additional transparency in the public sector and robust anti-corruption and AML/CFT enforcement. - Additional measures the authorities agreed on: - Strengthen the public provision of health, education, and social protection. - Urgency of a comprehensive and well-designed pension reform. - Confidence that the new agrarian law approved by Congress would continue to underpin the success of the agro-export industry. - Importance of investing in infrastructure and recent efforts to enhance digitalization. - Confirmed commitment to strengthening governance and fighting corruption. *PERU INTERNATIONAL MONETARY FUND STAFF APPRAISAL* ### 45. Staff recommends that the next Article IV consultation take place on the standard 12- ### 1perea2021001 - 45. Staff recommends that the next Article IV consultation take place on the standard 12- ### Article IV timing - Staff recommends that the next Article IV consultation take place on the standard 12-month cycle. ### Containment measures and economic recovery - Strict containment measures were eased in June-July. - More than in other countries in the region, a large part of the economy was closed. - Unlike in Chile, Peru’s mining sector was subject to the lockdown. - The restrictive measures crippled economic activity; mobility recovered as measures were eased and economic activity recovered thereafter. - Illustrative indices and timing: - Lockdown start: 3/16/2020. - Phase 1 reopen: 5/4/2020. - Phase 2 reopen: 6/5/2020. - Phase 3 reopen: 7/1/2020. - Phase 4 reopen: 10/1/2020. ### Real sector developments - Growth and labor market: - Real GDP: -11.1 in 2020; projected 8.5 in 2021, 5.2 in 2022, 4.8 in 2023, 3.4 in 2024, 3.3 in 2025, 3.3 in 2026. - Output gap (percent of potential GDP): -7.2 in 2020; -3.0 in 2021; -1.4 in 2022; -0.1 in 2023; 0.0 in 2024–2026. - Unemployment in Metropolitan Lima increased sharply; period-average unemployment: 13.6 in 2020 (noted as a sharp increase, particularly among young and female). - Inflation and monetary policy: - Consumer prices (end of period): 2.0 in 2020; 2.0 in 2021–2026 (projected). - Central bank cut the policy rate to a historically low level (qualitative statement). - Core and tradable/non-tradable inflation remained low. - Composition of recovery: - Recovery is driven by consumption and investment. - Confidence indicators improved in second half of 2020. ### Fiscal sector developments and projections - Fiscal balances (NFPS; percent of GDP): - NFPS primary balance: -7.2 in 2020; -3.3 in 2021; -1.6 in 2022; -0.9 in 2023; -0.6 in 2024; -0.3 in 2025; -0.1 in 2026. - NFPS overall balance: -8.8 in 2020; -5.0 in 2021; -3.4 in 2022; -2.8 in 2023; -2.4 in 2024; -2.1 in 2025; -1.8 in 2026. - NFPS structural balance: -6.4 in 2020; -4.3 in 2021; -3.1 in 2022; -2.9 in 2023; -2.5 in 2024; -2.3 in 2025; -2.0 in 2026. - Revenues and expenditures (percent of GDP): - NFPS revenue: 22.1 in 2020; 22.4 in 2021; 23.1 in 2022–2023; 23.2 in 2024–2026. - NFPS primary expenditures: 29.3 in 2020; 25.6 in 2021; 24.7 in 2022; declining toward 23.3 by 2026. - Public debt: - Gross non-financial public sector debt: 35.4 in 2020; projected 36.2 in 2022; 37.2 in 2023; 37.5 in 2025; 37.4 in 2026. - Public gross debt (nominal S/. millions series): 251,893 in 2020; 288,065 in 2021; 316,129 in 2022; rising to 402,077 by 2026 (levels reported in Table 2). - Fiscal outlook narrative: - After widening sharply in 2020, the primary balance is expected to gradually improve. - Improving growth prospects would allow for a partial withdrawal of the fiscal impulse in 2021. - In the baseline, both the fiscal deficit and the debt ratio would return to respective targets of 1 percent and 30 percent of GDP beyond the forecast horizon (text statement). ### Balance sheet and financial sector indicators - External position and reserves: - Gross reserves (in billions of U.S. dollars): 74.9 in 2020; projected 75.1 in 2021; 75.1 in 2022; 75.0 in 2023; 74.2 in 2024; 71.8 in 2025; 71.0 in 2026. - Net international investment position remained stable in 2019; liabilities to foreign banks fluctuated more in 2020. - Dollarization and external holdings: - Financial dollarization continued to decline. - Nonresident holdings of government securities increased (percent of total; series shown). - Banking sector soundness (selected indicators): - Nonperforming loans to total gross loans: 3.4 in 2019. - Return on equity (ROE) for depository corporations: 17.9 in 2019. - Return on assets (ROA): 2.2 in 2019. - Capital to risk-weighted assets: 14.7 in 2019. - Deposits-to-loans and liquidity indicators show resilience (detailed series in Table 4). ### Corporate sector financial performance - Median corporate indicators (Peru and peers; series presented): - Return on assets and return on equity declined across 2020 for many countries; leverage, cash ratios, interest coverage ratios, and share of debt at risk metrics are provided in figure series (no single summary number beyond series). ### External sector and debt sustainability - Trade and current account: - Export and import values: - Export value growth: -11.1 in 2020; projected 27.5 in 2021; 3.7 in 2022; 3.7 in 2023; 3.9 in 2024; 4.1 in 2025; 4.5 in 2026 (percent changes, memorandum). - Import value growth: -15.6 in 2020; projected 19.9 in 2021; 5.0 in 2022; 4.8 in 2023; 5.0 in 2024; 4.8 in 2025; 4.5 in 2026. - Current account: - External current account balance (percent of GDP): 0.5 in 2020; -0.4 in 2021; -0.7 in 2022; -1.0 in 2023; -1.4 in 2024; -1.8 in 2025; -1.8 in 2026. - Trade balance (4Q sum, billions of US dollars): series shown; trade surplus narrowed in 2020. - Financial account: - Financial account (rolling 4-quarter sum as percent of GDP) was driven by large public sector inflows in 2020; portfolio flows broadly stable. - External debt dynamics and stress tests (percent of GDP): - Baseline external debt: 43.1 in 2020; projected 39.0 in 2021; 36.6 in 2022; 34.2 in 2023; 32.5 in 2024; 30.9 in 2025; 29.8 in 2026. - Stress-test scenarios (selected values shown in Figure 7 boxes): - Interest rate shock: 30.2 (i-rate shock box) vs Baseline 29.8 (presentation uses percent of GDP). - Growth shock: 32.2 baseline 29.8. - Current account shock: 35.2 baseline 29.8. - Combined shock and 30% depreciation: Combined shock 33.9 baseline 29.8; Real depreciation shock 43.2 baseline 29.8. - Gross financing need under baseline (right scale in figure): series shown; see Table 7 for quantified needs. - External Debt Sustainability Framework (Table 7 highlights): - Baseline external debt (percent of GDP): 35.7 in 2017; 34.6 in 2018; 34.7 in 2019; 43.1 in 2020; 39.0 in 2021; 36.6 in 2022; 34.2 in 2023; 32.5 in 2024; 30.9 in 2025; 29.8 in 2026. - Debt-stabilizing non-interest current account: -1.3 (reported in Table 7). - Gross external financing need (in billions of US dollars): 22.8 in 2017; 19.5 in 2018; 20.9 in 2019; 12.7 in 2020; 15.2 in 2021; 16.6 in 2022; 17.8 in 2023; 18.4 in 2024; 21.2 in 2025; 21.6 in 2026. ### Key macroeconomic projections and indicators (selected Table 1 and Table 5 series) - Real GDP (annual percent change): 2.1 in 2017; 4.0 in 2018; 2.2 in 2019; -11.1 in 2020; 8.5 in 2021; 5.2 in 2022; 4.8 in 2023; 3.4 in 2024; 3.3 in 2025; 3.3 in 2026. - Consumer prices (end of period): 1.4 in 2017; 2.2 in 2018; 1.9 in 2019; 2.0 in 2020; projected 2.0 in 2021–2026. - Exports and imports (annual percent change, Table 1): - Exports: 22.5 in 2017; 8.0 in 2018; -2.8 in 2019; -11.1 in 2020; 27.5 in 2021; 3.7 in 2022–2023; 3.9 in 2024; 4.1 in 2025; 4.5 in 2026. - Imports: 10.2 in 2017; 8.1 in 2018; -1.9 in 2019; -15.6 in 2020; 19.9 in 2021; 5.0 in 2022; 4.8 in 2023; 5.0 in 2024; 4.8 in 2025; 4.5 in 2026. - Gross international reserves (Table 5 memorandum): 63.7 in 2017; 60.3 in 2018; 68.4 in 2019; 74.9 in 2020; 75.1 in 2021; 75.1 in 2022; 75.0 in 2023; 74.2 in 2024; 71.8 in 2025; 71.0 in 2026. - Exchange rate (average S/. per US$): 3.26 in 2017; 3.29 in 2018; 3.34 in 2019; 3.50 in 2020; 3.61 in 2021; 3.62 in 2022; 3.64 in 2023; 3.66 in 2024; 3.68 in 2025; 3.70 in 2026. *International Monetary Fund. Peru: Selected figures and staff analysis as presented in the source content.