## _cr15133

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### Fiscal policy and fiscal framework
- Directors emphasized that hikes in non-priority current spending should be avoided given the need to:
  - finance structural reforms,
  - carry through the civil service reform,
  - increase allocations for physical and human capital investment,
  - protect social programs.
- Medium-term guidance and framework:
  - Target a small structural fiscal surplus would be advisable to preserve buffers.
  - Continued strong political commitment is essential to maintain credibility of the new fiscal framework.
  - Immediate priority: expedite execution of public investment in line with government plans while avoiding increases in non-priority current spending.
  - Revenue losses need to be offset to finance structural reforms, investment, and inclusion along a gradual fiscal consolidation path.
- Key fiscal figures (NFPS, 2010–2016):
  - NFPS Revenue: 26.0, 27.2, 27.6, 27.8, 27.5, 25.9, 26.1
  - NFPS Primary Expenditure: 25.0, 23.9, 24.3, 25.8, 26.6, 26.8, 26.7
  - NFPS Primary Balance: 1.0, 3.2, 3.3, 2.0, 0.9, -0.9, -0.6
  - NFPS Overall Balance: -0.2, 2.0, 2.3, 0.9, -0.2, -2.0, -1.7
  - NFPS Gross debt (including Repayment Certificates): 25.4, 23.0, 21.2, 20.3, 20.7, 21.5, 22.3
  - NFPS Gross debt — External: 13.2, 11.4, 9.8, 8.8, 8.7, 8.8, 8.8
  - NFPS Gross debt — Domestic: 12.2, 11.6, 11.4, 11.5, 12.0, 12.7, 13.5
- Policy recommendations:
  - Target a small structural fiscal surplus of around ½ percent of GDP over the medium term to preserve buffers.
  - Avoid hikes in non-priority current spending and prioritize public investment execution.
  - Compensate revenue losses from tax cuts and commodity downturn via widening the tax base, streamlining exemptions, promoting formalization, boosting local property tax collection, and reviewing excise taxes.

### Monetary policy and exchange rate policy
- Directors supported accommodative monetary policy that has kept inflation expectations well anchored.
- Forward guidance:
  - Monetary policy should remain responsive to inflation expectations and external developments.
  - Use exchange rate flexibility as the main line of defense against additional external pressures.
  - Limited foreign exchange intervention could be necessary to smooth excessive volatility in a still highly dollarized economy.
- Central bank actions noted:
  - Between November 2013 and January 2015, the BCRP lowered its policy rate by a cumulative 100 basis points to 3¼ percent.
  - The BCRP lowered reserve requirements on local currency deposits by a cumulative 23 percentage points to 7 percent between August 2013 and May 2015.
  - The BCRP intervened in the spot and forward markets in 2014 and into Q1 2015; interventions were sterilized via repo operations.
- Key price and interest indicators (2010–2016):
  - Real GDP growth: 8.5, 6.5, 6.0, 5.8, 2.4, 3.8, 5.0
  - Consumer Prices (end of period): 2.1, 4.7, 2.6, 2.9, 3.2, 2.2, 2.0
  - Consumer Prices (period average): 1.5, 3.4, 3.7, 2.8, 3.2, 2.5, 2.0

