## 1perea2021002 — EXECUTIVE SUMMARY

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---

### CONTEXT
- Policy frameworks cited as strengths: a sound inflation-targeting regime, flexible exchange rate, credible fiscal framework reflected in very low public debt, and sound financial sector supervision and regulation.
- Enabled a robust policy response to the COVID-19 pandemic and sustained access to international capital markets.
- Economic impact of the pandemic:
  - Official death toll currently exceeds 64,000.
  - Output contracted by 11.1 percent in 2020.
  - Real GDP expected to return to its pre-pandemic level by end-2022.
  - Unemployment in Lima Metropolitan region rose to 13.0 percent in 2020 from 6.6 percent in 2019.
  - Informality: informal share of employment rose from 71.6 percent in 2019Q3 to 73.7 percent in 2020Q3.
  - Poverty estimated to have increased to 27.5 percent in 2020 from 21.7 percent in 2019.
- External position and flows in 2020:
  - Current account moved into a 0.5 percent of GDP surplus from a deficit of 1.7 percent of GDP in 2019.
  - Substantial foreign borrowing by the public sector in 2020: US$7 billion.
  - FDI inflows down 67 percent in 2020.
  - Gross international reserves rose US$6.5 billion to US$74.9 billion (36.8 percent of GDP).
- Flexible Credit Line (FCL):
  - Executive Board approved a two-year FCL arrangement of SDR 8.007 billion (about US$11 billion or 600 percent of quota) on May 28, 2020.
  - Authorities expect to treat the FCL as precautionary and maintain the current level of access; exit conditional on evolution of external risks.

### RECENT DEVELOPMENTS
- COVID-19 epidemiology and vaccines:
  - Second wave beginning early 2021 is slowly abating; 7-day average of new daily cases fell to about 5,000 after peaking at about 9,000 in mid-April.
  - Peru has firm contracts for importing some 60 million doses, covering most of the population (32 million).
  - About 754 thousand people had been fully vaccinated as of mid-May.
  - Administration expects population over 60 vaccinated before June; most adult population vaccinated in the second half of the year.
- High-frequency and activity indicators:
  - Economic activity fell 2.1 percent m/m (sa) in February 2021 (down 4.2 percent y/y).
  - Staff forecast a 5.7 percent decline in Q1 (note: monthly data point suggests some upside risk to that forecast).
  - Public investment, cement consumption, and VAT revenues show sustained momentum in March.
  - Exports continued to recover through early 2021, supported by higher commodity prices (copper prices up about 70 percent since April 2020).
- Labor market and inflation:
  - Unemployment rate jumped to 14.5 percent in February 2021.
  - Employment in Lima remains 12.0 percent below pre-pandemic levels.
  - Shadow unemployment rate (assuming participation at pre-COVID-19 levels) stood at 20.7 percent.
  - Headline and core inflation remained within the central bank’s target range.
- Exchange rate and reserves:
  - Exchange rate depreciated by 2.1 percent year-to-date; central bank interventions stabilized volatility.
  - International reserves rose by US$2.4 billion to US$77.1 billion in April 2021 from end-2020.
- Financial system:
  - Credit growth to the private sector at 9.4 percent y/y in March 2021, driven by government-guaranteed lending under Reactiva Perú.
  - Dollarization ratio of credit to private sector declined to 20 percent in March from 26 percent a year earlier.
  - Asset quality: NPLs increased to 4.2 percent at end-2020 from 3.4 percent at end-2019.
  - Profitability: ROE fell to 3.1 percent at end-2020 from 17.9 percent at end-2019.
  - Cooperative and microfinance sectors (~7 percent of total system assets) face rising default risks.
  - Top-down stress tests (2018 FSAP) indicate resilience and limited solvency problems even under adverse scenarios; authorities’ 2020 stress tests confirm this assessment.
- Political developments:
  - Second round of presidential elections scheduled for June 6, 2021.
  - New Congress elected on April 11; ten parties will be seated and no single party will hold the majority; inauguration on July 27.
  - Runoff candidates: Mr. Pedro Castillo and Mrs. Keiko Fujimori; vote intention surveys point to a very tight race.
  - Financial market volatility increased ahead of elections but appears contained.
  - Both runoff candidates publicly committed to the strong policies and institutional frameworks underpinning the FCL; commitment confirmed in discussions with their economic teams.

### OUTLOOK, RISKS, AND POLICY SETTINGS
- Baseline projections and assumptions:
  - Assumes Peru will vaccinate 75 percent of its population by January 2022.
  - Staff projects real GDP growth of 8½ percent in 2021 and 5.2 percent in 2022.
  - Real GDP projected to converge to 3¼ percent over the medium term.
  - Real GDP would be 9 percent below pre-pandemic projections by the end of the forecast horizon, reflecting scarring.
  - Large negative output gap in 2021–22 expected to keep inflation within the target range of 2 +/-1 percent.
  - Current account to gradually move into a deficit of 1.6 percent of GDP over the medium term.
  - International reserves to remain at comfortably high levels.
- Risks (assessment and sources):
  - Outlook highly uncertain; risks elevated and tilted to the downside.
  - Domestic risks: containing the latest COVID-19 outbreak; risk of broader and stricter mobility restrictions; further political uncertainty and social unrest could weigh on private investment.
  - External risks: setbacks in the global pandemic; sharp rise in global risk premia; volatility in commodity prices and potential global reversal in trade integration.
  - Upside risks: faster rollout of vaccines; higher public investment; stronger global growth.
- External Economic Stress Index (ESI):
  - Under the baseline, ESI would turn negative later in the year—indicating risk levels above average—as commodity prices stabilize and the U.S. gradually tightens monetary policy.
  - Stress levels would remain above pre-pandemic levels well into 2022.
  - Exports of non-mineral goods and services (especially tourism) expected to lag global growth; ESI could understate economic stress.
  - Under an adverse ESI scenario, reversal of commodity price gains, lower global growth, and increased emerging market volatility would produce high external economic stress.
- Fiscal policy and near-term stance:
  - Fiscal deficit widened to 8.9 percent of GDP in 2020, including above-the-line measures amounting to 5.1 percent of GDP.
  - Overall deficit expected to fall to 5 percent of GDP in 2021 as transitory relief measures are phased out.
  - Government announced additional measures in late January amounting to about 1.2 percent of GDP to address the second wave.
  - In late March, Congress authorized new extraordinary withdrawals from private pension funds that could amount to about 4.7 percent of GDP, in addition to the 7.6 percent of GDP withdrawn last year.
- Medium-term fiscal considerations:
  - Higher revenue mobilization will be key to accommodate higher spending needs and preserve the fiscal anchor.
  - Peru’s tax intake (as a percent of GDP) is low relative to peers.
  - Pandemic-exposed budgetary pressures include public healthcare capacity bottlenecks, shortages in social safety net, need for higher infrastructure investment, improving education quality, facilitating sectoral reallocation, and reducing informality.
  - Continued pension fund withdrawals weaken viability of the pension fund system and may create implicit state liabilities.
  - Closing revenue gaps over the medium term will allow accommodation of higher spending needs and maintain fiscal sustainability.
  - Anchoring policy to a credible medium-term plan is important given unprecedented uncertainty.

