## 1perea2023002

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### Executive summary and context
- Peru has a long track record of very strong economic fundamentals and institutional policy frameworks, including a solid inflation-targeting regime, credible fiscal framework, and robust financial sector supervision and regulation.
- Pre-COVID performance:
  - Real GDP rose at an average annual rate of almost 5 percent and the economy multiplied its size by about 2½ times.
  - Inflation averaged 2½ percent over the same period.
- Policy buffers and actions:
  - Public debt: 34.3 percent of GDP at end-2022.
  - International reserves: 30 percent of GDP and about 243 percent of the ARA metric at end-2022.
  - Executive Board approved a two-year Flexible Credit Line (FCL) of SDR 4.0035 billion (about US$5.3 billion or 300 percent of quota) on May 27, 2022; authorities intend to treat the FCL as precautionary and maintain access levels.
- Political developments:
  - December 2022 transition: Dina Boluarte became President after the impeachment of Pedro Castillo; violent and disruptive protests followed but have waned and are largely contained to the southern part of the country.
- Staff recommendation:
  - Staff supports completion of the FCL review because Peru continues to meet all FCL qualification criteria and maintains very strong fundamentals and policy frameworks.
  - Upon completion of the review, Peru would continue to be allowed to make purchases under the FCL arrangement until its expiration on May 26, 2024.

### Recent developments (growth, inflation, fiscal, monetary, external, financial)
- Growth:
  - Real GDP: +13½ percent in 2021; +2.7 percent in 2022.
  - Real GDP declined by about 1 percent in January 2023 due to road and airport blockades; some recovery occurred in February 2023.
  - Real GDP projected to grow by 2.2 percent in 2023 (near-term projection).
  - Unemployment: 7.5 percent in March 2023.
- Inflation and monetary policy:
  - Headline inflation rose above 1-3 percent target band starting mid-2021; peaked at 8¾ percent in June 2022.
  - 12-month-ahead inflation expectations: 5½ percent in June 2022 → 4¼ percent in March 2023.
  - BCRP policy rate: increased by 750 basis points in 18 consecutive steps to 7¾ percent in January 2023; paused in February 2023.
  - Ex-ante real rate (based on 12-month inflation expectations): 3½ percent (noted in sections); elsewhere reported as 3.45 percent by April 2023.
- Fiscal:
  - 2022 NFPS fiscal deficit: 1.6 percent of GDP (within the 3¾ percent-of-GDP fiscal rule).
  - Revenue: 26 percent of GDP in 2022.
  - Public debt: fell two percentage points from 2021 to 34.3 percent of GDP in 2022.
  - Cumulative 12-month fiscal deficit: 1.9 percent of GDP in March 2023.
  - Authorities launched a small targeted fiscal impulse (Con Punche Perú) of about ½ percent of GDP in January 2023.
- External sector:
  - Current account deficit: widened to 4⅓ percent of GDP in 2022 from about half that in 2021.
  - Net central bank interventions: about $1 billion in 2022 (down from $18.3 billion in 2021).
  - International reserves: US$74.3 billion as of March 2023; US$72.2 billion at end-2022 (down from US$78.5 billion in 2021).
  - External debt: 41.3 percent of GDP at end-2022 (down from 45.9 percent in 2021).
- Financial sector:
  - NPLs stabilized at 4 percent; ROE and ROA about 16¼ and 2 percent as of December 2022.
  - Credit growth: 3 percent (y/y) in February 2023; real credit contracted 5½ percent (y/y) in February 2023.
  - Liquidity and interest-rate risk: LCR well above regulatory minimums (150 percent in local currency, 170 percent in foreign currency).
  - Funding structure: public deposits 71 percent of financial system liabilities; about 40 percent of deposits covered by deposit insurance; repos and unsecured obligations 17 percent; direct foreign counterparty exposure 4 percent; foreign-owned banks manage 38 percent of assets.
  - Recent US and European banking turmoil has not spilled over to Peru.

### Outlook and risks
- Growth outlook:
  - Real GDP projected to grow by 2.2 percent in 2023.
  - Small negative output gap of 0.4 percent of potential GDP in 2023 expected to close by the medium term.
  - Support: production at Quellaveco, small fiscal impulse, and higher copper prices.
- External outlook:
  - Current account deficit projected at 1.9 percent of GDP in 2023 and to gradually decline to 1½ percent over the medium term.
  - Net inflows into capital and financial account normalized in 2022 after record highs of 7 percent of GDP in 2021.
- Risks:
  - Downside growth risks: abrupt global slowdown, commodity price volatility, monetary policy miscalibration in advanced economies, systemic financial instability, intensification of domestic political uncertainty, climate-related shocks.
  - Inflation risks tilted to the upside.
  - External Economic Stress Index (ESI): indicates external risks remain high; baseline ESI stabilizes around the average over the next year but remains below 2019 levels and slightly negative (baseline uses April 2023 WEO assumptions).
- Adverse scenario assumptions (summary):
  - Global output: decrease by 1.8 percent in 2023 and 1.4 percent in 2024 relative to the baseline.
  - Copper prices: 15 percent below baseline.
  - VXEEM index: two standard deviations above baseline.
  - Yields: 100 basis points above baseline.
  - Magnitude of external stress comparable with that projected at FCL request in 2022.

### FCL arrangement, qualification, and staff assessment
- FCL details and treatment:
  - Two-year FCL: SDR 4.0035 billion (about US$5.3 billion or 300 percent of quota) approved May 27, 2022.
  - Authorities intend to treat the FCL as precautionary and maintain access levels; exit conditional on evolution of external risks as outlined at approval.
- Staff assessment (sections 16 and 23):
  - Staff assesses Peru continues to meet all FCL qualification criteria.
  - Macroeconomic frameworks supporting assessment: fiscal responsibility law and medium-term fiscal framework; credible inflation-targeting regime; effective financial system oversight.
  - Key indicators supporting qualification:
    - External debt: 41.3 percent of GDP in 2022; expected to decline to about 32 percent of GDP over the medium term.
    - Public flows averaged less than 33 percent of total capital flows over 2020-22; private flows accounted for over 93 percent of total gross flows in 2022.
    - Sovereign bond placements: US$1.8 billion (2018), US$1.9 billion (2019), US$7.0 billion (2020), US$11.2 billion (2021), US$0.6 billion (2022).
    - International reserves: US$72.2 billion at end-2022; reserves at 30 percent of GDP and 243 percent of the ARA metric in 2022.
    - Inflation-targeting since 2002 with target range 1-3 percent.
    - Banking system well-capitalized; top-down stress tests: in a severely adverse scenario capital ratios vary between 11.5 and 13.5 percent.
    - Peru subscribes to the SDDS.
  - Safeguards: KPMG Peru issued an unmodified audit opinion on BCRP’s 2021 financial statements; audited 2022 results set to be published by mid-April (as noted).
  - Capacity to repay under a full draw on FCL:
    - Fund obligations would represent 5.2 percent of Peru’s total external debt, 8.7 percent of international reserves, and 3.5 percent of exports at the peak of debt service in 2027.
  - Recommendation: complete the FCL review and allow purchases until May 26, 2024.