### De-dollarization, prudential measures, and financial stability
- Directors welcomed new de-dollarization measures and recommended:
  - strengthening prudential requirements on dollar lending,
  - encouraging private sector hedging of foreign currency exposure,
  - deepening financial and capital markets.
- Data, vulnerabilities, and supervisory priorities:
  - Credit dollarization fell to 36 percent in March 2015, from 70 percent a decade earlier, but remains a vulnerability.
  - Balance sheets of small non-bank institutions, particularly cajas rurales, worsened; cajas rurales constitute only 0.7 percent of assets of deposit taking institutions.
  - Strengthen data collection and analysis of corporate and household balance sheets to assess currency mismatch risks.
  - Use existing programs more effectively to support small and medium-sized enterprises.
- Key financial and external sector figures (2010–2016 unless noted):
  - Gross reserves (millions of U.S. dollars): 44,150, 48,859, 64,049, 65,710, 62,353, 61,353, 61,553
  - Percent of short-term external debt (reserves): 342, 559, 494, 539, 514, 449, 507
  - Percent of foreign currency deposits at banks (reserves): 241, 228, 301, 275, 262, 259, 245
  - Total external debt: 27.2, 25.6, 27.2, 27.4, 30.2, 32.5, 31.6
  - External current account balance: -2.4, -1.9, -2.7, -4.2, -4.0, -4.5, -4.2
- Boxed de-dollarization measures (December 2014 and 2015 targets):
  - New Repos in nuevo soles for expansion and substitution of FX loans.
  - Marginal reserve requirement on foreign currency deposits increased by 10 percentage points effective in January and by another 10 percentage points effective in March, 2015 to 70 percent.
  - Additional reserve requirements applied to institutions failing de-dollarization targets (5 percent reduction by June 2015; 10 percent by December 2015; mortgage/vehicle FX credit reduction targets also specified).

### Growth outlook, risks, and structural reforms
- Near-term and medium-term growth outlook:
  - Real GDP projected to expand about 3¾ percent in 2015 (staff baseline) assuming temporary supply shocks unwind.
  - Staff baseline projections (Real GDP growth, percent): Prel. 2014: 2.4; 2015: 3.8; 2016: 5.0; 2017: 5.5; 2018: 4.8; 2019: 4.5; 2020: 4.5
  - Output gap (percent of potential GDP): Prel. 2014: -1.0; 2015: -1.7; 2016: -1.2; 2017: -0.3; 2018: 0.0; 2019: 0.0; 2020: 0.0
  - Staff estimates potential growth may have fallen to about 4½ percent for 2015–20 baseline.
  - Staff projects current account deficit narrowing gradually to -3 percent of GDP by 2020.
  - Fiscal balance (NFPS, percent of GDP): 2014: -0.2; 2015: -2.0; 2016: -1.7; 2017: -1.4; 2018: -1.0; 2019: -1.0; 2020: -1.0
  - Public debt (percent of GDP): 2014: 20.7; 2015: 21.5; 2016: 22.3; 2017: 22.2; 2018: 21.7; 2019: 21.3; 2020: 22.0
- Risks:
  - Downside external risks: further slowdown in China; even lower terms of trade; surge in global financial volatility; persistent strengthening of the U.S. dollar.
  - Downside domestic risks: weaker investment; uncertainty linked to the 2016 Presidential elections; continuing social tensions in mining regions (conflicts nearly tripled from 76 in 2006 to 211 by March 2015); stronger than expected El Niño; slower structural reforms.
  - Upside risks: faster unwinding of supply shocks or more complete pass-through of lower food and fuel global prices.
- Structural reform priorities and recommendations:
  - Steadfast implementation of structural reforms to boost potential growth and foster social inclusion.
  - Streamline legal requirements and red tape (tramitologia).
  - Pursue ambitious education reform and inclusion policies within fiscal discipline.
  - Persevere with labor market reform to reduce non-wage costs and streamline work rules.
- Scenarios from Box 3 — potential growth (2015–20):
  - Baseline: potential growth at 4½ percent assuming reforms proceed slightly faster.
  - Slower-reform scenario: potential growth at 3.2 percent if reforms stall.