* ### Annex I. Implementation of Past Fund Advice ### Annex I. Implementation of Past Fund Advice ### Fiscal policies — findings and implementation status - Recommendation: Ease fiscal policy in the short term through accelerating budget execution and improve investment execution capacity, including through strengthening project design, better integrating projects with budget preparation, improving information systems for project execution, promoting concurrent control procedures, and enhancing the implementation capacity of local and regional governments. - Authorities’ response: In progress. Public investments increased in early 2020 just before the COVID-19 pandemic hit but declined sharply in H1 2020 due to strict COVID-19-related containment measures. The implementation accelerated again in the second half of the year, but bottlenecks in implementing public investments remain. - Recommendation: Introduce greater flexibility in the fiscal policy framework in the medium term to make it counter cyclical. - Authorities’ response: In progress. While responding to large shocks, the authorities have suspended the fiscal rules in 2020-21. - Recommendation: Raise revenue mobilization capacity in the medium term. - Authorities’ response: In progress. The 2021 budget plan and MTMF include several revenue measures. ### Monetary and exchange rate policies — findings and implementation status - Recommendation: Follow data-dependent policy. Ease policy further if downside risks materialize while remaining vigilant against the emergence of financial sector vulnerabilities. - Authorities’ response: Implemented. The BCRP has taken a number of measures to ease monetary conditions in the aftermath of very large shocks and support financial stability. - Recommendation: Introduce greater exchange rate flexibility to absorb external shocks and promote financial development. - Authorities’ response: In progress. The authorities continue to implement an inflation-targeting framework without targeting any particular level of the exchange rate. While the BCRP increased its interventions to stabilize the exchange rate during the COVID-19 and political shocks, the Sol was allowed to depreciate more than in some peer countries. - Recommendation: Limit FX interventions to cases of disorderly market conditions. - Authorities’ response: Partially implemented. Spot market interventions were limited in 2020, and intervention using other instruments has been two-way. ### Financial policies — findings and implementation status - Recommendation: Reinforce the legal protection of supervisors. - Authorities’ response: Not implemented. - Recommendation: Mandate the SBS to exercise consolidated supervision. - Authorities’ response: Not implemented. However, the authorities believe that the existing regulations allow the SBS to exercise consolidated supervision. - Recommendation: Enhance the effectiveness of the AML/CFT framework. - Authorities’ response: In progress. A new Companies Authorization Regulation has been prepared that contains clauses on the shareholders' moral suitability, final beneficiaries, directors, managers, and main officials of companies. Similarly, amendments to the Corporate Governance and Comprehensive Risk Management Regulations (GIR) include clauses on evaluating moral suitability. Both regulations will be published shortly. Also, modifications to the Financial System's Law to increase the limits on fines have been prepared. - Recommendation: Implement Basel III recommendations as outlined in the 2018 FSAP including increasing capital surcharges for systemic banks and countercyclical provisioning for smaller banks. - Authorities’ response: In progress. New methodologies were developed for countercyclical provisions and capital surcharges for systemic banks. A methodology for determining buffers for concentration and interest rate risk is being prepared. A new provisioning scheme more sensitive to risk has been developed, with a new quantitative impact study planned to be conducted in 2021. ### Structural policies — findings and implementation status - Recommendation: Increase labor market flexibility and reduce economic informality. - Authorities’ response: In progress. These are priority objectives of the National Competitiveness Plan. - Recommendation: Accelerate reforms to improve governance and fight corruption, boost competitiveness, and reduce informality. - Authorities’ response: The National Board of Justice, which appoint judges and prosecutors, is now fully operational. Other key reforms include openings of Offices of Institutional Integrity in more than 200 public sector entities, the launch of a platform to collect whistleblower allegations, and the development of an integrity index to help focus on areas where corruption risks are higher. - Recommendation: Improve social protection, including by reforming the pension system to ensure its sustainability and enhance its coverage, providing a more equitable distribution of natural resource revenues across regions, and deepening financial development and inclusion. - Authorities’ response: In progress. Despite early difficulties in their delivery, cash transfers to households have helped absorb the COVID-19 shock. On the other hand, allowing pension withdrawals did not provide relief to most informal workers and had adverse implications on the pension system’s integrity. Financial deepening and inclusion are priority objective of the National Competitiveness Plan. - Recommendation: Foster economic diversification, including through an extension of the agriculture promotion law and further improvements in business climate. - Authorities’ response: In progress. Improving the business climate is a priority objective of the National Competitiveness Plan. The new agriculture promotion law requires a gradual removal of fiscal incentives to create a level-playing field. *Source: 1perea2021001 - Annex I. Implementation of Past Fund Advice.* ### Annex II. Peru’s Health Preparedness ### Key findings on health infrastructure and capacity - Peru invested a smaller part of its GDP on public health than its peers for many years; a large proportion of health spending comes out of pocket or from other private sources. - Peru had fewer doctors than in peer countries, and most of them work in richer urban areas. - Peru had fewer ICU beds and ventilators than in peer countries before the pandemic, with reports suggesting that Peru had just 100 ICU beds available for COVID-19 patients when the pandemic struck. - Peru underperforms peers in terms of access to basic sanitation and drinking water, which facilitate the spread of the virus. - Peru appears to lag its peer countries in terms of infrastructure and the number of qualified medical personnel. ### Access and distributional issues - Distribution of infrastructure varied by region, with hospital services overwhelmingly (97 percent) concentrated in urban areas. - Indigenous people, especially women, experienced difficulties in accessing health services (OECD, 2015). - High informality: about 17 percent of the population not having health insurance. - Survey data suggested the health system did not meet demand; long waiting times were reported (OECD, 2017). ### System fragmentation and surveillance - The health care system is highly fragmented: five main healthcare insurers each own and operate their own clinics and hospitals; decentralization transferred supervision and management to regional and local governments. - Dual fragmentation—vertically by subsystem and horizontally to regions—caused problems for quality of care. - Persistence of high infectious disease burden and diminishing vaccination coverages indicated regional authorities were not fully prepared to provide good-quality services. - Early detection and reporting capacity underperformed peers according to the Global Health Security Index. - In the early days of the pandemic, Peru predominantly used rapid antibody tests, which cannot detect early COVID-19 infections, producing a sizable number of false positives and negatives and making it hard to identify and isolate the sick quickly. *Source: 1perea2021001 - Annex I. Implementation of Past Fund Advice.