### Fiscal policy, debt sustainability, and DSA findings
- Near-term fiscal projections and challenges:
  - NFPS deficit: set to increase moderately to 2.0 percent of GDP in 2023 (staff view), below the 2.4 percent of GDP envisioned by the 2023 budget.
  - Public debt stock: expected to remain largely unchanged at 34.3 percent of GDP (staff projection).
  - Authorities’ fiscal strategy: gradual fiscal consolidation of about ½ percentage points of GDP per year during 2025-26.
  - Staff view: additional revenue mobilization and/or expenditure rationalization needed to achieve fiscal targets beyond 2024 and stabilize the debt ratio.
  - Pension reform: identified as a critical priority to prevent erosion of the public debt investor base due to early withdrawals from private pension funds.
- DSA principal findings (Annex III):
  - Overall judgment: public debt is sustainable with high probability; overall risk of sovereign stress is low.
  - Baseline public debt path (public debt percent of GDP, selected years):
    - 2022: 34.3; 2023: 33.8; 2024: 34.0; 2025: 33.8; 2026: 33.2; 2027: 32.5; 2028: 32.0; 2029: 31.4; 2030: 30.7; 2031: 30.2; 2032: 29.5.
  - Gross financing needs (GFN) (percent of GDP, selected years):
    - 2022: 2.4; 2023: 2.8; 2024: 3.6; 2025: 3.3; 2026: 4.2; 2027: 3.4; 2028: 4.3; 2029: 4.5; 2030: 3.8; 2031: 5.4; 2032: 5.2.
  - Memo items:
    - Real GDP growth: 2022: 2.7; 2023: 2.2; 2024–2032: 3.0 each year (as presented).
    - Inflation (GDP deflator): 2022: 7.9; 2023: 5.6; 2024–2032: series 2.5, 2.2, 2.0, 2.0, 2.0, 2.0, 2.0, 2.0 (as presented).
  - Stress tests: debt manageable under shocks including sharp falls in commodity prices and large borrowing needs from natural disasters; long-term risks low.

### Monetary policy guidance and inflation outlook
- Monetary stance and guidance:
  - BCRP proactive tightening brought policy rate to 7¾ percent by January 2023 after 750 basis points of hikes.
  - Guidance: avoid premature ending of tightening to preserve central bank credibility; maintain effective communication to anchor expectations.
  - FX policy: allow currency to fluctuate freely; FX interventions limited to addressing volatility that could endanger market functioning given financial dollarization risks.
- Inflation outlook:
  - Inflationary pressures expected to persist in near term due to supply shocks and one-off increases in education prices.
  - Prompt tightening and weakening demand expected to bring inflation within target range by late 2023–early 2024.
  - BCRP projects headline inflation to gradually converge towards the upper bound of the 1-3 percent target band by late 2023.

### Financial sector resilience and prudential policy advice
- System health and supervisory advances:
  - Banking profitability approaching pre-pandemic levels; NPLs stable; capital adequacy above regulatory minima (Capital to risk-weighted assets: 2021: 15.0 percent; 2022: 14.5 percent).
  - Dollarization on a downward trajectory but remains substantial (foreign currency deposits share: 2021: 39.5 percent; 2022: 36.9 percent).
  - Top-down stress tests indicate resilience in severely adverse scenarios.
  - Reforms implemented or planned: capital conservation and systemic risk buffers (Basel III), expanded oversight of financial cooperatives, monitoring off-balance-sheet exposures, recovery and resolution planning for D-SIBs, strengthened crisis preparedness and emergency liquidity assistance.
- Policy recommendations:
  - Close remaining regulatory and supervisory gaps and use macroprudential tools to boost resilience.
  - Be ready to provide targeted and time-bound liquidity support if excessive tightening materializes.
  - Enhance financial group supervision and implement requirements for resolution planning for domestic systemically important banks and financial groups.
  - Improve payment infrastructure and access to electronic banking.

### Structural policies and medium-term growth priorities
- Key structural priorities identified:
  - Boost productivity: reverse pandemic-related learning losses, enhance infrastructure, improve business climate.
  - Augment human capital: improve education and public health while reducing incentives to informality.
  - Improve governance: strengthen anti-corruption institutions through digitalization and enhanced transparency.
  - Mitigate climate risks: scale up public investments and private sector contribution.
- Institutional opportunities:
  - OECD accession process seen as an opportunity to adopt structural reforms.

*Source: IMF staff content from the 2023 Article IV consultation materials provided in the supplied PDF content.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Peru has a long track record of very strong economic fundamentals and institutional policy frameworks, including a solid inflation-targeting regime, credible fiscal framework, and robust financial sector supervision and regulation.
- Prior to the COVID-19 pandemic, real GDP rose at an average annual rate of almost 5 percent and the economy multiplied its size by about 2½ times; inflation averaged 2½ percent over the same period.
- Built-up macroeconomic buffers enabled a robust pandemic policy response and a successful subsequent withdrawal of stimulus while preserving macroeconomic stability and access to international capital markets.
- Political instability is a recurring feature of Peru’s political system; the latest episode culminated in December 2022 with Dina Boluarte becoming President after the impeachment of Pedro Castillo. Violent and disruptive protests followed but have waned and are largely contained to the southern part of the country.
- The authorities have signaled commitment to preserve Peru’s policy frameworks and to pursue structural reforms to improve living standards.
- Policy buffers include: public debt at 34.3 percent of GDP at end-2022; international reserves at 30 percent of GDP and about 243 percent of the ARA metric at end-2022; access to international capital markets; and a robust financial sector.
- The Executive Board approved a two-year Flexible Credit Line (FCL) arrangement of SDR 4.0035 billion (about US$5.3 billion or 300 percent of quota) on May 27, 2022. The authorities intend to treat the FCL as precautionary and maintain access levels; exit will be conditional on the evolution of external risks as outlined at approval.