### Social and financial inclusion (Appendix I)
- Social progress and remaining challenges:
  - Poverty rate: 30.8, 27.8, 25.8, 23.9, 22.7 (2010–2014 series)
  - Life expectancy at birth (years): 73.9, 74.2, 74.5 (2010–2012)
  - Infant mortality (per thousand live births): 15.2, 14.3, 13.6, 12.9 (2010–2013)
  - Unemployment rate: 7.9, 7.7, 6.8, 5.9, 5.9 (2010–2014)
  - Poverty rate in rural areas over 46 percent versus 15 percent in urban settings.
  - Chronic child malnutrition: some 15 percent of children.
- Social programs and 2015 allocations:
  - Social spending in 2015 raised by 26 percent to expand coverage of Juntos and Pension 65.
  - 2015 program coverage figures (as presented): Qali Warma: 0.243 million children; Juntos: 0.18800,000 families; Pension 65: 0.13520,000 elderly; Rural assistance: 0.1020,000 households; Cuna Mas: 0.0670,000 infants; Total: 0.71 Over 5 million people
- Education targets:
  - Raise education spending from below 3 percent to around 4 and 6 percent by end-2016 and 2020, respectively, through annual ½ percentage point of GDP increments.
- Financial inclusion status and obstacles:
  - Only ¼ of adults have a bank deposit account.
  - Credit and deposit-to-GDP ratios under 35 percent.
  - Survey obstacles (percentages as presented): Limited financial literacy 73; Unsustainable growth 60; Product costs 59; Limited understanding of customers needs 55; Poor business practices 54.
  - Survey opportunities: Financial education 78; Expanding the range of products 55; Mobile phone banking 53; Correspondent banking 52; Provision of no-frills accounts 48.
- Technology and market initiatives:
  - Electronic e-money legislation (2012) and a unified mobile payments platform expected operational by mid-2015.

### Financial sector structure, vulnerabilities, and indicators
- Composition of financial system (end-2014, percent of total assets):
  - Banks: 89.0%
  - Financial companies: 4.6%
  - Municipality microfinance: 5.3%
  - Rural microfinance: 0.7%
  - Other: 0.5%
- Financial soundness indicators and time series (selected):
  - FX liabilities % (of total liabilities): 55.9, 53.0, 44.8, 43.9, 38.2, 43.6, 43.6, 43.4
  - FX loans % (of total loans): 54.1, 47.5, 47.3, 45.8, 44.4, 41.1, 38.4
  - NPL ratio (percent): 1.5, 1.9, 1.9, 1.8, 2.2, 2.6, 2.9
  - Deposit-to-loan ratio: 105.1, 105.5, 102.8, 95.3, 95.3, 95.2, 98.1, 90.5
  - ROA: 2.6, 2.3, 2.3, 2.3, 2.2, 2.0, 1.9
  - ROE: 30.0, 23.6, 22.9, 23.5, 21.5, 20.0, 18.2
- Corporate and household exposures:
  - During 2012−14, Peruvian companies issued about 7½ percent of GDP debt in international markets.
  - Corporate issuance by sector (2012-14, in billions of US$ / percent of 2014): Total: 14.8, 7.3; Non-financial: 9.3, 4.6; Tradable sectors: 4.4, 2.2 (Agriculture: 0.5, 0.3; Fishing: 0.3, 0.1; Manufacturing: 1.4, 0.7; Mining: 1.8, 0.9); International trade: 0.5, 0.3; Non-tradable sectors: 4.8, 2.4 (Construction: 1.1, 0.6; Energy: 2.5, 1.3; Retail: 0.7, 0.3; Transport: 0.5, 0.3); Financial: 5.5, 2.7
  - FX risk: SBS estimates only 13 percent of total credit (about 5 percent of GDP) is exposed to FX credit risk.
  - Dollarization of household credit: consumer credit 9⅓ percent at end-2014; mortgage loans 34 percent at end-2014.
- Small and medium firms NPLs (end-2014):
  - Small and micro firms NPL: 7¾ percent (increase about 2½ percentage points since end-2012).
  - Medium firms NPL: 4¾ percent (increase about 2 percentage points since end-2012).

### Growth drivers, asset prices, and macro-statistics
- Recent performance and drivers:
  - Real domestic demand (2010–2016): 14.9, 7.7, 7.4, 7.4, 2.0, 3.8, 4.2
  - Exports (2010–2016): 32.3, 29.5, 2.2, -9.6, -7.8, -9.9, 7.9
  - Imports (2010–2016): 37.1, 28.9, 10.7, 2.7, -3.4, -5.6, 5.7
  - Terms of trade (deterioration -) (2010–2016): 21.0, 7.3, -2.1, -5.7, -5.4, -4.5, -0.8
  - Broad money (2010–2016): 21.7, 15.1, 12.1, 14.8, 8.4, 13.6, 13.5
  - Net credit to the private sector (2010–2016): 16.7, 21.6, 13.3, 18.4, 13.5, 13.6, 13.5
  - Nominal GDP (S/. billions, 2010–2016): 419.7, 469.9, 508.3, 546.9, 576.1, 608.9, 647.3
  - GDP per capita (in US$, 2010–2016): 5,027, 5,685, 6,324, 6,540, 6,458, 5,962, 6,242
- Asset price assessment:
  - No signs of asset price bubbles.
  - Corporate price-to-earning ratio (2013): Peru: 15 percent (lowest among regional peers shown).
  - Housing price-to-rent ratio (2013): Peru: 15 percent.