* ### Annex III. Labor Market Developments and Social Support Programs in Peru during the COVID-19 Pandemic ### Employment shock magnitude and comparison - Peru suffered the largest contraction in employment in Q2 2020 among the main economies of Latin America (LA5). - Employment fell slightly in the last month of Q1 2020 and subsequently declined by 41 percent in Q2 relative to 2019Q4. - In comparison, employment in the other LA5 economies contracted between 11 and 24 percent in the same period. - While Q3 rebound brought Peru in line with other LA5 economies, employment remained some 20 percent below the pre-pandemic level. ### Distribution of job losses - The employment contraction in Peru was more evenly distributed across the labor force compared to Chile and Colombia. - Informal employment experienced a smaller fall than formal employment in Q2 and a faster recovery in Q3. - Informality share of employment rose from 71.6 percent in 2019Q3 to 73.7 percent in 2020Q3. - Gender: larger contraction for females in Peru consistent with developments in Chile and Colombia. ### Earnings and hours worked — formal vs informal - Informal sector: - Before the pandemic about 20 percent of informal workers reported receiving no income for their labor in the reference month; that share rose to almost 30 percent in 2020Q2. - Among informal workers who received salaries or business profits, income falls were frequent (distribution shifted left). By Q3 the situation partly reverted. - Weekly hours worked: peak fell from more than 40 hours to about 20 hours during the pandemic. - Formal sector: - Income losses were not common among formal workers who retained employment; unpaid labor is extremely rare among formal workers. - Weekly hours worked: small rise in share of those working no hours but peak remained broadly unchanged between 40 and 50 hours. - Interpretation: Informal work has a tighter link between hours worked and income; formal workers may benefit from greater protection of incomes when hours are reduced. ### Household-level impacts and social safety nets - Q2 2020: - Almost 40 percent of households reported that at least one member had lost their job since the national lockdown and had not yet returned to work. - 18 percent of households reported receiving no income from any source —including public and private transfers— compared to a pre-pandemic average of 2 percent. - Q3 2020: - Shares fell to 25 percent (households with job losses) and 5 percent (households with no income). - The larger fall in households with no income may indicate new income sources, including public transfers, or multiple workers per household acting as partial insurance. ### Pre-existing social programs and pandemic response - Pre-existing programs (JUNTOS, Pensión 65) were well targeted and constituted a larger fraction of total income per capita for low-income households, but were not designed for short-lived shocks like the pandemic. - During the pandemic there was no offsetting rise in transfers from the traditional social safety net despite sharp labor earnings falls for low-income households. - Newly created social support programs: - Cash transfer programs such as “Bono Yo me quedo en casa” and “Bono universal” were particularly successful in reaching low-income households and those affected by job losses. - A support measure allowed temporary withdrawals from private pension funds; fewer households used this initiative and it mostly reached those in the upper end of the income distribution. - Because participation in individual pension schemes is connected to formal labor, the pension withdrawal initiative was regressive and less helpful to low-income and informal workers. *Source: 1perea2021001 - Annex I. Implementation of Past Fund Advice.* ### Annex IV. 2021 Poverty Projections under Different Scenarios ### Annex IV. 2021 Poverty Projections under Different Scenarios ### Impact of COVID-19 on employment and incomes - Peru experienced large job and income losses due to lockdown measures, especially among informal workers and female workers. - Informality and sectoral composition contributed to severity of impacts; informal workers were more likely to lose their jobs. - Women were disproportionately affected relative to men due to gendered family care responsibilities and concentration in face-to-face intensive sectors. - Job-loss was less prevalent in rural areas, but labor incomes in rural areas fell more than in urban areas. - Source datasets referenced: World Bank High Frequency Phone Surveys and WDI. ### Effect of 2020 cash transfers on poverty - Preliminary estimates: moderate poverty (at US$5.5/day) in 2020 increased by about 6 percentage points. - Counterfactual without emergency cash transfers (“bonos”): poverty would have grown by 10 percentage points. - Cash transfers in 2020 substantially offset increases in poverty incidence; the roll-out of bonos helped to offset the unprecedented increase in poverty rates. ### 2021 poverty projections and baseline scenario - Without universal cash transfers across all regions in 2021, poverty is expected to remain 4.8 percentage points above pre-crisis levels. - Economic growth in 2021 is expected to rebound strongly, but the poverty rate is projected to decline only marginally and remain close to the 2012 rate headcount. - Reference: 2012 poverty headcount at US$5.5/day (2011 PPP) was 26.9 percent. - The Government implemented a bono of S/.600 (US$167) for the 10 regions in lockdown; its impact would decrease poverty levels by 0.7 percentage points compared to a scenario with no measures. ### Simulated mitigation measures and projected impacts (summary of four policies) - Simulation finding: implementing a bono with targeting similar to the one rolled-out in 2020 is expected to have the largest poverty- and inequality-mitigating impacts in 2021. - Most generous bono simulated: - Equivalent to about 2.3 percent of GDP. - Amount per household: S/.2,760 (US$767). - Impact: reduce poverty by almost 6.4 percentage points with respect to the baseline scenario without emergency cash transfers. - Increase monthly income for the bottom decile by almost 35 percent compared to the baseline. - Reduce inequality (Gini coefficient) by 3 points, bringing it below pre-crisis levels (2019 Gini Index was 42.82). - Bono equivalent to 1.3 percent of GDP: - Could reduce poverty by more than 3.6 percentage points in 2021. - Bono of S/.600 for regions in lockdown: - Expected to reduce poverty by less than 1 percentage point. - Limited impact because some targeted regions (e.g., Lima) have substantially higher incomes than excluded regions. - Measures targeted to ONP contributors and the (now-denied) ONP early withdrawal policy: - Would have minimal poverty-reducing impacts, about a percentage point or less. - Fiscal cost of ONP withdrawal measure estimated at least 1.3 percent of GDP; Fiscal Council estimate cited 2.3 percent of GDP. ### Coverage, targeting, and distributional outcomes - Figure 5 (Coverage by Quintiles) summarized: - ONP coverage concentrated in upper quintiles; thus poverty impacts from ONP-focused measures would be minimal. - Bono (2.3 percent) and Bono (1.3 percent) have broader coverage across lower quintiles and deciles. - Figure 6 (Monthly Income Increase Compared to no Measures for the Bottom 40): - Bono (2.3 percent) produces the largest increases in monthly income for the bottom deciles (up to almost 35 percent for the bottom decile). - Table 1: simulated program criteria and amounts (selected entries preserved exactly) - Bono ONP: - One-time cash transfer equivalent to 1 Remuneración Mínima Vital (RMV) ~ S/.930 for all ONP pensioners. - Pensioner Criteria: To be a pensioner, a worker must have contributed to the public pension system for at least 20 years and be 65 years or older. Early retirement requires 30 years of contribution. - Model Criteria: Affiliated to the public pension system; Receiving a pension from ONP; 50 years or older (in order to consider early retirement workers). - Amount: S/.930 (~US$260). - Withdrawal ONP: - One-time refund of up to 1 unidad impositiva tributaria (UIT) ~ S/.4300 for all active and inactive contributors. - Contributors Criteria: Workers (dependent or independent) who are not affiliated to the private pension system (AFP); Contribute 13 percent of their monthly labor income to the public fund. - Maximum of S/.4300 (~US$1,200). - Bono Universal: - Simulation of a one-time cash transfer to households who: Are recipients of the Juntos and Pensión 65; HH in poverty conditions in urban or rural areas; HH with members who are no formal waged workers in the public or private