### MONETARY POLICY, EXCHANGE RATE, AND MACROPRUDENTIAL MEASURES
- Monetary policy stance and actions:
  - Monetary policy is appropriately expansionary given the large negative output gap and anchored inflation expectations.
  - The central bank (Banco Central de Reserva de Perú, BCRP) reduced its benchmark interest rate by 2 percentage points to a historic low of 0.25 percent at the onset of the crisis.
  - The BCRP has reiterated that supportive monetary conditions are likely to persist for a prolonged period.
  - Other BCRP measures: liquidity provision through guaranteed-credit repo operations under Reactiva Perú; lowering reserve requirements; extending amount and maturity of repo operations; introduction of new security repos conditional on expansion of long-term lending.
  - Inflation expectations remain anchored at the mid-point of the target range.
- Exchange rate policy and recommendation for flexibility:
  - Policy framework focuses on exchange rate and financial stability; level of the exchange rate is market-determined, with FX interventions reducing volatility.
  - Medium-term recommendation: greater exchange rate flexibility would increase economic resilience by fostering development of hedging instruments, strengthening transmission of monetary policy, and further reducing dollarization.
- Macroprudential policy and financial sector resilience:
  - Authorities eased several macroprudential measures, including reducing the countercyclical capital buffer.
  - Measures extended grace periods for loans under Reactiva Perú and permitted loan restructurings.
  - Risks and monitoring: default rates likely to rise among corporates as pandemic-related support is withdrawn; careful monitoring required.
  - As recovery proceeds, macroprudential policy should gradually return to normal and encourage focus on borrowers’ viability, fund viable but illiquid firms, and allow resolution of unviable enterprises.
  - Areas for further progress: recovery and resolution planning for domestic systemically important banks, reinforcing legal protection of supervisors, aligning some regulations with Basel III (risk weights for foreign currency loans, capital surcharges for systemic banks).

### FCL, QUALIFICATION, AND STAFF RECOMMENDATION
- FCL details and role:
  - Two-year FCL arrangement of SDR 8.007 billion (about US$11 billion or 600 percent of quota) approved on May 28, 2020.
  - Arrangement provides a substantial buffer and has helped anchor market confidence.
  - Authorities plan to continue treating the FCL as precautionary and expressed desire to maintain current level of access given elevated global risks.
  - Exit from the arrangement will be conditional on the evolution of external risks.
- Staff assessment and recommendation:
  - Staff assesses Peru continues to meet the qualification criteria for access to FCL resources.
  - Staff recommends the Board complete this review, which would allow Peru to make purchases until the expiration of the FCL arrangement on May 27, 2022.
  - Staff’s rationale: Peru has "very strong macroeconomic policies and institutional policy frameworks" and "a strong track record of prudent policy settings."

### EXTERNAL AND PUBLIC DEBT SUSTAINABILITY — KEY INDICATORS AND SCENARIOS
- Selected baseline macro projections (exact figures from source):
  - Real GDP: 2.1 (2019), 4.0 (2020), 2.2 (2021), -11.1 (2022), 8.5 (2023), 5.2 (2024), 4.8 (2025), 3.4 (2026), 3.3 (2027), 3.3 (2028).
  - Output gap (percent of potential GDP): -1.4 (2019), -1.0 (2020), -1.7 (2021), -7.2 (2022), -3.0 (2023), -1.4 (2024), -0.1 (2025), 0.0 (2026), 0.0 (2027), 0.0 (2028).
  - Consumer prices (end of period): 1.4 (2019), 2.2 (2020), 1.9 (2021), 2.0 (2022), 2.0 (2023), 2.0 (2024), 2.0 (2025), 2.0 (2026), 2.0 (2027), 2.0 (2028).
  - Current account balance (percent of GDP): -1.3 (2019), -1.7 (2020), -1.5 (2021), 0.5 (2022), -0.4 (2023), -0.7 (2024), -1.0 (2025), -1.4 (2026), -1.8 (2027), -1.8 (2028).
  - Gross international reserves (billions of U.S. dollars): 63.7 (2019), 60.3 (2020), 68.4 (2021), 74.9 (2022), 75.1 (2023), 75.1 (2024), 75.0 (2025), 74.2 (2026), 71.8 (2027), 71.0 (2028).
  - NFPS overall balance (percent of GDP): -3.1 (2019), -2.3 (2020), -1.6 (2021), -8.9 (2022), -5.0 (2023), -3.4 (2024), -2.8 (2025), -2.4 (2026), -2.1 (2027), -1.8 (2028).
  - Gross non-financial public sector debt (percent of GDP): 25.4 (2019), 26.2 (2020), 27.1 (2021), 35.4 (2022), 35.4 (2023), 36.2 (2024), 36.7 (2025), 37.2 (2026), 37.5 (2027), 37.4 (2028).
  - Total external debt (percent of GDP): 35.7 (2019), 34.6 (2020), 34.7 (2021), 43.1 (2022), 39.0 (2023), 36.6 (2024), 34.2 (2025), 32.5 (2026), 30.9 (2027), 29.8 (2028).
- External Economic Stress Index (ESI) construction and scenario outcomes:
  - ESI composition weights: 0.35 for commodity prices, 0.16 for world GDP, -0.22 for the VXEEM, -0.17 for the U.S. Treasury rate.
  - Four variables used: growth rate of weighted average of copper and gold prices; world GDP growth rate; VXEEM; change in 10-year U.S. Treasury yield.
  - Baseline ESI at -0.1; adverse scenario ESI calculated to be at -0.8; ESI was -0.7 during the GFC.
  - Adverse scenario assumptions: global GDP 1.5 percentage points below baseline in 2021 and 2.5 percentage points below in 2022; commodity price gains reversed to around 2019 levels; emerging market volatility about 2 standard deviations above baseline; U.S. interest rates increase 5 basis points every quarter starting in 2021Q2.
- External debt DSA highlights (selected exact figures):
  - External debt-to-exports ratio: 145.2 (2017), 138.5 (2018), 145.1 (2019), 191.9 (2020), 147.2 (2021), 140.2 (2022), 133.0 (2023), 126.2 (2024), 119.7 (2025), 115.4 (2026).
  - Gross external financing need (billions of US dollars): 22.8 (2017), 19.5 (2018), 20.9 (2019), 12.7 (2020), 15.2 (2021), 16.6 (2022), 17.8 (2023), 18.4 (2024), 21.2 (2025), 21.6 (2026).
- Public debt sustainability and stress tests:
  - Nominal gross public debt (percent of GDP): 23.4 (2019), 27.1 (2020), 35.4 (2021), 35.4 (2022), 36.2 (2023), 36.7 (2024), 37.2 (2025), 37.5 (2026).
  - Public gross financing needs (percent of GDP): 2.3 (2019), 4.1 (2020), 9.2 (2021), 5.4 (2022), 4.3 (2023), 4.4 (2024), 4.8 (2025), 4.6 (2026).
  - Stress test outcomes (selected): interest rate shock 30.2 versus baseline 29.8 (percent of GDP); historical scenario peak 37.1 (percent of GDP); real depreciation shock (one-time 30 percent in 2021) 44.8 versus baseline 29.8.
  - Medium-term primary balance target: 1.0 percent of GDP; public debt-to-GDP ratio projected to fall to 31.4 percent by 2030.

### INSTITUTIONAL QUALITY, GOVERNANCE, AND SAFEGUARDS
- Governance and anti-corruption advances:
  - Strengthened governance and anti-corruption institutions; 2019 referendum reforms implemented.
  - Under the Anti-Corruption Plan (2018–21): Offices of Institutional Integrity created in more than 200 public sector entities; whistleblower complaint platform launched; Integrity Secretariat developed an integrity index.
  - Comptroller’s Office monitors emergency-related spending, identifies abuses, and regularly publishes reports.
  - Efforts ongoing to ensure accuracy of beneficial ownership information collected by SUNAT.
  - Several AML/CFT regulations issued to guide customer due diligence for politically exposed persons.
  - Asset declaration requirements cover high-level public officials and are publicly available.
- Safeguards and audits:
  - Safeguards procedures for Peru’s FCL arrangement completed.
  - KPMG Peru issued an unmodified audit opinion on BCRP’s 2019 financial statements.
  - Annual financial statements audited in accordance with international standards, include comprehensive disclosures and are published timely.
  - Staff review of 2019 audit results found no significant issues.