### Data, statistics, and technical assistance
- Monetary statistics and SRF migration:
  - Mission completed SRF work for the central bank and developed bridge tables; BCRP had not yet started reporting monetary data using SRFs and no migration date foreseen.
- Data dissemination and frequencies (selected, as of March 31, 2015):
  - Exchange Rates: Latest Observation 03/30/15; Date Received 03/31/15; Frequency of data D; Frequency of reporting M; Frequency of publication D.
  - International Reserve Assets and Reserve Liabilities: Latest Observation 12/31/14; Date Received 03/09/15; Frequency D/W/M as shown in source.
  - Consumer Price Index: Latest Observation 03/30/15; Date Received 04/01/15; Frequency of data M; Methodological soundness: O, LO, LO, LO; Accuracy/Reliability: LO, LO, O, O, O.
  - GDP/GNP: Latest Observation Q4 2014; Date Received 3/05/15; Frequency Q; Methodological soundness: LO, LO, LO, LO; Accuracy/reliability: LNO, LNO, LNO, LO, LO.
- Technical assistance in 2013−14:
  - FAD: Treasury management; Macro-fiscal framework and fiscal rules; Tax policy and administration; General Tax Policy.
  - MCM: Payment systems; Capital market regulation; Developing fixed income swap markets; Risk based supervision of securities markets.
  - STA: Government finance statistics.

### Resilience, stress testing, and authorities’ views
- Resilience and stress tests:
  - The Peruvian financial system described as very resilient to large shocks (output, exchange rate, U.S. interest rate liftoff); severe stress tests suggest system can manage very large shocks.
  - Historical test: 2008–09 global financial crisis—Peru had positive growth and a strong rebound.
- Authorities’ projections and actions:
  - Authorities project around 4 percent growth for 2015 and medium-term potential growth of 5 percent.
  - Authorities revised 2015 fiscal deficit target to 2 percent of GDP to incorporate stimulus of 1½ percent of GDP; plan gradual consolidation starting in 2016 and to establish a Fiscal Council in 2015.
  - Authorities reaffirm commitment to exchange rate flexibility and de-dollarization measures; have increased marginal reserve requirements on foreign currency deposits to 70 percent and issued repos in nuevo soles to support local currency credit.

*Source: Peru: Staff Report for the 2015 Article IV Consultation (May 5, 2015) — IMF staff report content as provided.*

### 2018. Directors emphasized that hikes in non-priority current spending should be avoided,

### _cr15133 - 2018. Directors emphasized that hikes in non-priority current spending should be avoided,

### Fiscal policy and fiscal framework
- Directors emphasized that hikes in non-priority current spending should be avoided, given the need to:
  - finance structural reforms,
  - carry through the civil service reform,
  - increase allocations for physical and human capital investment,
  - protect social programs.
- Over the medium term, directors agreed that targeting a small structural fiscal surplus would be advisable to preserve buffers.
- Continued strong political commitment remains essential to maintain the credibility of the new fiscal framework.
- Near-term policy guidance in the report:
  - The immediate priority is expediting the execution of public investment in line with government plans, while avoiding increases in non-priority current spending.
  - Revenue losses would need to be offset to finance structural reforms, investment, and inclusion along a gradual fiscal consolidation path.
- Key fiscal figures (from Selected Economic Indicators and fiscal discussion):
  - NFPS Revenue: 26.0, 27.2, 27.6, 27.8, 27.5, 25.9, 26.1 (for 2010–2016 respectively)
  - NFPS Primary Expenditure: 25.0, 23.9, 24.3, 25.8, 26.6, 26.8, 26.7 (2010–2016)
  - NFPS Primary Balance: 1.0, 3.2, 3.3, 2.0, 0.9, -0.9, -0.6 (2010–2016)
  - NFPS Overall Balance: -0.2, 2.0, 2.3, 0.9, -0.2, -2.0, -1.7 (2010–2016)
  - NFPS Gross debt (including Repayment Certificates): 25.4, 23.0, 21.2, 20.3, 20.7, 21.5, 22.3 (2010–2016)
  - NFPS Gross debt — External: 13.2, 11.4, 9.8, 8.8, 8.7, 8.8, 8.8 (2010–2016)
  - NFPS Gross debt — Domestic: 12.2, 11.6, 11.4, 11.5, 12.0, 12.7, 13.5 (2010–2016)