sectors, and who earn below S/.3000 each (837 USD). - Amounts of S/.1530 and S/.2760 (US$425 and US$767) to match 1.3 percent and 2.3 percent of GDP. - Bono of S/.600 for regions in Lockdown: - Same criteria as for Bono Universal. - Only for households in Ancash, Apurimac, Callao, Huancavelica, Huánuco, Ica, Junín and Lima. - Amount: S/.600 (US$167 USD). ### Policy implication and recommendation (from simulations) - Repeating or expanding universal-style bonos similar to those used in 2020 would produce the largest poverty- and inequality-mitigating impacts in 2021. - Targeted measures limited to certain regions (e.g., S/.600 bono) or to ONP contributors would have substantially smaller poverty reduction effects. - Fiscal cost considerations: - Large universal bonos (e.g., 2.3 percent of GDP) carry substantial fiscal cost but yield the largest reduction in poverty and inequality per the simulations. ### Key statistics and figures (exact values preserved) - Moderate poverty increase in 2020: about 6 percentage points. - Counterfactual without bonos in 2020: increase of 10 percentage points. - Projected poverty gap relative to pre-crisis in 2021 without universal transfers: 4.8 percentage points above pre-crisis levels. - 2012 poverty headcount at US$5.5/day (2011 PPP): 26.9 percent. - Bono implemented for 10 lockdown regions: S/.600 (US$167) between February 1 to February 15. - Most generous bono simulated per household: S/.2,760 (US$767); equivalent to about 2.3 percent of GDP. - Bono (1.3 percent) amounts referenced: S/.1530 (US$425) and Bono (2.3 percent) S/.2760 (US$767). - ONP one-time cash transfer amount: S/.930 (~US$260). - Withdrawal ONP maximum: S/.4300 (~US$1,200). - Gini Index in 2019: 42.82. *Prepared by Ronald Cueva and Hernan Winkler, Poverty and Equity Global Practice, World Bank (as cited in source).* ### 5. Peru’s IIP is characterized by large foreign reserves, moderate external debt and large ### 5. Peru’s IIP is characterized by large foreign reserves, moderate external debt and large FDI liabilities ### International Investment Position (IIP) — status and drivers - After improving from a minimum of -54 percent of GDP in the late 90s to - 24 percent of GDP in 2011, Peru’s IIP has been on a declining trend, driven by the accumulation of FDI liabilities. - As of end-2019: - External assets: 57.1 percent of GDP, including central bank foreign assets of 29.6 percent of GDP. - Liabilities: - FDI liabilities: 50 percent of GDP. - Public and private external debt: 35 percent of GDP. - Other liabilities: 9.5 percent of GDP. - In 2020 the large increase in central bank assets was offset by large fiscal borrowing and other flows, leaving the IIP balance in dollar terms largely unchanged. - These developments are expected to be short-lived and the IIP is projected to stay broadly stable in percent of GDP in the medium term. ### International reserves and adequacy - Gross international reserves: - US$74.9 billion (estimated 37.4 percent of GDP) at end-2020. - Reserves equal 307 percent of the ARA metric, well above the 100–150 percent adequacy range. - Reserves also exceed an augmented ARA metric that incorporates: - Volatility of copper and gold prices. - Peru’s heavy reliance on commodity exports. - Reserves exceed the augmented metric even after subtracting large FX liabilities to the banking sector (reserve requirements and deposits from de-dollarization swaps). ### BCRP foreign exchange market actions - The BCRP does not target a specific level of the exchange rate but has been active to smooth volatility. - In 2020: - The BCRP sold US$4 billion (about 2 percent of GDP) in the non-spot market, including swaps and adjustable CDs. - Interventions in the spot market were limited, with net of close to zero. - Interventions aimed to smooth volatility at the outset of COVID-19 and during episodes of market pressure, and to calm markets amid heightened political uncertainty (impeachment and resignation episodes). ### Assessment of external position (2020) - EBA current account model: - Current account norm: -2.4 percent of GDP. - One-off tax payment excluded: about 0.3 percent of GDP due to foreign sales of shares of a domestic corporation. - Cyclically adjusted current account (considering output and terms of trade gaps): -1 percent of GDP. - Overall CA gap: 1.4 percent of GDP, indicating an external position in 2020 that was moderately stronger than implied by fundamentals and desirable policy settings. - Of the CA gap of 1.4 percent of GDP, policy gaps account for 1 percent of GDP (explained by stronger fiscal balances compared to the rest of the world). - REER models: - REER index model: external position moderately weaker than fundamentals. - REER level model: external position weaker than fundamentals. - The CA regression-based approach is considered more reliable for Peru; assessment places more weight on it. - Given the unprecedented year of 2020, uncertainty around these estimates is very high. ### Risk Assessment — selected domestic and external risks and policy advice - Unexpected shift in the COVID-19 pandemic - Likelihood: Medium; Time horizon: ST; Impact: H (↓). - Policy advice: Recalibrate countercyclical policies; protect the vulnerable; focus on limiting scarring and facilitating adjustment to the new normal. - Widespread social discontent and political instability ahead of general elections in 2021 - Likelihood: Medium/Low; Time horizon: ST, MT; Impact: M/H (↓). - Policy advice: Continue institutional reforms; strengthen anticorruption institutions; use policy space (particularly fiscal) if necessary; persevere with structural reforms; faster execution of public investment. - Rapid execution of public investment - Likelihood: Medium; Time horizon: ST, MT; Impact: M (↑). - Policy advice: Recalibrate countercyclical policies; mobilize public investment rapidly to increase fiscal policy effectiveness. - Accelerating de-globalization - Likelihood: High; Time horizon: MT; Impact: H (↓). - Policy advice: Allow exchange rate to adjust to permanent real shocks; accelerate structural reforms. - Sharp rise in risk premia exposing financial vulnerabilities - Likelihood: Medium; Time horizon: ST; Impact: M (↓). - Policy advice: Central bank to provide liquidity in soles and dollars; maintain financial market functioning; use exchange rate interventions to prevent excessive volatility with clear communication; avoid premature withdrawal of fiscal support and outline medium-term return to fiscal rules. - Faster-than-expected containment of COVID-19 (positive shock) - Likelihood: Medium; Time horizon: ST; Impact: H (↑). - Policy advice: Recalibrate countercyclical policies; withdraw stimulus sooner if appropriate. - Higher frequency and severity of climate-related natural disasters - Likelihood: Medium; Time horizon: ST, MT; Impact: M (↓). - Policy advice: Improve immediate preparedness and build resilience in economic activities and infrastructure; deploy countercyclical policies as needed. ### Public Debt Sustainability Assessment — baseline, scenarios, and stress tests - Recent fiscal and debt developments: - NFPS deficit: 8.8 percent of GDP in 2020 (from 1.6 percent of GDP in 2019). - Public debt rose by about 8.3 percentage points to 35.4 percent of GDP in 2020. - Fiscal deficit expected to decline to 5.0 percent of GDP in 2021 as some COVID-19 transitory measures are phased out. - Debt-to-GDP ratio would peak at about 38 percent of GDP in 2025 and fall slowly thereafter. - Debt structure and markets: - External public debt: around 40 percent of total public debt. - About 90 percent of the debt is marketable and contracted at fixed rates, with a half-life of 12 years. - Peru’s sovereign debt is rated investment grade by all major rating agencies; Moody’s and S&P outlook qualified as stable; Fitch downgraded the outlook to negative on December 2020. - Baseline scenario assumptions: - COVID-19 health emergency broadly contained until vaccine/treatment deployment; health policies to address outbreaks have limited impact on activity. - Return to pre-COVID-19 fiscal-rule targets occurs outside the forecast horizon (2021-26). - Macroeconomic parameters summarized: - Real GDP Growth: recover strongly in 2021-22; level of real GDP reaches pre-pandemic levels by end-2022; large negative output gap expected to close by