### Recent developments
- Growth:
  - Real GDP rose 13½ percent in 2021, then slowed to 2.7 percent in 2022, falling below potential as stimulus was withdrawn, terms of trade deteriorated, financial conditions tightened, and political instability weighed on private investment.
  - Real GDP declined by about 1 percent in January 2023 due to road and airport blockades; some recovery occurred in February 2023. Recent cyclone and torrential rains are likely to negatively affect growth.
  - Unemployment was 7.5 percent in March 2023. Job creation in the formal sector is increasing at a lower rate; nominal incomes are not keeping up with higher inflation.
- Inflation:
  - Headline inflation rose well above the target band of 1-3 percent starting mid-2021; peaked at 8¾ percent in June 2022.
  - Shorter-horizon annualized inflation (3- and 6-month) and annualized core and wholesale inflation have been moderating since mid-2022, with some upticks in January and March 2023.
  - 12-month-ahead inflation expectations fell from 5½ percent in June 2022 to 4¼ percent in March 2023.
- Fiscal:
  - 2022 NFPS fiscal deficit fell to 1.6 percent of GDP, within the 3¾ percent-of-GDP fiscal rule and nearly one percentage point improvement from 2021.
  - Revenue reached 26 percent of GDP in 2022 (about one percentage point of GDP higher than pre-pandemic), partly due to one-off receipts.
  - Public debt fell two percentage points from 2021 to 34.3 percent of GDP in 2022, below the debt limit of 38 percent of GDP.
  - The cumulative 12-month fiscal deficit rose to 1.9 percent of GDP in March 2023.
  - Foreign holdings of government debt declined from 50 percent at end-2021 to 41 percent in February 2023.
- Monetary policy:
  - BCRP increased the policy rate by 750 basis points in 18 consecutive steps to 7¾ percent in January 2023; paused the tightening in February 2023 but signaled readiness to act further if needed.
- Financial sector:
  - Banking system performance returned near pre-pandemic levels; NPLs stabilized at 4 percent; ROE and ROA about 16¼ and 2 percent as of December 2022 (compared to 17¾ and 2⅓ percent in February 2020).
  - Credit growth decelerated to 3 percent (y/y) in February 2023 and contracted 5½ percent (y/y) in real terms in February 2023.
  - Liquidity and interest-rate risk positions: LCR well above regulatory minimums (150 percent in local currency, 170 percent in foreign currency); HTM securities are 2 percent of financial system assets with unrealized losses of 10 percent of the HTM portfolio; long-dated AFS securities and mortgages represent 4 and 11 percent of financial system assets, respectively.
  - Funding: public deposits account for 71 percent of financial system liabilities; about 40 percent of deposits covered by deposit insurance; other funding including repos and unsecured obligations are 17 percent; direct liability exposure with foreign counterparties is 4 percent; foreign-owned banks manage 38 percent of assets.
  - The recent US and European banking turmoil has not spilled over to Peru.
- External sector:
  - Current account deficit widened to 4⅓ percent of GDP in 2022 from about half that in 2021, reflecting worse terms of trade and transitory factors.
  - Net central bank interventions fell to about $1 billion in 2022 from $18.3 billion in 2021.
  - International reserves were US$74.3 billion (around 28 percent of GDP) as of March 2023.
  - External debt at end-2022 was 41.3 percent of GDP, down from 45.9 percent of GDP in 2021.
- Boxed analysis noted effects of recent global banking turmoil and concluded Peruvian system is insulated given buffers and risk management.

### Outlook and risks
- Near-term growth:
  - Real GDP projected to grow by 2.2 percent in 2023.
  - Projection reflects tighter financial conditions, decelerating credit growth, sluggish external demand, subdued confidence, impact of social protests and transport blockades, fertilizer shortages, and recent cyclone and torrential rains.
  - Support factors include production at a new copper mine (Quellaveco), a small fiscal impulse, and higher copper prices.
  - Small negative output gap of 0.4 percent (of potential GDP) in 2023 is expected to close by the medium term.
- Risks:
  - Growth risks tilted to the downside: abrupt global slowdown and commodity price volatility; monetary policy miscalibration in advanced economies; systemic financial instability; intensification of domestic political uncertainty; climate-related shocks.
  - Inflation risks tilted to the upside.
  - External accounts remain vulnerable to external shocks.

### Arrangement and review
- FCL arrangement details:
  - Two-year Flexible Credit Line of SDR 4.0035 billion (about US$5.3 billion or 300 percent of quota) approved May 27, 2022.
  - Arrangement has supplemented Peru’s policy buffers and anchored market confidence.
  - Authorities expect to treat the FCL as precautionary and maintain access levels.
  - Exit from the arrangement will be conditional on the evolution of external risks as outlined at approval.
- Staff recommendation:
  - Staff supports completion of the FCL review because (i) Peru continues to meet all FCL qualification criteria; (ii) the Executive Board gave a very positive assessment of Peru’s policies in the context of the 2023 Article IV Consultation; and (iii) Peru continues to have very strong economic fundamentals and institutional policy frameworks, is implementing—and has a sustained track record of implementing—very strong policies, and remains committed to maintaining such policies in the future.
  - Upon completion of the review, Peru would continue to be allowed to make purchases under the FCL arrangement until its expiration on May 26, 2024.

*Prepared by IMF staff; Executive Summary dated May 2, 2023.*

### 2024. The current account deficit is projected at 1.9 percent of GDP in 2023 and to gradually decline

### 1perea2023002 - 2024. The current account deficit is projected at 1.9 percent of GDP in 2023 and to gradually decline

### External outlook and balances
- The current account deficit is projected at 1.9 percent of GDP in 2023 and to gradually decline to 1½ percent over the medium term.
- Net inflows into the capital and financial account are estimated to have normalized in 2022 after record highs of 7 percent of GDP in 2021.
- Inflows in 2022 were dominated by a sharp increase in FDI, reflecting higher reinvested earnings from high metal prices and additional liquidation of portfolio investments abroad by private pension funds.
- The downward revision of GDP growth from 2.4 percent at the time of the 2023 Article IV Consultation to 2.2 percent reflects a higher-than-anticipated negative impact of the protests earlier in the year.

### Inflation and monetary policy
- Inflationary pressures are expected to persist in the near term, driven mostly by supply shocks and one-off increases in education prices.
- The prompt monetary policy tightening until January 2023 and weakening global and domestic demand are expected to bring inflation within the target range by late 2023-early 2024.
- The BCRP has been proactive in tightening the monetary policy stance; the ex-ante real rate (based on 12-month inflation expectations) currently stands at 3½ percent, exceeding the estimated real neutral rate of approximately 1½ percent.
- The monetary authority recently paused its tightening campaign to assess developments while signaling commitment to tighten further if warranted.
- Policy guidance: avoid a premature ending of tightening to preserve central bank credibility; maintain effective communication to anchor inflation expectations; continue allowing the currency to fluctuate freely with FX interventions limited to addressing volatility that could endanger market functioning given risks associated with financial dollarization.

### External risk assessment and External Economic Stress Index (ESI)
- Uncertainty around the outlook is high, with downside risks to the growth outlook and upside risks to the inflation outlook.
- Main external risks: escalation of Russia’s war in Ukraine; an abrupt global slowdown and commodity price volatility; monetary policy miscalibration with possible de-anchoring of inflation expectations; systemic financial instability.
- Domestic risks: higher political instability and social unrest; natural disasters. Upside growth risks: a “soft landing” in key trade partner countries; an acceleration of structural reforms at home.
- The updated ESI shows external risks continue to be high. The ESI under the baseline indicates substantially higher risks in 2022 relative to the level and forecasts at the time of the 2022 FCL request.
- For 2023, an upward revision in copper and gold price assumptions and global financial conditions would improve the external outlook relative to 2022, but would remain below 2019 levels.
- Under the baseline, the ESI would stabilize around the average over the next year but remain below 2019 levels and slightly negative, suggesting a mild level of external economic stress. The baseline uses April 2023 WEO assumptions.
- Adverse scenario assumptions and impacts:
  - Global output would decrease by 1.8 percent in 2023 and 1.4 percent in 2024 relative to the baseline (consistent with the April 2023 WEO adverse scenario).
  - Copper prices are 15 percent below baseline.
  - The VXEEM index is two standard deviations above baseline.
  - Yields are 100 basis points above baseline.
  - The magnitude of external stress in this adverse scenario remains comparable with that projected at the time of the FCL request.
- Peru’s ample policy buffers and access to the FCL arrangement provide insurance against elevated external downside risks; authorities intend to treat the FCL arrangement as precautionary, with exit contingent on the evolution of external risks.