### Monetary policy and exchange rate policy
- Directors supported the accommodative monetary policy stance that has kept inflation expectations well anchored.
- Looking ahead, they concurred that monetary policy should:
  - remain responsive to inflation expectations and external developments,
  - use exchange rate flexibility as the main line of defense against additional external pressures.
- Limited foreign exchange rate intervention could be necessary to smooth excessive volatility in a still highly dollarized economy.
- Actions by the central bank noted in the report:
  - Between November 2013 and January 2015, the BCRP lowered its policy rate by a cumulative 100 basis points to 3¼ percent.
  - The BCRP lowered reserve requirements on local currency deposits by a cumulative 23 percentage points to 7 percent between August 2013 and May 2015.
  - The BCRP intervened in the spot and forward markets in 2014 and into Q1 2015; interventions were sterilized via repo operations.
- Key price and interest indicators:
  - Real GDP growth: 8.5, 6.5, 6.0, 5.8, 2.4, 3.8, 5.0 (2010–2016)
  - Consumer Prices (end of period): 2.1, 4.7, 2.6, 2.9, 3.2, 2.2, 2.0 (2010–2016)
  - Consumer Prices (period average): 1.5, 3.4, 3.7, 2.8, 3.2, 2.5, 2.0 (2010–2016)

### De-dollarization, prudential measures, and financial stability
- Directors welcomed the new de-dollarization measures and agreed that:
  - strengthening prudential requirements on dollar lending,
  - encouraging the private sector to hedge its foreign currency exposure,
  - deepening financial and capital markets,
  could further support the de-dollarization process.
- Directors supported enhancing data collection and analysis of corporate and household balance sheets to better assess risks from currency mismatches.
- Financial system observations and risks:
  - The financial system remains stable, though the recent deterioration in the quality of the loan portfolio of non-bank financial institutions warrants close monitoring and supervision.
  - Credit dollarization fell to 36 percent in March 2015, from 70 percent a decade earlier, but continues to be a vulnerability.
  - The balance sheets of small non-bank institutions, particularly cajas rurales, worsened as their portfolios concentrate on small firms.
  - A more effective use of existing programs to support small and medium-sized enterprises could help mitigate the impact of the growth slowdown.
- Key financial and external sector figures:
  - Gross reserves in millions of U.S. dollars: 44,150, 48,859, 64,049, 65,710, 62,353, 61,353, 61,553 (2010–2016)
  - Percent of short-term external debt (reserves): 342, 559, 494, 539, 514, 449, 507 (2010–2016)
  - Percent of foreign currency deposits at banks (reserves): 241, 228, 301, 275, 262, 259, 245 (2010–2016)
  - Total external debt: 27.2, 25.6, 27.2, 27.4, 30.2, 32.5, 31.6 (2010–2016)
  - External current account balance: -2.4, -1.9, -2.7, -4.2, -4.0, -4.5, -4.2 (2010–2016)

### Growth outlook, risks, and structural reforms
- Outlook and risks:
  - Growth is expected to recover in 2015 and over the medium term, contingent on production at new mines approaching capacity, priority infrastructure projects advancing, and shocks to terms of trade fading.
  - Downside risks dominate: a surge in global financial volatility, further dollar appreciation, lower commodity prices and external demand, weaker investment, uncertainties surrounding 2016 Presidential elections, and persistent social conflicts.
  - Upside risks include a faster unwinding of supply shocks or a more complete pass-through of lower food and fuel global prices.
- Structural reform priorities and recommendations:
  - Steadfast implementation of structural reforms to boost potential growth and foster social inclusion.
  - Streamlining legal requirements and red tape is a government reform priority and was welcomed by directors.
  - Pursue ambitious education reform and inclusion policies within the framework of fiscal discipline.
  - Persevere with labor market reform.
- Medium-term fiscal trade-offs:
  - Revenue losses from the end of the commodity boom would need to be offset to finance structural reforms, investment, and inclusion along a gradual fiscal consolidation path.