end-2024. - Consumer prices and GDP deflator: expected to remain anchored at about 2 percent over the forecast horizon. - Fiscal strategy: primary deficit narrows from 7.2 percent of GDP in 2020 to reach balance in 2026; new debt issuances principally in domestic currency. - Current Account: current account deficit expected to average 1.2 percent of GDP over the medium term. - Public DSA outcomes: - Under the baseline, public debt-to-GDP ratio expected to peak at about 38 percent of GDP in 2025, then decline gradually. - Under the historical scenario, the debt ratio would peak outside the forecast horizon. - Baseline assessed as realistic; staff’s real GDP forecast is below consensus and authorities’ forecasts for 2021. - Stress tests (standardized) — impacts on public debt ratio and financing needs: - Real GDP growth shock: lower growth by one standard deviation for 2 years starting in 2021 would take public debt towards 55 percent of GDP and public gross financing needs to about 7 percent of GDP over the medium term. - Real interest rate shock (200bp increase) or real exchange rate shock (20 percent depreciation): each event would take public debt to about 44 percent of GDP in 2026; gross financing needs about 5.1 percent of GDP through 2026. - Primary balance shock: deterioration of an additional cumulative 3 percent of GDP over 2021-26 would take debt ratio to about 46 percent of GDP in 2026; public gross financing needs about 6.1 percent of GDP during 2021-26. - Combined macro-fiscal shock (combining above): debt ratio about 60 percent of GDP by 2026; debt-to-revenue and public gross financing needs remain elevated. - COVID-19 contingent liabilities shock: under baseline, a fifth of Reactiva Perú guarantees called = 1.8 percent of GDP during 2021-23. Doubling the expected materialization rate of these contingent liabilities plus lower real GDP growth by 0.5 percentage points would keep public debt over 46 percent of GDP by 2025. - Overall DSA conclusion: - Public debt is expected to remain sustainable given the projected recovery and gradual withdrawal of fiscal impulse. - Under the baseline, the public debt-to-GDP ratio is forecast to stabilize at about 38 percent of GDP over the medium term. - Gross financing needs expected to average about 5 percent of GDP over the forecast horizon. - Main debt profile risks: elevated share of public debt held by non-residents; moderate external financing requirements risks. - Negative growth shocks remain a major risk to the debt outlook. *Source: IMF staff estimates and supporting country data as reported in the source chapter.* ### 7. The risk assessment shows that debt profile vulnerabilities are limited. Risks arise ### 1perea2021001 - 7. The risk assessment shows that debt profile vulnerabilities are limited. Risks arise ### Risk assessment — summary findings - Debt profile vulnerabilities are limited overall; main risks arise mostly from a high share of public debt held by non-residents (indicator close to the upper early warning threshold). - Moderate risks arise from: - the share of public debt in foreign currency, and - external financing requirements, which could give rise to concerns over financial stability in the case of large exchange rate adjustments (Figure 5). ### Debt sustainability conclusion (text) - Peru’s public-sector debt level is sustainable with a high probability. - The debt sustainability analysis is broadly positive. - Debt is unlikely to exceed 70 percent of GDP over the medium term, including in the event of large shocks to key macroeconomic variables. - However, in the absence of fiscal consolidation an adverse shock could take the debt ratio close to the 70 percent of GDP benchmark. - Main sources of risk: - high proportion of public debt held by non-residents, - real GDP growth shocks. - Emerging moderate risks: - share of public debt in foreign currency, - external financing requirements. ### Key historical and projection indicators (selected figures as reported) - Nominal gross public debt (in percent of GDP): 2019: 23.4; 2020: 27.1; 2021: 35.4; 2022: 35.4; 2023: 36.2; 2024: 36.7; 2025: 37.2; 2026: 37.5; 2026 (last column): 37.4. - Public gross financing needs (in percent of GDP): 2019: 2.3; 2020: 4.1; 2021: 9.2; 2022: 5.4; 2023: 4.3; 2024: 4.4; 2025: 4.8; 2026: 4.6; 2026 (last column): 5.9. - EMBIG (bp): 136 (as reported in table heading). - 5Y CDS (bp): 55 (as reported in table heading). - Real GDP growth (in percent): 2019: 4.8; 2020: 2.2; 2021: -11.1; 2022: 8.5; 2023: 5.2; 2024: 4.8; 2025: 3.4; 2026: 3.3; 2026 (last column): 3.3. - Inflation (GDP deflator, in percent): 2019: 2.9; 2020: 2.1; 2021: 1.8; 2022–2026: 2.0 (each year). - Effective interest rate (in percent): 2019: 5.3; 2020: 5.5; 2021: 5.5; 2022: 5.5; 2023: 5.4; 2024: 5.4; 2025: 5.2; 2026: 5.1; 2026 (last column): 5.0. - Change in gross public sector debt (cumulative, in percent of GDP): 2019: -0.2; 2020: 0.9; 2021: 8.3; 2022: 0.0; 2023: 0.9; 2024: 0.4; 2025: 0.5; 2026: 0.3; 2026 (last column): -0.1; cumulative: 2.0. - Primary (noninterest) revenue and grants (in percent of GDP) cumulative/projection: 25.7; 24.7; 22.0; 22.3; 23.0; 23.0; 23.1; 23.2; 23.2; cumulative: 137.8. - Primary (noninterest) expenditure (in percent of GDP) cumulative/projection: 25.2; 25.0; 29.3; 25.6; 24.7; 24.0; 23.7; 23.6; 23.3; cumulative: 145.0. ### Baseline and alternative scenario assumptions (Figure 2 underlying assumptions) - Baseline scenario (Real GDP growth, Inflation, Primary Balance, Effective interest rate): - Real GDP growth: 8.5; 5.2; 4.8; 3.4; 3.3; 3.3. - Inflation: 2.0; 2.0; 2.0; 2.0; 2.0; 2.0. - Primary Balance: -3.3; -1.7; -1.0; -0.6; -0.4; -0.1. - Effective interest rate: 5.5; 5.4; 5.4; 5.2; 5.1; 5.0. - Historical scenario: - Real GDP growth: 8.5; 2.5; 2.5; 2.5; 2.5; 2.5. - Inflation: 2.0 (each year). - Primary Balance: -3.3; -0.4; -0.4; -0.4; -0.4; -0.4. - Effective interest rate: 5.5; 5.3; 5.3; 5.3; 4.8; 4.6. - Constant Primary Balance scenario: - Primary Balance: -3.3 each year (2021–2026). - Other assumptions: Real GDP growth 8.5; 5.2; 4.8; 3.4; 3.3; 3.3; Inflation 2.0 each year; Effective interest rate: 5.5; 5.3; 5.2; 5.0; 4.8; 4.7. ### Composition, maturity, and currency structure (reported) - Composition charts indicate projections for: - Gross nominal public debt (in percent of GDP) by scenario (baseline, historical, constant primary balance). - Public gross financing needs (in percent of GDP) projected. - By maturity: medium and long-term vs short-term (percent of GDP) across 2010–2026 projection horizon. - By currency: local currency-denominated vs foreign currency-denominated (percent of GDP) across 2010–2026 projection horizon. ### Stress tests (Figure 4) — scenarios included - Macro-fiscal stress tests performed include: - Primary Balance Shock, - Real GDP Growth Shock, - Real Interest Rate Shock, - Real Exchange Rate Shock, - Combined Shock, - COVID-19 Contingent Liabilities Shock. - Representative reported parameter paths under shocks (selected examples as shown): - Primary Balance Shock: Real GDP growth path: 8.5; 0.1; -0.3; 3.4; 3.3; 3.3; Primary balance: -3.3; -3.2; -2.5; -0.6; -0.4; -0.1; Effective interest rate: 5.5; 5.3; 5.3; 5.1; 5.0; 4.9. - Real GDP Growth Shock: Real GDP growth path: 8.5; 0.1; -0.3; 3.4; 3.3; 3.3; Inflation and other variables adjusted as shown in figure notes. - Real Interest Rate Shock: Effective interest rate increases shown (example year values up to 5.6 in one scenario). - Combined and contingent shocks produce higher projected gross nominal public debt and public gross financing needs in the charts. - Stress-test benchmarks and color rules (Figure 5 notes): - Debt burden benchmark: 70 percent of GDP. - Gross financing needs benchmark: 15 percent of GDP. - Risk-assessment benchmark thresholds cited: bond spreads 200 and 600 basis points; external financing requirement 5 and 15 percent of GDP; change in share of short-term debt 0.5 and 1 percent; public debt held by non-residents 15 and 45 percent; share of foreign-currency denominated debt 20 and 60 percent. ### Risk assessment heat map and indicators (Figure 5 details) - Market perception and debt-profile indicators reported (2020 values in heat map): - EMBIG: 140 bp (reported in heat map figures). - External Financing Requirement: 12 (in percent of GDP) with benchmarks 5 and 15. - Annual Change in