### Fiscal policy and public finances
- Main near-term fiscal challenges: fight high inflation; prevent significant under-execution of the budget; enhance financial resilience; support inclusive and sustainable growth.
- The NFPS deficit is set to increase moderately to 2.0 percent of GDP in 2023, well below the 2.4 percent of GDP envisioned by the 2023 budget and the fiscal rules.
- The public debt stock is expected to remain largely unchanged at 34.3 percent of GDP.
- Staff estimates indicate a significant budget under-implementation would be likely in 2023 absent corrective measures, as new regional governments usually have difficulties executing public works.
- The authorities launched a small, targeted and temporary fiscal impulse in January 2023 (Con Punche Perú) of about ½ percent of GDP to help contain the impact of increased social unrest on vulnerable households, firms, and subnational governments in the most affected sectors and regions.
- The authorities’ fiscal strategy envisions a gradual fiscal consolidation of about ½ percentage points of GDP per year during 2025-26 to further enhance macroeconomic resilience.
- Staff view: the fiscal adjustment is feasible but additional measures to strengthen revenue mobilization and/or expenditure rationalization would be necessary to achieve fiscal targets beyond 2024 and stabilize the debt ratio.
- Pension reform is a critical priority to prevent erosion of the public debt investor base and rising financing costs due to continued early withdrawals from private pension funds.

### Financial sector resilience and prudential policies
- Closing remaining regulatory and supervisory gaps and using macroprudential policies will boost financial sector resilience.
- Withdrawal of broad pandemic-era policy support has not resulted in an increase in NPLs; reintroduction of capital buffers has not impeded credit flows due to high levels of voluntary provisioning.
- Authorities should be ready to provide new targeted and time-bound liquidity support if excessive tightening of financial conditions materializes domestically and abroad.
- Areas for further progress: enhancement of financial group supervision; implementing requirements for resolution planning for domestic systemically important banks and financial groups; improving payment infrastructure and access to electronic banking.

### Structural policies and medium-term growth
- Key structural priorities:
  - Boost productivity by reversing pandemic-related learning losses, enhancing infrastructure, and improving the business climate.
  - Augment human capital by improving education and public health while reducing incentives to informality.
  - Further improve anti-corruption institutions through digitalization and enhanced transparency.
  - Mitigate climate risks through public investments and private sector contribution.
- The OECD accession process would provide an opportunity to adopt these and other structural reforms.

*Source: IMF staff content from the 2023 Article IV consultation materials provided in the supplied PDF content.*

### 16. In staff’s assessment, Peru continues to meet the qualification criteria for an FCL

### 16. In staff’s assessment, Peru continues to meet the qualification criteria for an FCL arrangement

### Summary assessment
- Staff assesses that Peru continues to meet the qualification criteria for a Flexible Credit Line (FCL) arrangement.
- Macroeconomic frameworks supporting this assessment:
  - Fiscal policy guided by the Fiscal Responsibility and Transparency Law and a well-defined medium-term fiscal framework, contributing to one of the lowest levels of public debt in the region.
  - Monetary policy guided by a credible inflation targeting framework, delivering one of the lowest inflation rates in the region over recent decades (notwithstanding inflation rising above the target band since mid-2021).
  - Effective financial system oversight based on a sound supervisory and regulatory framework.
- Peru meets all relevant core indicators for qualification (Annex I).

### Criterion 1 — Sustainable external position
- External Sector Assessment during the 2023 Article IV Consultation is in line with the Flexible Credit Line Operational Guidance Note (2018).
- External position for 2022 assessed as moderately weaker than the level implied by fundamentals and desirable policies, with high uncertainty due to unprecedented 2022 circumstances.
- Macroeconomic policy mix in 2022 supported the external position: rapid fiscal consolidation, stronger fiscal balances relative to the rest of the world, and rapid monetary tightening.
- Central bank interventions in the foreign exchange market occurred to smooth excessive volatility, without targeting a specific exchange rate level, and were considerably less than in 2021.
- External debt and IIP projections:
  - External debt declined to 41.3 percent of GDP in 2022.
  - External debt expected to decline over the medium term to about 32 percent of GDP.
  - Net IIP projected to stabilize at around -41 percent of GDP over the medium term.

### Criterion 2 — Capital account dominated by private flows
- Public flows averaged less than 33 percent of total capital flows over 2020-22.
- In 2022, private capital flows (portfolio flows, FDI, long-term loans, and short-term capital flows) accounted for over 93 percent of Peru’s total gross flows.
- 2022 net IIP-to-GDP stood at -40 percent of GDP.
- IIP characterized by large foreign reserves, moderate external debt, and large FDI liabilities.

### Criterion 3 — Track record of sovereign market access
- Strong track record of access to international capital markets; sovereign spreads among the lowest in Latin America.
- Successful sovereign bond placements:
  - US$1.8 billion in 2018
  - US$1.9 billion in 2019
  - US$7.0 billion in 2020
  - US$11.2 billion in 2021
  - US$0.6 billion in 2022
- Cumulative placements represent more than 10 times Peru’s IMF quota.
- EMBIG spread over U.S. Treasury Bonds: averaged 173 in 2020, 166 in 2021, and 207 in 2022.
- Average sovereign spread through mid-March 2023 stands at 200 basis points.
- Market appetite remains strong; bond placements have been vastly oversubscribed.

### Criterion 4 — Comfortable reserve position
- International reserves:
  - US$72.2 billion at end-2022 (down from US$78.5 billion in 2021).
  - Reserves at 30 percent of GDP and 243 percent of the Assessing Reserve Adequacy (ARA) metric in 2022, highest in Latin America as a percent of GDP.
  - International reserves averaged 260 percent of the unadjusted ARA metric over 2020-2022 and did not fall below 80 percent in any of these three years.
  - After adjusting for FX deposits of the government and commercial banks and augmenting the ARA metric for commodity export volatility, the reserves-to-ARA ratio comes to 195 percent for 2022.

### Criterion 5 — Sound public finances and sustainable public debt
- 2022 NFPS deficit was lower than expected.
- Fiscal consolidation under fiscal rules projects the NFPS deficit to reach 1 percent of GDP by 2026.
- Public debt remains among the lowest in Latin America and is projected to fall towards the long-run debt ceiling of 30 percent of GDP by 2030.
- Ample fiscal buffers and strong fiscal institutions; investment-grade credit ratings from major agencies (Fitch (BBB/Negative), Moody’s (Baa1/Negative), S&P (BBB/Negative)).
- Sovereign risk and public debt sustainability analysis indicates public debt is sustainable with a high probability; debt ratio expected to stabilize over the medium term.
- Gross financing needs expected to average around 3½ percent of GDP over the forecast horizon.
- 2023 small fiscal impulse noted as temporary, well targeted, and warranted given a negative output gap and pressing social needs.

### Criterion 6 — Low and stable inflation within sound frameworks
- Inflation-targeting framework introduced in 2002 with a target range of 1-3 percent.
- Peru has achieved one of the lowest single-digit inflation rates in Latin America over the last two decades.
- Headline inflation remained inside the target range since 2017; monthly inflation in the past five years averaged 3.4 percent.
- Recent inflation and inflation expectations exceeded the BCRP target range over the past year, driven mostly by imported inflation and supply shocks.
- Aggressive monetary tightening has reduced inflationary pressures and brought one-year-ahead inflation expectations closer to the target range.
- BCRP credibility supported by low and stable inflation since 2002.