### POLICY IMPLICATIONS AND RECOMMENDATIONS (as reflected in the source)
- Maintain very strong macroeconomic policies and institutional frameworks to preserve qualification for FCL.
- Gradual withdrawal of fiscal support while safeguarding debt sustainability (consistent with NFPS primary and overall balances projections).
- Higher revenue mobilization to accommodate higher spending needs and preserve fiscal anchor.
- Monitor external financing needs and reserve adequacy given projected CAD widening.
- Preserve financial sector resilience given increases in nonperforming loans and credit dynamics.
- Continue treating the FCL as precautionary and temporary; exit conditional on reduction in global risks.

*IMF staff report content (May 18, 2021 — EXECUTIVE SUMMARY, Peru).*

### EXECUTIVE SUMMARY

### 1perea2021002 - EXECUTIVE SUMMARY

### CONTEXT
- Peru’s policy frameworks cited as strengths: a sound inflation-targeting regime, flexible exchange rate, credible fiscal framework reflected in very low public debt, and sound financial sector supervision and regulation.
- These frameworks enabled a robust policy response to the COVID-19 pandemic and sustained access to international capital markets.
- Economic impact of the pandemic:
  - Official death toll currently exceeds 64,000.
  - Output contracted by 11.1 percent in 2020.
  - Real GDP expected to return to its pre-pandemic level by end-2022.
  - Unemployment in Lima Metropolitan region rose to 13.0 percent in 2020 from 6.6 percent in 2019.
  - Informality: informal share of employment rose from 71.6 percent in 2019Q3 to 73.7 percent in 2020Q3.
  - Poverty estimated to have increased to 27.5 percent in 2020 from 21.7 percent in 2019.
- External position improvements in 2020:
  - Current account moved into a 0.5 percent of GDP surplus from a deficit of 1.7 percent of GDP in 2019.
  - Substantial foreign borrowing by the public sector in 2020: US$7 billion.
  - FDI inflows down 67 percent in 2020.
  - Gross international reserves rose US$6.5 billion to US$74.9 billion (36.8 percent of GDP).
- Flexible Credit Line (FCL):
  - Executive Board approved a two-year FCL arrangement of SDR 8.007 billion (about US$11 billion or 600 percent of quota) on May 28, 2020.
  - Authorities expect to treat the FCL as precautionary and maintain the current level of access; exit conditional on evolution of external risks.

### RECENT DEVELOPMENTS
- COVID-19 epidemiology and vaccines:
  - Second wave beginning early 2021 is slowly abating; 7-day average of new daily cases fell to about 5,000 after peaking at about 9,000 in mid-April.
  - Peru has firm contracts for importing some 60 million doses, covering most of the population (32 million).
  - About 754 thousand people had been fully vaccinated as of mid-May.
  - Administration expects population over 60 vaccinated before June; most adult population vaccinated in the second half of the year (reflecting higher expected vaccine availability).
- High-frequency and activity indicators:
  - Economic activity fell 2.1 percent m/m (sa) in February 2021 (down 4.2 percent y/y).
  - Staff forecast a 5.7 percent decline in Q1 (note: monthly data point suggests some upside risk to that forecast).
  - Public investment, cement consumption, and VAT revenues show sustained momentum in March.
  - Exports (traditional and non-traditional) continued to recover through early 2021, supported by higher commodity prices (copper prices up about 70 percent since April 2020).
- Labor market and inflation:
  - Unemployment rate jumped to 14.5 percent in February 2021.
  - Employment in Lima remains 12.0 percent below pre-pandemic levels.
  - Shadow unemployment rate, assuming participation at pre-COVID-19 levels, stood at 20.7 percent.
  - Headline and core inflation remained within the central bank’s target range.
- Exchange rate and reserves:
  - Exchange rate depreciated by 2.1 percent year-to-date; central bank interventions stabilized volatility.
  - International reserves rose by US$2.4 billion to US$77.1 billion in April 2021 from end-2020.
- Financial system:
  - Credit growth to the private sector at 9.4 percent y/y in March 2021, driven by government-guaranteed lending under Reactiva Perú.
  - Dollarization ratio of credit to private sector declined to 20 percent in March from 26 percent a year earlier.
  - Asset quality: NPLs increased to 4.2 percent at end-2020 from 3.4 percent at end-2019.
  - Profitability: ROE fell to 3.1 percent at end-2020 from 17.9 percent at end-2019.
  - Cooperative and microfinance sectors (~7 percent of total system assets) face rising default risks.
  - Top-down stress tests (2018 FSAP) indicate resilience and limited solvency problems even under adverse scenarios; authorities’ 2020 stress tests confirm this assessment.
- Political developments:
  - Second round of presidential elections scheduled for June 6, 2021.
  - New Congress elected on April 11; ten parties will be seated and no single party will hold the majority; inauguration on July 27.
  - Runoff candidates: Mr. Pedro Castillo and Mrs. Keiko Fujimori; vote intention surveys point to a very tight race.
  - Financial market volatility increased ahead of elections but appears contained.
  - Both runoff candidates publicly committed to the strong policies and institutional frameworks underpinning the FCL; commitment confirmed in discussions with their economic teams.

### OUTLOOK, RISKS, AND POLICY SETTINGS
- Baseline economic projections and assumptions:
  - Assumes Peru will vaccinate 75 percent of its population by January 2022.
  - Staff projects real GDP growth of 8½ percent in 2021 and 5.2 percent in 2022.
  - Real GDP projected to converge to 3¼ percent over the medium term.
  - Real GDP would be 9 percent below pre-pandemic projections by the end of the forecast horizon, reflecting scarring (firm closures, permanent loss of dislocated workers, reduced human capital accumulation, foregone investment).
  - Large negative output gap in 2021–22 expected to keep inflation within the target range of 2 +/-1 percent.
  - Current account to gradually move into a deficit of 1.6 percent of GDP over the medium term.
  - International reserves to remain at comfortably high levels.
- Risks (general assessment and main sources):
  - Outlook highly uncertain; risks elevated and tilted to the downside.
  - Domestic risks:
    - Containing the latest COVID-19 outbreak; risk of broader and stricter mobility restrictions, especially if vaccination rollout is slow.
    - Further political uncertainty and social unrest could weigh on private investment.
  - External risks:
    - Setbacks in the global pandemic.
    - Sharp rise in global risk premia leading to tighter financial conditions and reduced access to international capital markets.
    - Volatility in commodity prices and potential global reversal in trade integration.
  - Upside risks:
    - Faster rollout of vaccines.
    - Higher public investment.
    - Stronger global growth.
- External Economic Stress Index (ESI):
  - Under the baseline, ESI would turn negative in the later part of the year—indicating risk levels above average—as commodity prices stabilize and the U.S. gradually tightens monetary policy.
  - Stress levels would remain above pre-pandemic levels well into 2022.
  - Exports of non-mineral goods and services (especially tourism) expected to lag global growth; ESI could understate economic stress.
  - Under an adverse ESI scenario, reversal of commodity price gains, lower global growth, and increased emerging market volatility would produce high external economic stress.
- Fiscal policy and near-term stance:
  - Fiscal deficit widened to 8.9 percent of GDP in 2020, including above-the-line measures amounting to 5.1 percent of GDP.
  - Overall deficit expected to fall to 5 percent of GDP in 2021 as transitory relief measures are phased out.
  - Government announced additional measures in late January amounting to about 1.2 percent of GDP to address the second wave (cash transfers, higher health spending, new guaranteed-lending program for SMEs).
  - In late March, Congress authorized new extraordinary withdrawals from private pension funds that could amount to about 4.7 percent of GDP, in addition to the 7.6 percent of GDP withdrawn last year.
- Medium-term fiscal considerations:
  - Higher revenue mobilization will be key to accommodate higher spending needs and preserve the fiscal anchor.
  - Peru’s tax intake (as a percent of GDP) is low relative to peers.
  - Pandemic-exposed budgetary pressures to address: public healthcare capacity bottlenecks, shortages in social safety net, need for higher infrastructure investment, improving education quality, facilitating sectoral reallocation, and reducing informality to increase productivity.
  - Continued pension fund withdrawals weaken viability of the pension fund system and may create implicit state liabilities.
  - Closing revenue gaps over the medium term will allow accommodation of higher spending needs and maintain fiscal sustainability.
  - Anchoring policy to a credible medium-term plan is important given unprecedented uncertainty.