Short-Term Public Debt: -0.8% with benchmarks 0.5 and 1. - Public Debt Held by Non-Residents: 39% (in percent of total) with benchmarks 15 and 45. - Public Debt in Foreign Currency: 12 (in percent of total) with benchmarks 20 and 60. - The heat map logic: green if below lower benchmark, yellow if between, red if above upper benchmark; cell coloring for shocks/baseline per caption. ### Annex IX — Foreign Exchange Intervention (FXI): key points - Since abandoning the exchange rate peg in 1990, the Central Reserve Bank of Peru (BCRP) has intervened to smooth volatility; focus on exchange rate and financial stability persisted after adoption of inflation targeting in 2002. - Rationale: financial dollarization implies balance-sheet mismatches; large depreciations can cause financial instability and macro instability that may outweigh beneficial expenditure-switching effects. - Empirical patterns: - Average daily interventions are much higher when market conditions were disorderly. - Gross interventions suggest BCRP tends to be active also on non-disorderly days, although less so recently. - FXI correlated with unusual changes in the exchange rate but not with unusual levels. - Dollarization: - Dollarization has come down significantly over past decades, aided by credibility of macro policies and measures such as higher reserve requirements for foreign currency liabilities. - Persistent factors: history of hyperinflation, widespread dominant currency pricing for exports and domestic activities, constitutional right to have deposits in US dollars as well as domestic currency. - Implication: some level of entrenched dollarization may need to be tolerated over the medium term, affecting appropriate degree of FX interventions. - Transparency and communication: - BCRP publishes foreign exchange intervention data at daily frequency. - Recommendation: BCRP could improve communication about policy goals and tradeoffs, for example by enriching ex-post explanations in inflation reports without compromising discretionary FXI. ### Annex X — Implementation of 2018 FSAP Recommendations (selected entries) - Systemic Risk and Macroprudential Policy: - Increase capital surcharges for systemic banks; increase countercyclical provisioning for smaller banks. (SBS) (ST) — Status: In progress. New methodologies developed for countercyclical provisions and capital surcharges; work on methodology for buffers for concentration and interest rate risk. - A new provisioning scheme more sensitive to risk has been developed, with a new quantitative impact study planned to be conducted in 2021. - Enhance monitoring of off-balance-sheet exposures of banks. (SBS) (IT) — Status: Implemented. - Increase foreign currency lending risk weights in line with Basel III guidelines. (SBS) (ST) — Status: In progress. An 8-percent increase in capital surcharges is currently applied to exposures subject to credit exchange rate risk; SBS is assessing whether additional surcharges are needed. - Introduce new risk-monitoring tools (growth-at-risk, systemic risk analysis, corporate sector stress testing); give enhanced macroprudential mandate to BCRP and SBS; implement MoU between BCRP and SBS to strengthen coordination. (BCRP/SBS) (ST/MT) — Status: Implemented. Growth-at-risk methodology and granular corporate debt stress model incorporated; heat maps included in the Financial Stability Report (since November 2019); growth-at-risk monitoring discussed in December 2019 Inflation Report and November 2020 FSR. - Coordination among BCRP, MEF, and SBS increased during the pandemic, e.g., implementation of Reactiva Peru and National Guarantee programs for Financial Intermediaries in May. *Source: IMF staff calculations.* ### 2020. The authorities believe that the current ### Peru: FSAP Key Recommendations (continued) / Staff Report Informational Annex (selected excerpts) ### Financial Sector Oversight — Banks - Amend legal framework to grant SBS powers to exercise full consolidated supervision. (SBS) (MT) - Status: In progress. The draft law for holding companies is in the process of being sent to Congress. - Enhance financial group supervisory and regulatory approach with regard to (i) group governance and risk-management requirements; (ii) consolidated capital adequacy and liquidity risk-management assessment; (iii) establishing a lead supervisor; and (iv) establishing a supervisory group rating. (SBS) (ST) - Status: In progress. Draft law on supervision of holding companies covers issues related to corporate governance and comprehensive risk management issues. The authorities believe that the Consolidated Supervision Regulation already defines the company responsible for the consolidated information. - Implement requirements for recovery and resolution planning for D-SIBs, as well as for financial groups. (SBS) (MT) - Status: In progress. - Strengthen legal protection of all SBS staff in line with international best practice. (MEF) (MT) - Status: Not implemented. - Strengthen the SBS’s internal governance and control framework by enhancing the Internal Audit Function, including the establishment of an Internal Audit Committee. (SBS) (ST/MT) - Status: Partly implemented. - Finalize the review of the current methodology for the calculation of the additional capital requirements as planned; enhance the activation trigger of the countercyclical buffer, and enhance the systemic and single name risk buffers. (SBS) (ST) - Status: In progress. The review of the methodology for activating the cyclical rule and the additional charges for systemic risk was completed. The methodological review of the creation of buffers for individual concentration risk, geographic sector, and economic sector as well as risk propensity was also completed. The methodological review of capital charges for the interest-rate risk in the bank book is in process. Once this last element is completed, a quantitative impact study of the new additional capital scheme will be carried out. ### Insurance and Cooperatives - Implement risk-based supervision for all insurers and brokers. (SBS) (ST) - Status: Partly implemented. Risk-based supervision for insurance companies was applied in 2019-2020. The SBS is developing a risk-based supervision model that will be applied to brokers. - After passage of law to bring financial cooperatives under supervisory umbrella of SBS, design a deposit-insurance system. (BCRP, MEF and SBS) (MT) - Status: Implemented. The regulation for a deposit-insurance system has been approved. The amount of the coverage and the contribution rates to the Cooperative Deposit Insurance Fund have been approved. The beginning of the collection was scheduled for April 2020, but this was postponed due to the pandemic, initially to July 2020 and then to April 2021. ### Crisis Management - Strengthen crisis preparedness and management arrangements. (MEF, BCRP, SBS, FSD) (MT) - Status: In progress. The measures taken to maintain financial stability during the pandemic have shown that the current crisis management arrangements have worked effectively. - Enhance information-sharing between SBS and FSD. (SBS, FSD) (MT) - Status: In progress. Work is underway to develop a proposal for a comprehensive bank resolution framework. - Require payout of most insured deposits within seven working days and provide legal protection to FSD staff/agents. (SBS, MEF) (MT) - Status: Partly implemented. In practice, FSD payouts are carried out within 48 hours. - Enhance the ELA framework by specifying eligibility and collateral requirements, and by providing for enhanced supervision, to ensure its effectiveness. (BCRP) (ST) - Status: Partly implemented. The BCRP can grant loans of last resort to financial institutions that need short-term liquidity and may not have high-quality collaterals used for repo operations. Coordination between the BCRP and the supervisory authority is not required to provide CRM, but the BCRP shares information with the supervisory authority. In addition to CRM, the BCRP can offer liquidity using repos, for which eligible instruments are announced. ### Financial Integrity - Strengthen risk-based AML/CFT supervision (including sanctioning powers to enhance effectiveness) for banks and other high-risk reporting entities, focusing on preventive measures for mitigating risks of laundering of proceeds of corruption