### Criterion 7 — Sound financial system and absence of systemic solvency problems
- Banking system emerged from COVID-19 largely unscathed; profitability approaching pre-pandemic rates and NPLs remaining stable.
- System remains well-capitalized; average capital adequacy ratios above regulatory thresholds.
- Dollarization on a downward trajectory but remains at a substantial structural level.
- Top-down stress tests show resilience; in a severely adverse scenario capital ratios vary between 11.5 and 13.5 percent across the financial system.

### Criterion 8 — Effective financial sector supervision
- Authorities have taken significant steps to strengthen oversight, following 2018 FSAP recommendations.
- No supervisory framework concerns raised by the 2018 FSAP or the 2023 Article IV Consultation.
- January 2023: new capital structure for banks introduced including capital conservation and systemic risk buffers in line with Basel III.
- Implemented or partially implemented reforms: expanded oversight of financial cooperatives by the SBS, monitoring off-balance-sheet exposures, new risk-monitoring tools, risk-based supervision for insurers, strengthened crisis preparedness and management, and enhanced emergency liquidity assistance framework.
- Planned measures include enhanced supervision of financial groups and requirements for recovery and resolution planning for domestic systemically important banks and financial groups.

### Criterion 9 — Data transparency and integrity
- Overall quality of economic data remains high and adequate for effective surveillance.
- Peru remains in observance of the Special Data Dissemination Standards (SDDS).

### Institutional reforms and governance
- Authorities implementing measures to enhance institutional quality and anti-corruption:
  - New Anti-Corruption Plan being implemented.
  - Legislation passed to strengthen fiscal governance.
  - National Board of Justice operational.
  - Offices of Institutional Integrity opened in more than 200 public sector entities.
  - Whistleblower complaint platform launched; an integrity index by the Integrity Secretariat created.
  - Comptroller’s Office monitors emergency-related spending and regularly publishes reports.
- Note: elevation of President Boluarte proceeded in line with constitutional norms; national elections legally set to take place in 2026.

### Safeguards procedures
- Safeguards procedures for the FCL arrangement completed.
- KPMG Peru (BCRP external auditor) issued an unmodified (clean) audit opinion on BCRP’s 2021 financial statements.
- Annual financial statements audited in accordance with international auditing standards, include comprehensive disclosures, and are published timely.
- Staff reviewed 2021 audit results; no significant safeguards issues emerged.
- Audited 2022 results set to be published by mid-April.

### Capacity to repay the Fund
- Under a tail risk scenario prompting a draw on the entire FCL amount, Peru would continue to have adequate capacity to repay the Fund; credit and liquidity risks to the Fund would remain low.
- If a drawdown occurred in 2023, Fund obligations would represent:
  - 5.2 percent of Peru’s total external debt,
  - 8.7 percent of international reserves,
  - 3.5 percent of exports at the peak of the debt service in 2027.
- Peru retains investment-grade status and an excellent track record of servicing debt.

### Exit strategy and access
- Authorities treat the FCL arrangement as precautionary; exit dependent on evolution of external risks.
- Current access: SDR 4.0035 billion (300 percent of quota) under a two-year FCL arrangement (reduced from SDR 8.007 billion (600 percent of quota) under the previous arrangement).
- Authorities are not requesting a change in access at this review and intend to continue treating the FCL as precautionary.
- Exit intended conditional on reduction of external risks, consistent with treating the facility as temporary.

*Source: IMF staff assessment contained in the Peru Article IV Consultation materials (section 16).*

### 22. The FCL arrangement has bolstered the authorities’ macroeconomic policy settings in a

### 1perea2023002 - 22. The FCL arrangement has bolstered the authorities’ macroeconomic policy settings in a

### Summary of findings
- The FCL arrangement, along with sizable international reserves, low public debt, anchored inflation expectations, and a sound financial system has provided the authorities with valuable insurance in a period of continued uncertainty and volatility.
- Despite a more challenging external and domestic backdrop, the authorities have successfully removed the extraordinary pandemic-related stimulus, preserved strong policy buffers, and retained ample market access.
- The authorities expect to continue treating access to the FCL as precautionary.

### Indicators and capacity to repay
- 24 These indicators of capacity to repay are similar to the levels reported at the time of the FCL request in 2022.

### Policy stance and implications
- The FCL arrangement has bolstered macroeconomic policy settings by providing insurance against elevated uncertainty.
- Maintained elements supporting resilience:
  - sizable international reserves
  - low public debt
  - anchored inflation expectations
  - a sound financial system
- Policy actions taken:
  - removal of extraordinary pandemic-related stimulus
  - preservation of strong policy buffers
  - retention of ample market access
- Forward-looking stance:
  - continued precautionary treatment of FCL access

*PERU INTERNATIONAL MONETARY FUND 19*

### 23. Staff assesses that Peru continues to meet the qualification criteria for access to FCL

### 23. Staff assesses that Peru continues to meet the qualification criteria for access to FCL resources

### Staff assessment and recommendation
- Staff assesses that Peru continues to meet the qualification criteria for access to FCL resources.
- Peru "has very strong economic fundamentals and policy frameworks," and the authorities "have a sustained track record of implementing very strong macroeconomic policies that have helped the country absorb large adverse shocks in recent years."
- The authorities "remain committed to maintaining such policies in the future."
- Therefore, staff recommends completion of the review under the FCL arrangement for Peru.

### Financial market and reserve position (selected indicators)
- Gross international reserves, end-2022: 68.4 (billions of U.S. dollars).
- Gross international reserves (projections):
  - 2023: 74.9 (billions of U.S. dollars)
  - 2024: 78.5 (billions of U.S. dollars)
  - 2025: 72.2 (billions of U.S. dollars)
  - 2026: 74.4 (billions of U.S. dollars)
  - 2027: 76.4 (billions of U.S. dollars)
- Gross international reserves (in percent of short-term external debt, end-period):
  - 2019: 428 (percent)
  - 2020: 487 (percent)
  - 2021: 589 (percent)
  - 2022: 515 (percent)
  - 2023: 541 (percent)
  - 2024: 552 (percent)
- Gross international reserves (in percent of broad money, end-2022): 67 (percent).
- Gross international reserves (in percent of unadjusted ARA metric, 2022): 269 (percent).