### FCL, QUALIFICATION, AND STAFF RECOMMENDATION
- FCL details:
  - Two-year FCL arrangement of SDR 8.007 billion (about US$11 billion or 600 percent of quota) approved on May 28, 2020.
  - Arrangement provides a substantial buffer and has helped anchor market confidence.
  - Authorities plan to continue treating the FCL as precautionary and expressed desire to maintain current level of access given elevated global risks.
  - Exit from the arrangement will be conditional on the evolution of external risks, consistent with the strategy at time of approval.
- Staff assessment and recommendation:
  - Staff assesses Peru continues to meet the qualification criteria for access to FCL resources.
  - Staff recommends the Board complete this review, which would allow Peru to make purchases until the expiration of the FCL arrangement on May 27, 2022.

*May 18, 2021 — EXECUTIVE SUMMARY (PERU, IMF staff report)*

### 13.      Guided by the inflation targeting framework, monetary policy remains appropriately

### 1perea2021002 - 13.      Guided by the inflation targeting framework, monetary policy remains appropriately

### Monetary policy stance and actions
- Monetary policy is appropriately expansionary given the large negative output gap and anchored inflation expectations.
- The central bank (Banco Central de Reserva de Perú, BCRP) reduced its benchmark interest rate by 2 percentage points to a historic low of 0.25 percent at the onset of the crisis.
- The BCRP has reiterated that supportive monetary conditions are likely to persist for a prolonged period.
- Other BCRP measures:
  - Liquidity provision through guaranteed-credit repo operations with banks under the Reactiva Perú program.
  - Lowering reserve requirements.
  - Extending the amount and maturity of repo operations.
  - Introduction of new security repos conditional on the expansion of long-term lending.
- Inflation expectations remain anchored at the mid-point of the target range.

### Exchange rate policy and recommendation for flexibility
- Peru’s multi-instrument policy framework has a strong focus on the exchange rate and financial stability and has served the country well.
- The level of the exchange rate is market-determined, but the central bank’s FX interventions (FXI) on both sides have kept exchange rate volatility lower than in peer countries.
- Medium-term recommendation: greater exchange rate flexibility would increase economic resilience by:
  - Fostering development of hedging instruments.
  - Strengthening transmission of monetary policy.
  - Further reducing dollarization by inducing agents to internalize exchange rate risk.
- Rationale: as currency mismatches decline further, additional flexibility would be beneficial.

### Macroprudential policy, regulatory gaps, and financial sector resilience
- The authorities eased several macroprudential measures, including reducing the countercyclical capital buffer for financial institutions.
- Measures extended the grace period for loans issued under Reactiva Perú and permitted loan restructurings.
- Risks and monitoring:
  - Default rates are likely to rise among corporates as pandemic-related support is withdrawn; careful monitoring is required.
- As the economy recovers, macroprudential policies could:
  - Initiate a gradual return to normal conditions.
  - Encourage banks to focus on borrowers’ viability, fund viable but illiquid firms, and allow resolution of unviable enterprises.
- Areas for further progress:
  - 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 risk weights for foreign currency loans and capital surcharges for systemic banks.

### Flexible Credit Line (FCL) role and authorities’ intentions
- The FCL complements Peru’s very strong policy frameworks, reinforces external buffers and provides insurance against elevated risks.
- Authorities are not requesting a reduction in access at this time and intend to treat the FCL arrangement as precautionary and temporary.
- Exit from the arrangement will be contingent on the evolution of external risks, consistent with the 2020 FCL approval strategy.

### External Economic Stress Index (Box 1) — construction and scenarios
- ESI composition (weights unchanged): 
  - 0.35 for commodity prices,
  - 0.16 for world GDP,
  - -0.22 for the VXEEM,
  - -0.17 for the U.S. Treasury rate.
- Four variables used:
  - Growth rate of a weighted average of copper and gold prices (proxy for mineral exports and FDI).
  - World GDP growth rate (proxy for demand of exports of goods and services other than minerals).
  - Emerging market volatility index VXEEM (proxy for risks to equities in emerging markets).
  - Change in the 10-year U.S. Treasury yield (proxy for risks to short-term debt and medium/long-term debt rollovers).
- Calculation: weighted sum of standardized deviations of the above variables from their means; weights estimated using BOP and IIP data expressed as shares of GDP.
- Baseline outlook: ESI was positively affected by favorable commodity prices and the global growth rebound in late 2020 but is expected to turn negative over the next 12 months in the baseline scenario.
- Adverse scenario assumptions:
  - Global GDP assumed to be 1.5 percentage points below the baseline in 2021, and 2.5 percentage points below the baseline in 2022 (following the downside scenario in the April 2021 WEO).
  - Commodity price gains from 2020Q3 through 2021Q1 assumed reversed; weighted average of copper and gold prices assumed to stabilize around 2019 levels.
  - Emerging market volatility assumed to remain about 2 standard deviations above the baseline.
  - U.S. interest rates assumed to increase 5 basis points (bp) every quarter starting in 2021Q2, compared to 2021Q3 under the baseline.
- ESI outcomes:
  - Adverse scenario ESI calculated to be at -0.8.
  - Baseline ESI at -0.1.
  - ESI was -0.7 during the GFC.
- Note: The current ESI design likely understates the level of external economic stress because demand for some Peru exports (e.g., tourism-related) will continue to lag due to COVID-19.