and drug trafficking. (MEF/SBS) (ST/MT) - Status: In progress. A new Companies Authorization Regulation has been prepared that contains clauses on the moral suitability of the shareholders, final beneficiaries, directors, managers, and main officials of companies. Amendments to the Corporate Governance and Comprehensive Risk Management Regulations (GIR) include clauses on the evaluation of moral suitability. Both regulations have been published. Work has been done to modify the General Law of the Financial System to increase the limits on fines. ### Financial Deepening and Pension Reforms - Deepen repo markets, improve clearing and settlement infrastructure, prioritize medium- and long-term issuance around benchmark tenors. (BCRP/MEF) (ST/MT) - Status: In progress. Work is going on to improve Repurchase Agreements related to the temporary transfer of securities to give greater dynamism to the public debt market and allow financial institutions to improve their settlement procedures in the secondary market. Regulations for these operations have been approved while a framework contract is being prepared. To facilitate securities loans, a collateral management system is being developed. - The Strategy for Global Asset and Liability Management (EGIAP) aims to strengthen the market for public debt securities in the national currency with medium and long-term maturities and to achieve interconnection with Euroclear. The implementation of phase 2 “Secondary Market Link” would allow all bonds to be euro-clearable and can be registered and settled in the local ICLV. - Design reforms to improve the private pension system. (MEF) (ST/MT) - Status: Not implemented. A Multiparty Commission of Congress on the subject has been created. The committee has proposed a reform, which has created confusion about policy intentions. ### Time Frame Definitions (as used in recommendations) - IT (Immediate) = less than 1 year - ST (short term) = 1- 3 years - MT (medium term) = 3-5 years ### Fund Relations — Key Financial Indicators and Arrangements (selected) - Membership Status: Joined 12/31/1945; accepted the obligations of Article VIII, Sections 2(a), 3, and 4 on 2/15/1961. - Quota: 1334.50 SDR Million = 100.00 percent of Quota - Fund holdings of currency: 993.12 SDR Million = 74.42 percent of Quota - Reserve Tranche Position: 341.43 SDR Million = 25.58 percent of Quota - SDR Department net cumulative allocation: 609.89 SDR Million = 100.00 percent of Allocation - SDR Department holdings: 511.80 SDR Million = 83.92 percent of Allocation - Outstanding Purchases and Loans: None - Latest Financial Arrangements: - FCL: Date of Arrangement May 28, 2020; Date of Expiration May 27, 2022; Amount Approved 8,007.00 (SDR Million); Amount Drawn 0.00 (SDR Million) - Stand-By: Date of Arrangement Jan. 26, 2007; Date of Expiration Feb. 28, 2009; Amount Approved 172.37 (SDR Million); Amount Drawn 0.00 (SDR Million) - Stand-By: Date of Arrangement Jun. 09, 2004; Date of Expiration Aug. 16, 2006; Amount Approved 287.28 (SDR Million); Amount Drawn 0.00 (SDR Million) - Projected Payments to the Fund (Principal and Charges/Interest by year): - Principal 2021–2025: 0.00 0.00 0.00 0.00 0.00 - Charges/Interest 2021–2025: 0.07 0.07 0.07 0.07 0.07 - Total 2021–2025: 0.07 0.07 0.07 0.07 0.07 - Exchange Arrangements: Peru has a floating exchange rate arrangement. On January 29, 2021 the average of interbank buying and selling rates was 3.64 soles per U.S. dollar. ### Statistical Issues — Key Points and Ongoing Work (as of January 29, 2021) - General: Peru subscribes to the Special Data Dissemination Standard (SDDS) since August 7, 1996. A data ROSC was prepared and published in 2003. - Areas for improvement: (i) coordination among compiling agencies; (ii) publishing a single official measure of inflation for Peru with component regional indexes; (iii) redeveloping the wholesale price index (WPI) as a producer price index (PPI); (iv) finalizing migration to standardized report forms for monetary data related to other financial corporations; (v) expanding scope of data sources for compiling financial flows of individual residents. - National accounts: INEI released a new national accounts series implementing the 2008 SNA using 2007 as the base year. INEI is preparing historical quarterly GDP series for 1980-2007. Integrated quarterly sectoral accounts and balance sheet statistics (Q1 2014 to Q3 2020) were developed with STA assistance. INEI intends to disseminate these new series unofficially to key users by April 2021; data will be submitted to STA on this date and officially to the general public by end of 2021. - Price statistics: Official CPI is for Metropolitan Lima using weights based on the 2008/09 ENAPREF. A national level CPI (December 2011=100) has been published separately since January 2012. INEI started the 2019/20 ENAPREF in May 2019; data collection stopped in May 2020 due to the pandemic. STA is assisting INEI to estimate the missing data of the 2019/20 ENPREF and compile new weights to rebase the CPI by June 2021. - Monetary and financial statistics: Reported monthly to STA using SRFs; OFC data have been recently reported and are under review. Reported monetary statistics broadly align with MFSM methodology. - Financial sector surveillance: BCRP reports quarterly all twelve core FSIs and nine of the encouraged set for the deposit taking sector. No FSIs are reported for other sectors and real estate markets. - External sector statistics: Authorities are encouraged to resume participation in the Coordinated Direct Investment Survey (latest inward data 2013 and outward 2010) and in the Coordinated Portfolio Investment Survey (latest data 2017). Recommended improvements include coverage, valuation, instrument classification, delineation of reserves in IIP, and consistency among external sector datasets. ### Statement by Mr. Chodos and Mr. Hendrick on Peru — Key Points (March 19, 2021) - Peru remains one of the best performing economies in Latin America, maintaining sustained growth, low inflation, and poverty reduction for more than two decades. - Economic growth averaged 4.6 percent from 1999-2019, but the pandemic led to a temporary recession of 11.1 percent in 2020. Double-digit growth is expected in 2021 and pre-pandemic levels will be reached in 2022. - Peru designed a large and comprehensive fiscal, monetary, and financial package to contain the pandemic’s impact, save jobs, and provide lifelines to many SMEs. - Inflation expectations remain well anchored; headline inflation in 2021 and beyond is expected to fluctuate around the mid-point of the inflation-targeting range of 1-3 percent. - External and fiscal positions are strong, with net international reserves equivalent to 37 percent of GDP in 2020. - Public debt stood at 35.0 percent of GDP despite substantial fiscal stimulus. - Poverty rate fell from near 59 percent in 2004 to 20.2 percent in 2019. - Main challenges: sustaining near-term recovery and boosting medium-term potential growth amid uncertainty over post-pandemic recovery and commodity prices; assessing second and third generation structural reforms to boost productivity, enhance the social safety net, and ensure sustainable and equitable growth. *Source: IMF staff report excerpts from the Peru FSAP Key Recommendations and Informational Annex (dates and figures as presented in source).