### Macroeconomic outlook (selected projections and indicators)
- Real GDP (annual percent change):
  - 2022: 2.2
  - 2023: -11.0
  - 2024: 13.6
  - 2025: 2.7
  - 2026: 2.2
  - 2027–2028: 3.0 each year
- Output gap (percent of potential GDP):
  - 2022: -1.6
  - 2023: -7.2
  - 2024: -0.3
  - 2025: -0.3
  - 2026: -0.4
  - 2027–2028: 0.0
- Consumer prices (period average):
  - 2022: 2.1 (percent)
  - 2023: 1.8 (percent)
  - 2024: 4.0 (percent)
  - 2025: 7.9 (percent)
  - 2026: 5.6 (percent)
  - 2027: 2.5 (percent)
  - 2028: 2.2 (percent)
- Consumer prices (end of period):
  - 2022: 1.9 (percent)
  - 2023: 2.0 (percent)
  - 2024: 6.4 (percent)
  - 2025: 8.5 (percent)
  - 2026: 3.0 (percent)
  - 2027–2028: 2.3 and 2.0 (percent), respectively
- External current account balance (percent of GDP):
  - 2022: -0.7
  - 2023: 1.2
  - 2024: -2.3
  - 2025: -4.3
  - 2026: -1.9
  - 2027: -2.1
  - 2028: -2.0

### Fiscal sector (selected aggregates and projections)
- NFPS (Non-Financial Public Sector) overall balance (percent of GDP):
  - 2022: -1.6
  - 2023: -8.9
  - 2024: -2.5
  - 2025: -1.6
  - 2026–2028: around -2.0 to -1.0 (percent) with -2.0 in 2026 and -1.0 in 2028.
- NFPS primary balance (percent of GDP):
  - 2022: -0.2
  - 2023: -7.3
  - 2024: -1.0
  - 2025: -0.1
  - 2026: -0.3
  - 2027: -0.4
  - 2028: 0.1
- NFPS structural balance (percent of GDP):
  - 2022: -0.6
  - 2023: -6.4
  - 2024: -3.7
  - 2025: -1.8
  - 2026: -2.1
  - 2027: -2.3
  - 2028: -1.8
- Gross non-financial public sector debt (percent of GDP):
  - 2022: 26.9
  - 2023: 35.0
  - 2024: 36.3
  - 2025: 34.3
  - 2026: 33.8
  - 2027: 34.0
  - 2028: 33.8
- External (component of public debt, percent of GDP):
  - 2022: 8.4
  - 2023: 14.9
  - 2024: 19.5
  - 2025: 17.6
  - 2026: 17.3

### External sector and financing (selected items)
- Exports (U.S. dollars, percent change):
  - 2022: -2.2
  - 2023: -10.6
  - 2024: 47.2
  - 2025: 4.2
  - 2026–2028: between 0.1 and 3.9 (percent)
- Imports (U.S. dollars, percent change):
  - 2022: -1.8
  - 2023: -15.6
  - 2024: 38.9
  - 2025: 16.7
  - 2026: -2.6
- Current account (billions of U.S. dollars):
  - 2022: -1.7
  - 2023: 2.4
  - 2024: -5.2
  - 2025: -10.6
  - 2026: -4.9
- Capital and financial account balance (billions of U.S. dollars):
  - 2022: 8.9
  - 2023: 7.8
  - 2024: 14.2

### Financial system soundness (selected indicators, as of December)
- Capital to risk-weighted assets:
  - 2021: 15.0 (percent)
  - 2022: 14.5 (percent)
- Nonperforming loans to total gross loans:
  - 2021: 3.9 (percent)
  - 2022: 4.2 (percent)
- Return on equity (ROE):
  - 2021: 12.1 (percent)
  - 2022: 16.5 (percent)
- Deposit-to-loan ratio:
  - 2021: 92.6 (percent)
  - 2022: 89.5 (percent)
- Share of foreign currency deposits in total deposits:
  - 2021: 39.5 (percent)
  - 2022: 36.9 (percent)
- Share of foreign currency loans in total credit:
  - 2021: 23.3 (percent)
  - 2022: 24.2 (percent)

### Debt and vulnerability metrics (selected)
- Total external debt (percent of GDP):
  - 2019: 34.5
  - 2020: 43.2
  - 2021: 45.9
  - 2022: 41.3
  - 2023: 38.8
  - 2024: 37.6
  - 2025: 35.6
  - 2028: 32.4
- Total debt service (percent of exports of goods and services):
  - 2019: 37.5
  - 2020: 36.0
  - 2021: 24.2
  - 2022: 25.8

*Source: IMF staff assessment and supporting figures and tables in the document.*

### Annex I. Assessment of FCL Qualification Criteria

### Annex I. Assessment of FCL Qualification Criteria

### FCL qualification areas and Peru’s assessment
- 1. Sustainable external position.
  - Core indicator: external position in most recent Board document assessed as “broadly consistent”, “moderately stronger (weaker)”, “stronger”, or “substantially stronger” than implied by fundamentals and desirable policies.
  - Peru’s information: External Sector Assessment for 2022 (2023 Article IV) assesses the external position for 2022 as moderately weaker than the level implied by fundamentals and policies.
  - Status: ✓

- 2. Capital account position dominated by private flows.
  - Core indicator: public flows account for less than half of direct, portfolio, and other asset and liability flows, on average in the past three years.
  - Peru’s information: Public flows averaged less than 33 percent of total capital flows over 2020-22; bulk of external capital flows carried out by the private sector.
  - Status: ✓

- 3. Track record of steady sovereign access to international capital markets at favorable terms.
  - Core indicator: public sector issuance or guaranteeing of external bonds or disbursements of public and publicly-guaranteed external commercial loans in international markets during at least three of the last five years, cumulative amount ≥ 50 percent of Fund quota.
  - Peru’s information: Strong track record; spreads among the lowest in Latin America; placed sovereign bonds at favorable terms for more than 10 times its IMF quota during four out of the last five years (2018-22).
  - Status: ✓

- 4. Comfortable reserve position.
  - Core indicator: reserves > 100 percent of unadjusted ARA metric on average over three years, and not below 80 percent in any of these three years.
  - Peru’s information: International reserves averaged 260 percent of the ARA metric over the last three years and were not below 80 percent in any of the last three years.
  - Status: ✓

- 5. Sound public finances and sustainable public debt.
  - Core indicator: public debt assessed as sustainable with a high probability.
  - Peru’s information: Sovereign risk and public debt sustainability analysis indicates public debt assessed as sustainable with a high probability; fiscal position remains robust.
  - Status: ✓

- 6. Low and stable inflation, in the context of a sound monetary and exchange rate policy framework.
  - Core indicator: single-digit inflation over the past five years.
  - Peru’s information: Inflation targeting framework since 2002; inflation in single digits over the last two decades; one of the lowest inflation rates in Latin America over the last two decades.
  - Status: ✓

- 7. Sound financial system and absence of solvency problems that may threaten systemic stability.
  - Core indicator: average capital adequacy ratio above regulatory thresholds; recent Article IV did not highlight significant solvency risks or recapitalization needs.
  - Peru’s information: Banking system well-capitalized; average capital adequacy ratios above regulatory thresholds; 2023 Article IV did not mention significant solvency or recapitalization needs.
  - Status: ✓

- 8. Effective financial sector supervision.
  - Core indicator: most recent FSAP or Article IV report did not raise substantial concerns regarding supervisory framework.
  - Peru’s information: Neither 2018 FSAP nor 2023 Article IV raised concerns regarding the supervisory framework.
  - Status: ✓

- 9. Data transparency and integrity.
  - Core indicator: member is an SDDS subscriber or has made satisfactory progress toward SDDS requirements.
  - Peru’s information: Peru subscribes to the Special Data Dissemination Standards (SDSS).
  - Status: ✓