### Staff assessment: qualification criteria for FCL
- Staff assesses that Peru continues to meet the qualification criteria for an FCL arrangement.
- Fiscal framework:
  - Fiscal policy guided by the Fiscal Responsibility and Transparency Law with ceilings on the fiscal deficit and public debt and a medium-term fiscal framework.
  - Fiscal rules suspended during 2020–21; authorities indicated intention to reinstate them in 2022.
  - Under authorities’ projections, the 1 percent-of-GDP fiscal deficit target would be met in 2026; staff advised a more gradual return to targets.
- Core indicators met:
  - Sustainable external position:
    - External position characterized as moderately stronger than implied by fundamentals and desirable policy settings.
    - Policy gaps (1 percent of GDP) account for over two-thirds of the current account gap (1.4 percent of GDP).
    - External debt increased in 2020 to 43.1 percent of GDP but expected to decline to about 30 percent of GDP over the medium term.
    - Net foreign assets projected to stabilize at around 37 percent of GDP over the medium term.
  - Capital account dominated by private flows:
    - Share of public debt in total external debt averaged 36 percent over the past three years.
    - Public sector flows averaged about 23 percent of total flows for 2017–19 and rose to about 54 percent in 2020.
  - Track record of sovereign market access:
    - EMBIG spreads: 148 bp in 2018, 129 bp in 2019, 173 bp in 2020.
    - Average sovereign spread through end-April stood at 150 bp.
    - 5-year CDS spreads averaged 80 bp in 2018, 59 bp in 2019, 76 bp in 2020 and 69 bp through April 2021.
    - Sovereign bond issuances: US$2.4 billion in 2017, US$1.8 billion in 2018, US$1.9 billion in 2019, and US$7 billion in 2020 (including US$1 billion in century bonds).
    - Latest global issuance in March 2021 at $5 billion covers over 40 percent of nonfinancial public sector financing requirements.
    - Three major credit rating agencies continue to assign investment grade to Peru; Peru is the second highest-rated sovereign in Latin America behind Chile.
    - Staff assessment: Peru did not lose market access in the last 12 months.
  - Comfortable reserve position:
    - Gross international reserves reached US$74.9 billion at end-2020, up from US$68.4 billion at end-2019.
    - Adjusted reserves to ARA metric ratio: 189 percent for 2020, and 136 percent for the average of the past five years.
  - Sound public finances and sustainable public debt:
    - Public debt expected to remain sustainable; public debt-to-GDP ratio forecast to stabilize at about 38 percent of GDP over the medium term under staff’s baseline.
    - Gross financing needs expected to average about 5 percent of GDP over the forecast horizon.
    - Elevated share of public debt held by non-residents is the main debt profile risk.
  - Low and stable inflation and credible monetary framework:
    - Inflation has been low (single-digit) and stable since 2002.
    - One-year ahead expected inflation remains at 2.3 percent.
  - Sound financial system and no systemic solvency problems:
    - Banking system entered the crisis well-capitalized and profitable; average capital adequacy ratios remain above regulatory thresholds.
    - Dollarization is decreasing.
    - Growth in NPLs limited, partly due to loan forbearance; as of November 2020, 28 percent of total loans had been modified (highest shares in consumer lending and lending to SMEs).
    - 2021 Article IV Consultation did not highlight significant solvency risks or recapitalization needs.
  - Effective financial sector supervision:
    - Steps taken in line with 2018 FSAP recommendations; implemented capital and liquidity regulatory framework aims for broadly equivalent overall capital levels to Basel III.
    - Reforms implemented or in preparation include expanding oversight of financial co-operatives, monitoring off-balance-sheet exposures, new risk-monitoring tools, risk-based supervision for insurers, strengthened crisis preparedness and management, enhanced emergency liquidity assistance framework, and measures such as higher capital surcharges for systemically important banks and recovery and resolution planning requirements.
  - Data transparency and integrity:
    - Overall data quality high and Peru remains in observance of the Special Data Dissemination Standards (SDSS).
  - Track record:
    - Sustained track record of implementing very strong macroeconomic policies as noted in the 2021 Article IV Consultation.

### Institutional quality and governance advances
- Progress despite COVID-19:
  - Strengthened governance and anti-corruption institutions; 2019 referendum reforms implemented.
  - Under the Anti-Corruption Plan (2018–21):
    - Offices of Institutional Integrity created in more than 200 public sector entities.
    - Whistleblower complaint platform launched.
    - Integrity Secretariat developed an integrity index to focus on higher corruption risk areas.
  - Comptroller’s Office monitors emergency-related spending, identifies abuses, and regularly publishes reports.
  - Efforts ongoing to ensure accuracy of beneficial ownership information collected by SUNAT.
  - Several AML/CFT regulations issued to guide customer due diligence for politically exposed persons.
  - Asset declaration requirements cover high-level public officials and are publicly available.

### Safeguards assessment and staff appraisal
- Safeguards procedures for Peru’s FCL arrangement completed.
- KPMG Peru issued an unmodified audit opinion on BCRP’s 2019 financial statements.
- Annual financial statements audited in accordance with international standards, include comprehensive disclosures and are published timely.
- Staff review of 2019 audit results found no significant issues.
- Staff appraisal:
  - The FCL arrangement provided a buffer against tail risks and, together with sizable international reserves, low public debt, anchored inflation, and a sound financial system, offered valuable insurance during unprecedented uncertainty.
  - Despite the pandemic’s negative effects on activity, unemployment, and poverty, fiscal space and market access remain ample.
  - Authorities expect to continue treating the FCL as precautionary; given elevated global risks and uncertainty, they are not requesting a reduction in access at this time.

*IMF staff report content.*

### 22.      Staff’s assessment is that Peru continues to meet the qualification criteria for access to

### 1perea2021002 - 22. Staff’s assessment is that Peru continues to meet the qualification criteria for access to

### Staff assessment and recommendation
- Staff’s assessment: Peru continues to meet the qualification criteria for access to FCL resources.
- Rationale:
  - Peru has "very strong macroeconomic policies and institutional policy frameworks."
  - The authorities have "a strong track record of prudent policy settings."
  - "Both candidates who will participate in the second round of the Presidential elections have expressed their broad commitment to maintaining very strong policies and institutional frameworks."
- Recommendation: Staff recommends completion of the review under the FCL arrangement for Peru as specified under the Executive Board decision on FCL arrangements (Decision No. 14283-(09/29), adopted on March 24, 2009, as amended).

### Macroeconomic developments and policy stance
- Economic activity:
  - "Economic activity is rebounding" — supported by public spending and private investment.
  - Components shown: private investment, private consumption, net exports, public investment, public consumption, change in inventory (contribution to GDP growth).
- Credit and financial conditions:
  - "Government-guaranteed lending has supported credit."
  - Credit growth series shown for total, local currency (LC), and foreign currency (FC).
- Inflation and monetary policy:
  - "Inflation remains well within the target range."
  - Policy rate and inflation (headline, non-food and non-energy; Metropolitan Lima) are presented.
- Fiscal policy and external sector:
  - "Fiscal support will be withdrawn gradually."
  - "The CAD will widen over the medium-term."

### Qualification criteria and strengths highlighted
- Low and sustainable external debt.
- Nonresident claims concentrated in FDI.
- Comfortable reserve coverage.
- Sustainable public debt dynamics under stress scenarios.
- Low and stable inflation and anchored inflation expectations.
- Uninterrupted access to capital markets (sovereign spreads and government debt issuance metrics).