### Key socio-economic and macro indicators (selected)
- Life expectancy at birth (years): 73.9, 74.2, 74.5 (2010–2012)
- Infant mortality (per thousand live births): 15.2, 14.3, 13.6, 12.9 (2010–2013)
- Poverty rate (total): 30.8, 27.8, 25.8, 23.9, 22.7 (2010–2014)
- Unemployment rate: 7.9, 7.7, 6.8, 5.9, 5.9 (2010–2014)
- Real domestic demand: 14.9, 7.7, 7.4, 7.4, 2.0, 3.8, 4.2 (2010–2016)
- Exports: 32.3, 29.5, 2.2, -9.6, -7.8, -9.9, 7.9 (2010–2016)
- Imports: 37.1, 28.9, 10.7, 2.7, -3.4, -5.6, 5.7 (2010–2016)
- Terms of trade (deterioration -): 21.0, 7.3, -2.1, -5.7, -5.4, -4.5, -0.8 (2010–2016)
- Broad money: 21.7, 15.1, 12.1, 14.8, 8.4, 13.6, 13.5 (2010–2016)
- Net credit to the private sector: 16.7, 21.6, 13.3, 18.4, 13.5, 13.6, 13.5 (2010–2016)
- Nominal GDP (S/. billions): 419.7, 469.9, 508.3, 546.9, 576.1, 608.9, 647.3 (2010–2016)
- GDP per capita (in US$): 5,027, 5,685, 6,324, 6,540, 6,458, 5,962, 6,242 (2010–2016)

*PERU: Staff Report for the 2015 Article IV Consultation (May 5, 2015).*

### 9.      Growth in 2015 is expected to recover supported by domestic conditions. In staff’s

### _cr15133 - 9.      Growth in 2015 is expected to recover supported by domestic conditions. In staff’s

### Growth outlook for 2015
- Real GDP is projected to expand at about 3¾ percent in 2015 on the assumption that temporary supply shocks unwind.
- Recovery critically hinges on executing the public investment budget and the stimulus measures.
- The 2015 fiscal deficit is projected to rise to 2 percent of GDP.
- Inflation is expected to converge to the middle of the target band of 2 percent by end-2015 as domestic supply shocks dissipate.
- The 2015 external current account deficit is projected to remain elevated but would be broadly financed by long-term capital flows.

### Medium-term outlook and staff baseline
- Staff expects growth to rise in 2016–17 assuming mines approach production capacity, planned public-private partnerships and “Public Works in Lieu of Taxes” projects are implemented, and shocks to terms of trade fade; the output gap is projected to close by 2018.
- Staff estimates potential growth may have fallen to about 4½ percent.
- The current account deficit is projected to narrow gradually to 3 percent of GDP by 2020 as mining exports gain ground.
- Fiscal deficits are projected to continue reflecting recent tax measures and the need to invest in infrastructure and structural reforms; public debt will rise slightly from still very low levels.
- Monetary aggregates are projected to continue growing faster than nominal GDP.