*Assessment draws on Annex I: “Assessment of FCL Qualification Criteria.”*

---

### Annex III. Sovereign Risk and Debt Sustainability Analysis — Key findings and projections

### Principal findings and judgment
- Overall judgment: Peru’s public debt is sustainable with high probability; overall risk of sovereign stress is low.
- Supporting evidence:
  - Peru has among the lowest public debt stocks in Latin America; sovereign debt is rated investment grade.
  - As recovery from COVID-19 progressed, public debt ratio and other indicators improved.
  - Public debt is expected to stabilize over the medium term and fall toward the long-run debt target, reflecting planned fiscal consolidation envisioned in the fiscal rules.
  - Shares of foreign- and domestic-currency denominated debt, marketable debt, and residual maturity profile expected to remain broadly stable over the forecast horizon.
  - Statistical coverage of public debt extends to the Non-Financial Public Sector (beyond general government); investor base is well diversified; law of the debt equally distributed between local and foreign; lion’s share of public debt marketable with over ten years of residual maturity.
  - Realism analysis: no major concerns; forecast track record for main debt drivers shows no systematic bias; projected fiscal consolidation within norms; real GDP growth forecast consistent with reasonable fiscal multiplier estimates.
  - Medium-term liquidity risks: low, signaled by the GFN Financeability Module and supported by low gross financing needs and strong policy frameworks and institutions. Fanchart module points to moderate levels of risk.
  - Long-term risks: low. Stress tests indicate debt manageable under scenarios of sharp falls in commodity prices and large borrowing needs from natural disasters. Risks from large amortization profiles assessed as low. Aging-related spending on health and pensions expected to be accommodated within fiscal rules.

### Baseline public debt path and contributions (table excerpt as presented)
- Public debt (percent of GDP) by year (Actual/Projection):
  - 2022: 34.3
  - 2023: 33.8
  - 2024: 34.0
  - 2025: 33.8
  - 2026: 33.2
  - 2027: 32.5
  - 2028: 32.0
  - 2029: 31.4
  - 2030: 30.7
  - 2031: 30.2
  - 2032: 29.5

- Change in public debt (percent of GDP) by year:
  - 2022: -2.1
  - 2023: -0.4
  - 2024: 0.1
  - 2025: -0.2
  - 2026: -0.6
  - 2027: -0.6
  - 2028: -0.6
  - 2029: -0.6
  - 2030: -0.7
  - 2031: -0.6
  - 2032: -0.6

- Contribution of identified flows (percent of GDP):
  - 2022: -0.3
  - 2023: -0.3
  - 2024: 0.0
  - 2025: -0.4
  - 2026: -0.8
  - 2027: -0.8
  - 2028: -0.8
  - 2029: -0.7
  - 2030: -0.7
  - 2031: -0.6
  - 2032: -0.6

- Primary deficit (percent of GDP):
  - 2022: 0.1
  - 2023: 0.4
  - 2024: 0.4
  - 2025: -0.1
  - 2026: -0.5
  - 2027: -0.4
  - 2028: -0.4
  - 2029: -0.2
  - 2030: -0.2
  - 2031: -0.1
  - 2032: -0.1

- Noninterest revenues (percent of GDP):
  - 2022: 26.0
  - 2023: 25.5
  - 2024: 25.4
  - 2025: 25.3
  - 2026: 25.2
  - 2027: 25.0
  - 2028: 25.0
  - 2029: 25.1
  - 2030: 25.1
  - 2031: 25.1
  - 2032: 25.2

- Noninterest expenditures (percent of GDP):
  - 2022: 26.1
  - 2023: 25.9
  - 2024: 25.8
  - 2025: 25.2
  - 2026: 24.7
  - 2027: 24.6
  - 2028: 24.7
  - 2029: 24.9
  - 2030: 24.9
  - 2031: 25.0
  - 2032: 25.1

- Automatic debt dynamics (percent of GDP):
  - 2022: -1.8
  - 2023: -0.5
  - 2024: -0.2
  - 2025: 0.0
  - 2026: -0.1
  - 2027: -0.1
  - 2028: -0.1
  - 2029: -0.2
  - 2030: -0.3
  - 2031: -0.3
  - 2032: -0.3

- Real interest rate and relative inflation (percent):
  - 2022: -0.8
  - 2023: 0.3
  - 2024: 0.8
  - 2025: 0.9
  - 2026: 0.9
  - 2027: 0.8
  - 2028: 0.8
  - 2029: 0.7
  - 2030: 0.7
  - 2031: 0.6
  - 2032: 0.6

- Real growth rate contribution (percent of GDP):
  - 2022: -0.9
  - 2023: -0.7
  - 2024: -1.0
  - 2025: -1.0
  - 2026: -1.0
  - 2027: -1.0
  - 2028: -0.9
  - 2029: n.a.
  - 2030: -0.9
  - 2031: -0.9
  - 2032: -0.9

- Contribution of residual (percent of GDP):
  - 2022: -1.8
  - 2023: -0.1
  - 2024: 0.1
  - 2025: 0.2
  - 2026: 0.2
  - 2027: 0.2
  - 2028: 0.2
  - 2029: 0.1
  - 2030: 0.0
  - 2031: 0.1
  - 2032: 0.0

- Gross financing needs (GFN) (percent of GDP):
  - 2022: 2.4
  - 2023: 2.8
  - 2024: 3.6
  - 2025: 3.3
  - 2026: 4.2
  - 2027: 3.4
  - 2028: 4.3
  - 2029: 4.5
  - 2030: 3.8
  - 2031: 5.4
  - 2032: 5.2

- Of which: debt service (percent of GDP):
  - 2022: 2.3
  - 2023: 2.5
  - 2024: 3.3
  - 2025: 3.4
  - 2026: 4.7
  - 2027: 3.9
  - 2028: 4.7
  - 2029: 4.8
  - 2030: 4.0
  - 2031: 5.6
  - 2032: 5.3

- Memo items (as presented):
  - Real GDP growth (percent): 2022: 2.7; 2023: 2.2; 2024–2032: 3.0 each year (2024–2032 entries shown as 3.0).
  - Inflation (GDP deflator; percent): 2022: 7.9; 2023: 5.6; 2024–2032: 2.5, 2.2, 2.0, 2.0, 2.0, 2.0, 2.0, 2.0 (years aligned as presented).
  - Nominal GDP growth (percent): 2022: 6.9; 2023: 8.0; 2024: 5.4; 2025: 5.3; 2026: 5.2; 2027: 5.1; 2028: 4.9; 2029: 5.1; 2030: 5.1; 2031: 5.1; 2032: 5.1.
  - Effective interest rate (percent): 2022: 4.6; 2023: 5.1; 2024: 5.1; 2025: 5.1; 2026: 4.9; 2027: 4.7; 2028: 4.6; 2029: 4.3; 2030: 4.2; 2031: 4.1; 2032: 4.0.

### Coverage, structure, and projections of public debt
- Debt structure commentary: share of domestic and foreign-currency denominated public debt expected to remain broadly stable; lion’s share marketable with residual maturity longer than 10 years; investor base well diversified; law of debt equally distributed between local and foreign.
- Residual maturity: 11.9 years (as indicated in public debt structure figures).
- Projections presented by instrument, holder, currency, and maturity in figures (percent of GDP series shown in figures).

### Realism and risk analyses
- Realism of baseline:
  - Realism analysis does not point to major concerns.
  - Forecast track record for main drivers shows no systematic bias.
  - Projected fiscal consolidation within norms.
  - Baseline real GDP growth consistent with reasonable fiscal multiplier estimates and converges to potential GDP growth over forecast horizon.