### Key quantitative indicators (selected exact figures from the source)
- GDP and growth:
  - Real GDP: 2.1 (2019), 4.0 (2020), 2.2 (2021), -11.1 (2022), 8.5 (2023), 5.2 (2024), 4.8 (2025), 3.4 (2026), 3.3 (2027), 3.3 (2028) — (Table 1 / Table 8: "Real GDP" and projections).
  - Output gap (percent of potential GDP): -1.4 (2019), -1.0 (2020), -1.7 (2021), -7.2 (2022), -3.0 (2023), -1.4 (2024), -0.1 (2025), 0.0 (2026), 0.0 (2027), 0.0 (2028).
- Inflation:
  - Consumer prices (end of period): 1.4 (2019), 2.2 (2020), 1.9 (2021), 2.0 (2022), 2.0 (2023), 2.0 (2024), 2.0 (2025), 2.0 (2026), 2.0 (2027), 2.0 (2028).
- External sector and reserves:
  - Current account balance (percent of GDP): -1.3 (2019), -1.7 (2020), -1.5 (2021), 0.5 (2022), -0.4 (2023), -0.7 (2024), -1.0 (2025), -1.4 (2026), -1.8 (2027), -1.8 (2028).
  - Gross reserves (In billions of U.S. dollars): 63.7 (end-2020), 60.3 (2021), 68.4 (2022), 74.9 (2023), 75.1 (2024), 75.1 (2025), 75.0 (2026), 74.2 (2027), 71.8 (2028), 71.0 (2029) — (Table 1 / Table 4 / Table 8).
  - Gross international reserves (billions of U.S. dollars): 63.7 (2019), 60.3 (2020), 68.4 (2021), 74.9 (2022), 75.1 (2023), 75.1 (2024), 75.0 (2025), 74.2 (2026), 71.8 (2027), 71.0 (2028).
- Public finances:
  - NFPS overall balance (percent of GDP): -3.1 (2019), -2.3 (2020), -1.6 (2021), -8.9 (2022), -5.0 (2023), -3.4 (2024), -2.8 (2025), -2.4 (2026), -2.1 (2027), -1.8 (2028).
  - NFPS primary balance (percent of GDP): -1.9 (2019), -1.0 (2020), -0.2 (2021), -7.2 (2022), -3.3 (2023), -1.6 (2024), -0.9 (2025), -0.6 (2026), -0.3 (2027), -0.1 (2028).
  - Gross non-financial public sector debt (percent of GDP): 25.4 (2019), 26.2 (2020), 27.1 (2021), 35.4 (2022), 35.4 (2023), 36.2 (2024), 36.7 (2025), 37.2 (2026), 37.5 (2027), 37.4 (2028).
  - Public Gross Debt (millions of soles): 177,461 (2019), 193,721 (2020), 208,623 (2021), 251,893 (2022), 288,065 (2023), 316,129 (2024), 340,597 (2025), 362,591 (2026), 383,350 (2027), 402,077 (2028).
- External debt and debt service:
  - Total external debt (percent of GDP): 35.7 (2019), 34.6 (2020), 34.7 (2021), 43.1 (2022), 39.0 (2023), 36.6 (2024), 34.2 (2025), 32.5 (2026), 30.9 (2027), 29.8 (2028).
  - Total external debt service (percent of exports of GNFS): 44.7 (2019), 34.6 (2020), 38.9 (2021), 32.8 (2022), 29.9 (2023), 29.7 (2024), 29.1 (2025), 27.3 (2026), 28.7 (2027), 27.6 (2028).
- Financial soundness (selected):
  - Nonperforming loans to total gross loans: 2.9 (2014), 2.9 (2015), 3.1 (2016), 3.3 (2017), 3.3 (2018), 3.4 (2019), 4.2 (2020).
  - Capital to risk-weighted assets: 14.2 (2014), 14.3 (2015), 15.1 (2016), 15.2 (2017), 14.8 (2018), 14.7 (2019), 15.6 (2020).
- Balance of payments summary (billions of U.S. dollars):
  - Current account (levels): -2.8 (2019), -3.8 (2020), -3.6 (2021), 1.0 (2022), -0.8 (2023), -1.7 (2024), -2.6 (2025), -3.7 (2026), -5.0 (2027), -5.4 (2028).
  - Exports (billions of U.S. dollars): 45.4 (2019), 49.1 (2020), 47.7 (2021), 42.4 (2022), 54.1 (2023), 56.1 (2024), 58.2 (2025), 60.5 (2026), 62.9 (2027), 65.7 (2028).
  - Imports (billions of U.S. dollars): -38.7 (2019), -41.9 (2020), -41.1 (2021), -34.7 (2022), -41.6 (2023), -43.6 (2024), -45.7 (2025), -48.0 (2026), -50.3 (2027), -52.5 (2028).

### Risks and vulnerabilities highlighted
- External: medium-term widening of the current account deficit ("The CAD will widen over the medium-term").
- Fiscal: public debt rises in 2022 and remains elevated under scenarios, but "sustainable public debt dynamics" are illustrated using combined shocks and stress tests (Combined 1/, Combined 2/, contingent liabilities, exchange rate shocks).
- Financial sector: nonperforming loans rose to 4.2 in 2020; provisioning ratios and liquidity indicators are reported.
- Reserve adequacy: reserve coverage presented relative to ARA metric and other international comparators; reserve ratios and metrics shown (including percent of short-term external debt: 30/63/64/43/34/33/49/65/19/? across years in charts).

### Policy implications (as reflected in the source)
- Maintain very strong macroeconomic policies and institutional frameworks to preserve qualification for FCL.
- Gradual withdrawal of fiscal support while safeguarding debt sustainability (NFPS primary and overall balances projections).
- Monitor external financing needs and reserve adequacy given projected CAD widening.
- Preserve financial sector resilience given increases in nonperforming loans and credit dynamics.

*International Monetary Fund. Staff assessment and data as presented in the referenced chapter/section.*

### Annex I. External Debt Sustainability Analysis

### Annex I. External Debt Sustainability Analysis

### External debt baseline and projections (2017–2026)
- Baseline: External debt: 35.7 (2017), 34.6 (2018), 34.7 (2019), 43.1 (2020), 39.0 (2021), 36.6 (2022), 34.2 (2023), 32.5 (2024), 30.9 (2025), 29.8 (2026).
- Change in external debt: -2.5 (2017), -1.2 (2018), 0.2 (2019), 8.4 (2020), -4.1 (2021), -2.5 (2022), -2.3 (2023), -1.7 (2024), -1.6 (2025), -1.0 (2026).
- Identified external debt-creating flows (4+8+9): -4.3 (2017), -1.2 (2018), -2.6 (2019), 2.2 (2020), -5.0 (2021), -3.2 (2022), -2.6 (2023), -1.5 (2024), -0.8 (2025), -0.7 (2026).
- Debt-stabilizing non-interest current account: -1.3 (percent of GDP).

### Composition of identified flows (2017–2026)
- Current account deficit, excluding interest payments: -0.1 (2017), 0.2 (2018), 0.2 (2019), -1.7 (2020), -1.2 (2021), -0.9 (2022), -0.5 (2023), -0.1 (2024), 0.2 (2025), 0.3 (2026).
- Deficit in balance of goods and services: -2.4 (2017), -2.0 (2018), -1.5 (2019), -1.8 (2020), -3.6 (2021), -3.3 (2022), -3.0 (2023), -2.8 (2024), -2.6 (2025), -2.6 (2026).
- Exports: 24.6 (2017), 24.9 (2018), 23.9 (2019), 22.5 (2020), 26.5 (2021), 26.1 (2022), 25.7 (2023), 25.8 (2024), 25.8 (2025), 25.9 (2026).
- Imports: 22.2 (2017), 23.0 (2018), 22.4 (2019), 20.7 (2020), 22.9 (2021), 22.8 (2022), 22.7 (2023), 23.0 (2024), 23.2 (2025), 23.3 (2026).
- Net non-debt creating capital inflows (negative): -2.1 (2017), -1.1 (2018), -3.4 (2019), -1.9 (2020), -2.1 (2021), -2.0 (2022), -1.9 (2023), -1.8 (2024), -1.6 (2025), -1.6 (2026).

### Automatic debt dynamics and residuals
- Automatic debt dynamics: -2.0 (2017), -0.3 (2018), 0.5 (2019), 5.8 (2020), -1.7 (2021), -0.3 (2022), -0.1 (2023), 0.4 (2024), 0.6 (2025), 0.6 (2026).
  - Contribution from nominal interest rate: 1.4 (2017), 1.5 (2018), 1.4 (2019), 1.2 (2020), 1.6 (2021), 1.6 (2022), 1.5 (2023), 1.5 (2024), 1.6 (2025), 1.6 (2026).
  - Contribution from real GDP growth: -0.7 (2017), -1.3 (2018), -0.8 (2019), 4.4 (2020), -3.3 (2021), -1.9 (2022), -1.6 (2023), -1.1 (2024), -1.0 (2025), -1.0 (2026).
  - Contribution from price and exchange rate changes: -2.7 (2017), -0.4 (2018), -0.1 (2019), 0.2 (2020).
- Residual, incl. change in gross foreign assets (2-3): 1.7 (2017), 0.0 (2018), 2.8 (2019), 6.2 (2020), 0.9 (2021), 0.8 (2022), 0.2 (2023), -0.3 (2024), -0.8 (2025), -0.4 (2026).