* ### INTRODUCTION ### INTRODUCTION ### Context and agreement with IMF staff - Peruvian authorities express gratitude to Mr. Leo Bonato and his team for open and constructive policy dialogue and for their work on the staff report (SM/21/20). - Authorities broadly agree with the staff’s assessment and policy recommendations, and consent to the publication of the report. ### Pre-pandemic macroeconomic fundamentals (end-2019) - Public debt: 26.8 percent of GDP. - Fiscal rule convergence target: 1.0 percent (medium term). - Unemployment rate: 6.6 percent. - International reserves: US$68.4 billion in 2019. - Reserve coverage: equivalent to almost 500 percentage of short-term external debt defined on a residual maturity basis and includes amortization of medium and long-term debt. - Inflation: 1.9 percent by end-2019. - Poverty rate: 20.2 percent. - These initial conditions helped support the poorest segments of the population and SMEs during the pandemic. ### Institutional frameworks - Inflation-targeting framework in place since the beginning of the century. - Financial system described as strong with solid institutional policy frameworks. --- ### COVID-19 IMPACT AND POLICY RESPONSE #### Economic and social impact (2020) - Peru imposed very strict lockdowns and curfews in early March 2020. - Real GDP growth in 2020: -11.1 percent. - Economy fell 30 percent y/y in 2020-Q2. - Unemployment rate doubled to 13.9 percent by end-2020. - Employment contraction in 2020-Q2: 39.5 percent y/y; contraction narrowed to 6.1 percent by November 2020. - Increase in informality and some reversal in poverty gains. - Note: INEI, Labor Market Indicators for Metropolitan Lima. #### Overall policy package - Size of policy measures: equivalent to 26.6 percent of GDP. - Implementation to date: about 19.2 percent of the package has already been implemented. #### Central Bank of Peru (BCRP) actions - Policy rate reduced 200 bps in April 2020 to 0.25 percent (historic low). - Reserve requirements were lowered; maturity of repo operations extended. - BCRP provided foreign currency liquidity during stress. - Approval of the Flexible Credit Line (FCL) in May 2020 helped reassure markets. #### Reactiva Perú and credit support - “Reactiva Perú”: guaranteed-credit repo operations with banks to provide liquidity to small and medium-sized businesses. - Program outcomes: - Stimulated credit growth at low interest rates. - Averted widespread bankruptcies and business closures. - Maintained the payment chain and business survival. - Saved 2.8 million jobs. - Participation: out of more than half a million firms, 99 percent of beneficiaries were small businesses. - Fiscal credit guarantee program size: equivalent to 9.6 percent of GDP. - Additional program aimed at micro-enterprises supported production capacity in many industries. #### Fiscal measures - Revenues and expenditure measures amount to 7.4 percent of GDP. - Priority support: direct cash transfers to households, wage subsidies to businesses, and direct support to the health system. - Authorities are updating databases used for cash transfers and social support to improve targeting and effectiveness. #### Financial system measures - Macroprudential easing: countercyclical capital buffers reduced. - Allowed banks to adjust loan terms without changing loan classification. - Financial System Regulator eased macroprudential policies. - Financial Soundness Indicators Heatmap shows the financial system remains stable. - Top-down stress tests indicate a resilient banking system and limited solvency problems even under adverse scenarios. --- ### OUTLOOK #### Near-term recovery expectations (2021) - A strong recovery is expected in 2021 with gradual closing of the output gap and sustained reduction in unemployment in the medium term. - Many productive sectors were close to or had reached pre-Covid levels by end-2020. - By Q4 2020, Peru’s economic activity was one of the closest to pre-pandemic levels among peers. - Authorities expect double-digit growth in 2021, led by: - Strong recovery in domestic demand. - Historical high commodity prices. - Favorable terms of trade. #### Pandemic developments and vaccine rollout - A second small wave affecting 2021 Q1 is expected to be short lived. - New measures announced in late January and March 2021 to support the health system, households, and a new guaranteed-lending program for SMEs. - Vaccine rollout began in February 2021; Peru has secured vaccines for the whole population and expects the vaccination process to speed up with arrival of higher quantities. - Main engines of growth: mining, agriculture, construction are fully working; services industries gradually reopening. #### Resilience to shocks - Policy buffers are considered ample to cope with additional adverse shocks. - Despite increase in fiscal deficit, public debt remains low. - International reserves increased to about 37 percent of GDP by end-2020. - Reserve adequacy: equivalent to 307 percent of the ARA metric (well above the 100-150 percent adequacy range). - Financial system remains resilient and strong. - Peru maintains access to international markets with low financing costs. - Two-year FCL provides additional reassurance to the markets. --- ### THE ROAD AHEAD #### Short-term priorities - Enhance the health system (Annex II illustrates needs). - Further improvements in the social safety net to reach at least peer-country levels. - Continue support to small businesses due to their impact on job creation, informality, and poverty reduction. - On March 9, the government extended “Reactiva Peru”: - Additional grace period of one year (payments were scheduled to begin in May 2021). - Repayment period of 36 months. - Accelerate public investment in key infrastructure projects. - Large private projects, particularly in the mining sector, will continue and boost economic growth and potential output. #### Fiscal stance and sustainability - Gradual withdrawal of fiscal stimulus will be consistent with commitment to fiscal sustainability in the medium term. - Fiscal rule suspended for 2020-2021 to finance pandemic-related support. - Projected temporary increase in public debt-to-GDP ratio of 37.5 percent by 2025, then a steady decline towards the 30 percent target. - Public debt projected to remain sustainable under different shocks (see DSA annex). - Authorities open to providing additional assistance to households and small businesses as needed. - The Fund’s expertise has been requested to identify additional revenue sources. #### Monetary policy - The BCRP will maintain a supportive monetary policy stance until the economy is on a solid recovery path. - Inflationary pressures expected to be in check given the sizable negative output gap. - March 2021 forward-guidance: easy monetary conditions likely to persist for an extended period. - BCRP stands ready to take additional measures as needed. - Authorities continue to value exchange rate flexibility as an appropriate shock absorber. - Exchange rate behavior: evolves in line with fundamentals and broadly follows the same trend as peer countries but with less volatility. - Monetary authority transparency: announces in real time when it runs FX market operations and publishes same-day information on FX intervention; rationale explained in official publications, including the Inflation Report. #### Financial sector reform progress - Significant progress on 2018 FSAP recommendations as detailed in Annex X: - Reforms fully or partially implemented include extending regulator oversight to credit unions, enhancing emergency liquidity assistance framework, and monitoring banks’ off-balance-sheet exposures. - Some recommendations requiring amendments to the banking law are pending; administration seeks to build political support. #### Structural reforms and governance - Authorities emphasize importance of additional structural reforms exposed by the pandemic. - National Plan for Competitiveness and Productivity (launched in 2019) provides framework to address medium-term issues: - Improving education. - Enhancing infrastructure. - Facilitating labor relocation. - Further improving the business climate. - Implementation of new structural reforms, notably the integrated review of the pension system, will wait until a new administration takes office on July 28, 2021. - Progress on governance and anti-corruption in 2020: - Institutional reforms from the 2019 referendum operational, including the National Board of Justice. - Offices of Institutional Integrity created in more than 200 public sector entities. - Comptroller’s Office monitors emergency-related spending. - Several AML/CFT regulations issued for customer due diligence on politically exposed persons. - Asset declarations of public officials publicly available for the last 20 years. --- ### FINAL REMARKS - Authorities reiterate appreciation to Management and staff for permanent support and role as trusted advisor. - Authorities agree with staff’s assessment that Peru’s strong economic fundamentals and institutional policy frameworks provide the basis for sustained strong policies across electoral cycles and administrations. *Source: Peruvian authorities’ response to IMF staff report (SM/21/20) — INTRODUCTION.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1perea2021001.pdf_