Key projections and framework figures (as presented):
- Real GDP growth (in percent): Prel. 2014: 2.4; 2015: 3.8; 2016: 5.0; 2017: 5.5; 2018: 4.8; 2019: 4.5; 2020: 4.5
- Output gap (in percent of potential GDP): Prel. 2014: -1.0; 2015: -1.7; 2016: -1.2; 2017: -0.3; 2018: 0.0; 2019: 0.0; 2020: 0.0
- Contributions to growth (annual percentage change): Private consumption: 2014: 2.5; 2015: 2.5; 2016: 2.9; 2017: 3.3; 2018: 2.9; 2019: 2.7; 2020: 2.8
- Private investment, incl. invent.: 2014: -1.0; 2015: 0.1; 2016: 0.7; 2017: 1.1; 2018: 0.6; 2019: 0.8; 2020: 1.1
- Exports (annual percentage change): 2014: -0.1; 2015: 0.7; 2016: 1.7; 2017: 2.0; 2018: 1.8; 2019: 1.3; 2020: 1.0
- Inflation (eop) 1/: 2014: 3.2; 2015: 2.2; 2016: 2.0; 2017: 2.0; 2018: 2.0; 2019: 2.0; 2020: 2.0  (Inflation target 1-3 percent)
- Terms of trade (deterioration -) (in percent): 2014: -5.4; 2015: -4.5; 2016: -0.8; 2017: 0.4; 2018: 0.3; 2019: 0.2; 2020: 0.6
- National savings (in percent of GDP): 2014: 22.8; 2015: 22.1; 2016: 21.9; 2017: 22.3; 2018: 22.4; 2019: 22.3; 2020: 22.4
- Gross domestic investment (in percent of GDP): 2014: 26.8; 2015: 26.6; 2016: 26.1; 2017: 26.0; 2018: 25.5; 2019: 25.3; 2020: 25.3
- External current account (in percent of GDP): 2014: -4.0; 2015: -4.5; 2016: -4.2; 2017: -3.7; 2018: -3.2; 2019: -3.1; 2020: -2.9
- Fiscal balance (Nonfinancial Public Sector, including Repayment Certificates) (in percent of GDP): 2014: -0.2; 2015: -2.0; 2016: -1.7; 2017: -1.4; 2018: -1.0; 2019: -1.0; 2020: -1.0
- Structural balance 2/ (in percent of GDP): 2014: 0.2; 2015: -1.3; 2016: -1.1; 2017: -1.2; 2018: -0.9; 2019: -0.9; 2020: -1.0
- Structural primary balance 2/ 3/ (in percent of GDP): 2014: 1.2; 2015: -0.2; 2016: 0.0; 2017: 0.0; 2018: 0.3; 2019: 0.2; 2020: 0.0
- Public debt (in percent of GDP): 2014: 20.7; 2015: 21.5; 2016: 22.3; 2017: 22.2; 2018: 21.7; 2019: 21.3; 2020: 22.0

Notes and contextual figures:
- Cajas rurales constitute only 0.7 percent of assets of deposit taking institutions.
- Cajas rurales loss-absorbing capital at end-2014: 14¾ percent.
- Credit dollarization amounts to 36 percent; SBS estimates only 13 percent of total credit (5 percent of GDP) is exposed to FX credit risk.
- Average turnover ratio for secondary bond markets in Peru was ½ percent in 2014, compared to 56 percent in Chile.
- Domestic food prices increased by 6.4 percent yoy in March 2015; domestic fuel prices declined by 16.8 percent while international prices declined by 45 percent.
- Peru has a net oil deficit of ½ percent of GDP.

### Downside and other risks
- Downside external risks:
  - Further slowdown in China.
  - Even lower terms of trade.
  - A surge in global financial volatility (e.g., surprises about the liftoff in U.S. interest rates) leading to reversal of capital flows, financial pressures, and commodity price effects.
  - Persistent strengthening of the U.S. dollar (risk amplified by dollarization).
- Downside domestic risks:
  - Weaker investment.
  - Uncertainty linked to the 2016 Presidential elections.
  - Continuing social tensions in mining regions (conflicts nearly tripled from 76 in 2006 to 211 by March 2015).
  - Stronger than expected impact from El Niño weather phenomenon.
  - Slower pace of structural reforms could further encumber potential growth.
- Upside risks:
  - Faster pick-up in production in primary sectors.
- Overall assessment: Downside risks dominate but Peru is in a strong position to respond; outward spillover risks remain low.