### External debt vulnerability indicators
- External debt-to-exports ratio (in percent): 145.2 (2017), 138.5 (2018), 145.1 (2019), 191.9 (2020), 147.2 (2021), 140.2 (2022), 133.0 (2023), 126.2 (2024), 119.7 (2025), 115.4 (2026).
- Gross external financing need (in billions of US dollars): 22.8 (2017), 19.5 (2018), 20.9 (2019), 12.7 (2020), 15.2 (2021), 16.6 (2022), 17.8 (2023), 18.4 (2024), 21.2 (2025), 21.6 (2026).
- Gross external financing need (in percent of GDP): 10.7 (2017), 8.7 (2018), 9.0 (2019), 6.2 (2020), 6.7 (2021), 6.9 (2022), 7.0 (2023), 6.9 (2024), 7.6 (2025), 7.4 (2026).

### Scenario with key variables at historical averages
- Scenario result: 43.5 (2017 equivalent), 43.3 (2018 equivalent), 42.4 (2019 equivalent), 40.9 (2020 equivalent), 38.7 (2021 equivalent), 37.1 (2022 equivalent), -3.1 (label appears in table).

### Key macroeconomic assumptions underlying the baseline
- Real GDP growth (in percent): 2.1 (2017), 4.0 (2018), 2.2 (2019), -11.1 (2020), 8.5 (2021), 5.2 (2022), 4.8 (2023), 3.4 (2024), 3.3 (2025), 3.3 (2026).
- GDP deflator in US dollars (change in percent): 7.5 (2017), 1.2 (2018), 0.3 (2019), -0.6 (2020), 2.2 (2021), 1.4 (2022), 1.0 (2023), 1.1 (2024), 1.1 (2025), 1.3 (2026).
- Nominal external interest rate (in percent): 4.0 (2017), 4.3 (2018), 4.0 (2019), 3.2 (2020), 4.1 (2021), 4.3 (2022), 4.4 (2023), 4.6 (2024), 5.1 (2025), 5.4 (2026).
- Growth of exports (US dollar terms, in percent): 21.3 (2017), 6.6 (2018), -1.7 (2019), -17.1 (2020), 30.8 (2021), 5.0 (2022), 4.4 (2023), 4.4 (2024), 4.5 (2025), 4.9 (2026).
- Growth of imports (US dollar terms, in percent): 9.3 (2017), 8.8 (2018), 0.1 (2019), -18.6 (2020), 23.1 (2021), 5.9 (2022), 5.6 (2023), 5.5 (2024), 5.4 (2025), 5.2 (2026).
- Current account balance, excluding interest payments: 0.1 (2017), -0.2 (2018), -0.2 (2019), 1.7 (2020), 1.2 (2021), 0.9 (2022), 0.5 (2023), 0.1 (2024), -0.2 (2025), -0.3 (2026).
- Net non-debt creating capital inflows: 2.1 (2017), 1.1 (2018), 3.4 (2019), 1.9 (2020), 2.1 (2021), 2.0 (2022), 1.9 (2023), 1.8 (2024), 1.6 (2025), 1.6 (2026).

### External debt shock and stress-test outcomes (figure highlights)
- Baseline gross nominal public debt level shown in charts: Baseline 29.8 (percent of GDP).
- Interest rate shock: 30.2 (percent of GDP) under shock versus Baseline 29.8.
- Historical scenario peak: 37.1 (percent of GDP).
- Non-interest current account shock scenario: CA shock 35.5 (percent of GDP) vs Baseline 29.8.
- Combined shock result: 35.2 (percent of GDP) vs Baseline 29.8.
- Real depreciation shock (one-time 30 percent depreciation in 2021): 44.8 (percent of GDP) vs Baseline 29.8.
- Growth shock scenario: 34.6 (percent of GDP) vs Baseline 29.8.

---

### Public Debt Sustainability Analysis — Key indicators and assumptions
- Nominal gross public debt (percent of GDP): 23.4 (2019), 27.1 (2020), 35.4 (2021), 35.4 (2022), 36.2 (2023), 36.7 (2024), 37.2 (2025), 37.5 (2026), 37.4 (2026 column repeated).
- Public gross financing needs (percent of GDP): 2.3 (2019), 4.1 (2020), 9.2 (2021), 5.4 (2022), 4.3 (2023), 4.4 (2024), 4.8 (2025), 4.6 (2026), 5.9 (2026).
- Real GDP growth (in percent): 4.8 (2019), 2.2 (2020), -11.1 (2021), 8.5 (2022), 5.2 (2023), 4.8 (2024), 3.4 (2025), 3.3 (2026), 3.3 (2026).
- Inflation (GDP deflator, in percent): 2.9 (2019), 2.1 (2020), 1.8 (2021), 2.0 (2022), 2.0 (2023), 2.0 (2024), 2.0 (2025), 2.0 (2026).
- Ratings: Moody's A3 / A3; S&Ps BBB- / A-; Fitch BBB+ / BBB+.
- Effective interest rate (in percent): 5.3 (2019), 5.5 (2020), 5.5 (2021), 5.5 (2022), 5.4 (2023), 5.4 (2024), 5.2 (2025), 5.1 (2026), 5.0 (2026).

### Contributions to changes in public debt (selected lines)
- Change in gross public sector debt (cumulative): -0.2 (2019), 0.9 (2020), 8.3 (2021), 0.0 (2022), 0.9 (2023), 0.4 (2024), 0.5 (2025), 0.3 (2026), -0.1 (2026), 2.0 (cumulative).
- Identified debt-creating flows: -1.2 (2019), 1.0 (2020), 9.5 (2021), 1.2 (2022), 1.0 (2023), 0.4 (2024), 0.5 (2025), 0.3 (2026), 0.0 (2026), 3.3 (cumulative).
  - Primary deficit: -0.5 (2019), 0.3 (2020), 7.3 (2021), 3.3 (2022), 1.7 (2023), 1.0 (2024), 0.6 (2025), 0.4 (2026), 0.1 (2026), 7.2 (cumulative).
  - Primary (noninterest) revenue and grants: 25.7 (2019), 24.7 (2020), 22.0 (2021), 22.3 (2022), 23.0 (2023), 23.0 (2024), 23.1 (2025), 23.2 (2026), 23.2 (cumulative), 137.8 (cumulative).
  - Primary (noninterest) expenditure: 25.2 (2019), 25.0 (2020), 29.3 (2021), 25.6 (2022), 24.7 (2023), 24.0 (2024), 23.7 (2025), 23.6 (2026), 23.3 (cumulative), 145.0 (cumulative).
- Automatic debt dynamics: -0.4 (2019), 0.1 (2020), 5.4 (2021), -1.7 (2022), -0.6 (2023), -0.5 (2024), -0.1 (2025), -0.1 (2026), -0.1 (2026), -3.0 (cumulative).
  - Interest rate/growth differential: -0.6 (2019), 0.3 (2020), 4.5 (2021), -1.7 (2022), -0.6 (2023), -0.5 (2024), -0.1 (2025), -0.1 (2026), -0.1 (2026), -3.0 (cumulative).
    - Real interest rate: 0.5 (2019), 0.8 (2020), 1.2 (2021), 1.1 (2022), 1.1 (2023), 1.1 (2024), 1.1 (2025), 1.1 (2026), 6.5 (cumulative).
    - Real GDP growth: -1.1 (2019), -0.6 (2020), 3.3 (2021), -2.7 (2022), -1.7 (2023), -1.6 (2024), -1.2 (2025), -1.1 (2026), -1.2 (2026), -9.5 (cumulative).
  - Exchange rate depreciation: 0.1 (2019), -0.2 (2020), 0.9 (2021).
- Other identified debt-creating flows: -0.3 (2019), 0.6 (2020), -3.2 (2021), -0.5 (2022), -0.1 (2023), -0.1 (2024), -0.1 (2025), -0.1 (2026), -0.1 (2026), -1.0 (cumulative).
- Residual, including asset changes: 0.9 (2019), -0.1 (2020), -1.3 (2021), -1.2 (2022), -0.1 (2023), 0.0 (2024), 0.0 (2025), 0.0 (2026), -1.2 (cumulative).