- Medium-term risk analysis (as presented):
  - Debt fanchart indicators:
    - Fanchart width: 44.1 0.6 (as presented).
    - Probability of debt not stabilizing (pct): 22.6 0.2 (as presented).
    - Terminal debt level x institutions index: 19.8 0.4 (as presented).
    - Debt fanchart index: ...1.3 (as presented).
  - Average GFN in baseline: 3.6 1.2 (as presented).
  - Banking indicators:
    - Bank claims on government (pct bank assets): 7.5 2.4 (as presented).
    - Change in claims on government in stress (pct bank assets): 2.6 0.9 (as presented).
  - GFN financeability index: ...4.5 (as presented).
  - Probabilities from medium-term tool diagnostics:
    - Prob. of missed crisis, 2023-2028 (if stress not predicted): 9.1 pct.
    - Prob. of false alarm, 2023-2028 (if stress predicted): 58.0 pct.
  - Commentary: Debt Fanchart Module points to a moderate level of risk; GFN Financeability Module suggests a low risk level, supported by low gross financing needs.

- Long-term risk analysis (as presented):
  - Large-amortization risks and GFN-to-GDP and amortization-to-GDP ratios charted; overall risk indication remains low under baseline and long-run projections.
  - Commentary: Long-term risks low; aging-related public spending expected to be accommodated within fiscal rules.

### Stress testing and scenarios
- Stress tests indicate debt remains manageable under scenarios of sharp falls in commodity prices and large borrowing needs from natural disasters.
- Risks from large amortization profiles assessed as low.

### Final sustainability assessment (text from DSA summary)
- “The projected debt path is expected to stabilize and GFNs will remain at manageable levels, conditional on the implementation of the planned fiscal adjustment measures envisioned in the fiscal rules. Debt is assessed as sustainable with high probability. The overall risk of sovereign stress is low, reflecting low levels of vulnerability in the medium and long term horizons.”

*Source: Annexes I–III of the IMF staff report (selected tables, figures, and text as presented).*

### 2. Peru's very strong economic fundamentals and policy frameworks, as well as a

### 2. Peru's very strong economic fundamentals and policy frameworks, as well as a 

### OUTLOOK, RISKS, AND BUFFERS
- Authorities and staff view the outlook as uncertain with elevated risks, but Peru’s buffers and access to the FCL provide sufficient insurance against adverse scenarios.
- External risks identified: potential escalations of Russia’s war in Ukraine, an abrupt global slowdown, commodity price volatility, and global financial tightening.
- The updated External Economic Stress Index (ESI) for Peru indicates that external risks remain high.
- Key buffers and metrics:
  - Public debt: 33.8 percent of GDP at end-2022.
  - International reserves: equivalent to 30 percent of GDP at end-2022.
  - Reserves relative to ARA metric: approximately 240 percent at end-2022.
  - Access to international capital markets at a remarkably low cost.
  - Solid financial sector and access to the FCL.
- Upside possibilities cited by authorities:
  - A “soft landing” in key trade partners.
  - Revamped public investment and new FDI in mining projects generating stronger growth than projected.
- Baseline expectation: Peru's growth in 2023 is forecast to surpass that of its Latin American peers.

### RECENT DEVELOPMENTS
- Real GDP growth:
  - Authorities expect real GDP growth at around 2.5 percent in 2023, driven mainly by a recovery in primary sectors.
  - Growth is expected to be primarily fueled by a recovery in private consumption and strong exports.
- Domestic shocks and outlook:
  - Initial setbacks from domestic supply-side shocks (cyclone, heavy rainfall, road and airport blockades) hampered agriculture and infrastructure.
  - Business sentiment and expectations indicators improved in March 2023.
  - Congress has set aside calls for early general elections, which the private sector is incorporating into business strategies.
- Inflation and monetary policy:
  - Headline inflation (yoy) decreased for the third consecutive month in April 2023.
  - The Central Reserve Bank of Peru (BCRP) increased the policy rate by a total of 750 basis points through 18 consecutive hikes, bringing it to 7.75 percent.
  - April 2023 inflation readings: headline inflation 7.97 percent; core inflation 5.7 percent.
  - Ex-ante real interest policy rate by April 2023: 3.45 percent, above the estimated real neutral rate of around 1.5 percent.
  - BCRP projects headline inflation to gradually converge towards the upper bound of the 1-3 percent target band by late 2023.
  - Monetary stance: data-driven approach; BCRP stands ready to introduce additional measures if required.
- Fiscal position:
  - Non-financial public sector deficit: 1.7 percent of GDP in 2022 (from 2.5 percent in 2021); fiscal rule for that year was 3.7 percent.
  - 2023 deficit is expected to hit 2.1 percent of GDP in the context of a temporary fiscal stimulus launched in January.
  - Fiscal deficit expected to taper to 1.0 percent of GDP over the medium term.
  - Public debt-to-GDP ratio: 33.8 percent at the close of 2022.
  - Net public debt-to-GDP ratio: 21.0 percent at the close of 2022.
  - By March 2023, Peru’s sovereign yield (10-year bond) was the second lowest in Latin America.
  - Government debt held by foreign creditors fell from 50 percent at end-2021 to 39 percent at end-March 2023.
  - Sovereign risk and public debt sustainability analysis: public debt is sustainable with high probability.
- External accounts and reserves:
  - Current account deficit expected to contract to 1.4 percent in 2023, led by a recovery in the trade balance.
  - Current account deficit financed by long-term private flows (mainly FDI).
  - Net international reserves: US$74.3 billion as of March 2023, surpassing all standard reserve adequacy metrics.
  - Reserves supported by the FCL arrangement and compared favorably with peer countries (Figure 4 referenced in staff report).
  - Exchange rate policy: authorities value exchange rate flexibility; BCRP FX interventions are directed only toward containing excessive exchange rate volatility without affecting its trend.
  - PEN has maintained remarkable stability in the region since the beginning of the century, owing to comparatively low inflation.
- Financial sector:
  - Financial system described as strong, stable, and well-supervised.
  - Recent banking disturbances in the US and Europe have not spilled over into Peru (as explained in Box 1).
  - Significant steps taken to enhance financial sector oversight, in line with the 2018 FSAP recommendations.
  - Despite financial tightening, withdrawal of support measures, and increased market volatility, the banking system remains healthy.

### FINAL REMARKS
- FCL treatment and plans:
  - Authorities plan to continue treating the FCL as a precautionary and temporary arrangement.
  - Current FCL arrangement amounts to 300 percent of the quota, half of the first arrangement approved in 2020.
  - Authorities regard the current level of access as adequate and will consider exiting in May 2024 depending on global risks.
- Policy commitment:
  - Peruvian authorities remain committed to maintaining very strong macroeconomic policies and will respond in a timely and effective manner to any emerging shocks.
  - The FCL has imparted a strong signal of confidence in the strength of Peru's policy framework and fundamentals, offering protection against tail risks amid unprecedented uncertainty and volatility in global financial markets.
- Acknowledgment:
  - Gratitude expressed to Ms. Sonia Muñoz and her team for their commitment and diligence throughout the FCL mid-term review process.

*Source: IMF staff report (2023 Article IV Consultation and FCL mid-term review).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1perea2023002.pdf_