### Alternative public debt scenarios and stress tests (figures)
- Baseline scenario underlying assumptions (selected): Real GDP growth 8.5 (2021), 5.2 (2022), 4.8 (2023), 3.4 (2024), 3.3 (2025), 3.3 (2026); Inflation 2.0 (2021–2026); Primary Balance -3.3 (2021), -1.7 (2022), -1.0 (2023), -0.6 (2024), -0.4 (2025), -0.1 (2026); Effective interest rate 5.5 (2021), 5.4 (2022), 5.4 (2023), 5.2 (2024), 5.1 (2025), 5.0 (2026).
- Historical scenario assumptions (selected): Real GDP growth 8.5 (2021), 2.5 (2022–2026), Inflation 2.0 (2021–2026), Primary Balance -3.3 (2021), -0.4 (2022–2026), Effective interest rate 5.5 (2021), 5.3 (2022), 5.3 (2023), 5.0 (2024), 4.8 (2025), 4.6 (2026).
- Constant Primary Balance scenario: Primary Balance -3.3 (2021–2026) with Real GDP growth and Inflation same as baseline.
- Stress test highlights (selected shocks and outcomes shown in figures):
  - Primary Balance Shock: worsened primary balances and corresponding higher debt paths in 2021–2026.
  - Real GDP Growth Shock: example path shows Real GDP growth 8.5 (2021), 0.1 (2022), -0.3 (2023), 3.4 (2024), 3.3 (2025), 3.3 (2026).
  - Real Interest Rate Shock and Real Exchange Rate Shock: higher effective interest rates and exchange rate effects reflected in debt paths.
  - Combined Macro-Fiscal Shock and COVID-19 Contingent Liabilities Shock: show significantly higher gross nominal public debt and gross financing needs in stress scenarios (figures illustrate large upward deviations from baseline).

### Risk assessment (heat map indicators)
- Market perception and benchmarks used in risk assessment:
  - EMBIG (10-Nov-20 through 08-Feb-21 average): 140 (bp) shown in figure context.
  - External financing requirement benchmarks: 5 and 15 (percent of GDP).
  - Bond spread scenarios use 200 and 600 basis points.
  - Public debt held by non-residents benchmarks: 15 and 45 (percent).
  - Share of foreign-currency denominated debt benchmarks: 20 and 60 (percent).
- Chart indications: country-level cells are colored against upper/lower benchmarks for Debt level, Gross financing needs, Real GDP Growth Shock, Primary Balance Shock, Real Interest Rate Shock, Exchange Rate Shock, Contingent Liability Shock, and other vulnerability metrics.

### Narrative key points (excerpted statements)
- Peru is recovering from the negative impact of COVID-19.
- Peru’s track record of very strong macroeconomic policies and institutional frameworks played a crucial role in mitigating the impact of the pandemic.
- Peru continues to face the effects of the unprecedented shock caused by the pandemic and the authorities persist in their efforts to mitigate the impact on the poor.
- Global risks remain elevated.
- The FCL has played an important role in enhancing market confidence if tail risks were to materialize.
- Peru will continue to treat the FCL as precautionary and temporary; and, as originally envisaged, will exit in May 2022, provided that global risks have declined.
- As of May 12, 2021, international reserves reached US$ 77.8 billion (up from US$ 68.4 billion at end-2019).
- Ratio of public debt to GDP rose to 34.8 percent by end-2020.
- After a contraction of 11.1 percent in 2020, authorities expect double-digit growth in 2021 and recovery to pre-pandemic levels in 2022.
- BCRP policy rate was reduced by 200 bps to a historic low of 0.25 percent in March 2020; inflation-targeting framework target range is 1-3 percent.

*Source: IMF staff calculations.*

### 1.0 percent of GDP in the medium term, with the public debt-to-GDP ratio to fall to 31.4 percent by 2030

### 1.0 percent of GDP in the medium term, with the public debt-to-GDP ratio to fall to 31.4 percent by 2030

### Fiscal outlook and debt sustainability
- Medium-term primary balance target: 1.0 percent of GDP.
- Public debt-to-GDP ratio projected to fall to 31.4 percent by 2030 and gradually decline below the threshold of 30 percent in the outer years.
- Staff’s DSA analysis: public debt remains sustainable with a high probability.

### Financial system strength and supervision
- The financial system has remained strong and stable and is well supervised by the regulatory authority.
- Significant steps taken to strengthen financial sector oversight in line with recommendations of the 2018 FSAP.
- As Peru entered the pandemic, banks were well-capitalized and profitable, with average capital and adequacy ratios above regulatory thresholds.
- Dollarization in the financial system continues to decline.
- NPL growth has been limited.
- Banks are mostly conservative and follow strict screening and safeguard procedures.
- The Superintendence of Banks, Insurance Companies, and Pension Funds (SBS) has implemented a capital and liquidity regulatory framework aiming to achieve the same objectives of Basel III, with broadly equivalent overall capital levels.
- Authorities’ ongoing focus: remaining FSAP recommendations, including higher capital surcharges for systemically important banks and enhanced supervision of financial groups.

### COVID-19 impact, social effects, and vaccination
- The pandemic caused an unprecedented shock; authorities continue efforts to mitigate impacts on the poor.
- Policy response in 2020: equivalent to 20 percent of GDP.
- Poverty increased to 30.1 percent in 2020, up from 20.2 percent in 2019.
- Vaccination rollout: after a slow start due to initial supply problems, rollout is speeding up.
- Government secured 60 million doses of COVID-19 vaccines for this year, expected to cover the adult population before the end of the year.
- Authorities indicated that additional measures to support the most needed segment of the population and small- and medium-sized businesses will be announced in the following weeks.

### Risks, uncertainty, and electoral timeline
- Authorities agree the outlook is uncertain and risks remain elevated, with some upside risks that could materialize.
- Identified risk factors:
  - Persistent uncertainty about pandemic-related global developments, including possibility of new virus strains.
  - Risk associated with the upcoming winter season in Peru if vaccine rollout does not accelerate due to delivery delays.
  - Political uncertainty around transition to a new government: second round of the presidential elections scheduled for June 6, 2021.
  - External shocks typical for a small open economy: sharp rise in global risk premia, volatility in commodity prices, and global reversal in trade integration.
- Upside potential: authorities expect revamping public investment and accelerating vaccine rollout could materialize upside risks.
- Public investment note: Between January and April 2021, general government investment increased 65 percent in real terms.

### External Economic Stress Index (ESI) and scenarios
- The External Economic Stress Index (ESI) for Peru is expected to turn negative over the next 12 months in the baseline scenario.
- Contributing factors to negative ESI risk:
  - EME equities volatility (as measured by the VXEEM volatility index).
  - Debt rollover pressures (as measured by the change in the 10-year U.S. Treasury yield).
- Stress levels are likely to remain above pre-pandemic levels well into 2022.
- Note on ESI measurement limitation: exports indicator (weighted average of copper and gold prices) does not capture the importance of the tourism industry, which has been severely affected and is not expected to rebound to pre-pandemic levels until vaccination reaches higher levels in Peru and in tourists’ countries of origin.
- Adverse scenario: higher external economic stress assumed via reversal of recent commodity price gains, lower growth, and increasing EME volatility.

### Flexible Credit Line (FCL) stance and policy
- FCL treated as a precautionary and temporary arrangement.
- Given high risks and uncertainty, authorities will maintain access unchanged at this mid-term review.
- Authorities intend to exit the FCL arrangement after the end of the second year, conditional on a reduction of global risks.
- FCL role: provided a strong signal of confidence in Peru’s policy framework and fundamentals and valuable protection against tail risks amid unprecedented uncertainty and volatility in global financial markets.

*IMF staff communication (content unit: 1perea2021002).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1perea2021002.pdf_