### Authorities’ views
- Authorities project:
  - A somewhat faster recovery than staff: around 4 percent growth for 2015.
  - Medium-term potential growth of 5 percent based on a more favorable investment outlook, especially linked to infrastructure projects.
  - Expect supply disruptions in primary sectors to resolve in 2015, contributing 1½ percentage points to growth.
- Agreement with staff that structural reforms are critical to boost competitiveness and productivity.

### Policy discussions — Securing the recovery
- Staff assessment: policy mix broadly adequate to support recovery and maintain macro stability (tax cuts, higher public spending, accommodative monetary conditions).
- Immediate priority: timely implementation of the stimulus package with focus on public investment rather than additional fiscal measures.
- If negative shocks materialize: use exchange rate flexibility as main line of defense; provide liquidity to avoid credit contraction; ease monetary conditions if downside risks to inflation materialize.
- Authorities revised 2015 fiscal deficit target to 2 percent of GDP to incorporate stimulus of 1½ percent of GDP, financed mainly through domestic sources; revision exceeds the original indicative structural deficit target of 1 percent of GDP under the fiscal rule.
- Authorities outlined exceptional economic circumstances for deviating from the fiscal rule and a gradual consolidation plan starting in 2016; Fiscal Council to be established in 2015.
- Staff recommendation for medium term: target a small structural fiscal surplus of around ½ percent of GDP to preserve buffers.

### Policy discussions — Public investment, fiscal policy, and revenue
- Authorities committed to stepping up public investment execution and leveraging private sector expertise through joint infrastructure projects.
- Staff recommended embedding public-private partnerships in medium- and long-term budget planning and debt sustainability analysis; monitor “Public Works in Lieu of Taxes” closely with high transparency standards.
- Authorities agreed hikes in non-priority current spending should be avoided; new fiscal path takes infrastructure gap and structural reforms into account.
- On revenue: authorities noted corporate income tax cut aligns rates regionally and supports private investment, but cuts amplified a tax collection gap amid declining commodity fiscal revenues.
- Staff recommended compensatory measures to unwind revenue losses and enhance equity and efficiency by widening the tax base, streamlining exemptions, promoting formalization, boosting local property tax collection, and reviewing excise taxes.
- Staff welcomed revenue administration efforts to transition towards a client-based institution.

### Policy discussions — Monetary and FX policy
- Broad agreement that monetary policy should remain responsive to inflation expectations and external developments.
- Staff noted widening negative output gap and fuller pass-through of low commodity prices could create some space for monetary easing, though FX market pressures related to U.S. monetary normalization could constrain easing.
- Liquidity buffers and reserves provide capacity to manage potential surges in global financial volatility.
- Staff emphasized exchange rate flexibility as the main line of defense against downside external risks and to support de-dollarization by incentivizing deeper FX derivatives markets; advised considering regulations on foreign currency exposure of pension funds.
- Authorities reaffirmed commitment to exchange rate flexibility while containing excessive volatility in a dollarized economy; FX intervention aimed at containing risks without targeting any level or path for the exchange rate.

### Policy discussions — Financial stability and de-dollarization
- Financial system judged stable with no evidence of imminent systemic risks.
- Stress tests indicated resilience to tail risks of weak activity and large exchange rate depreciation.
- Legal framework for bank resolution aligned with best practices; supervisory and regulatory standards being strengthened in line with FSAP and Basel III.
- Staff welcomed new de-dollarization measures but advised flexible implementation to ensure smooth credit flow and avoid liquidity-maturity mismatches.
- Staff discussed prudential options such as strengthening requirements on dollar lending to un-hedged borrowers to address FX risk without undue pressure on dollar deposits.
- Need to improve data collection and analysis of private sector balance sheets to assess currency mismatch risks and inform targeted macro-prudential tools.
- Deepening financial and capital markets would support de-dollarization; IMF technical assistance suggested developing a deeper money market, easing restrictions on derivatives use by pension funds, and building supervisory capacity.
- Authorities agreed risk of capital outflows from higher reserve requirements on dollar deposits was limited; largest dollar depositors were pension funds subject to a binding prudential limit on investment abroad.
- Commercial banks supported coordinated BCRP role in reducing credit dollarization.

*Source: IMF staff report content as provided.*

### 25.      Past structural reforms set the stage for the investment and growth boom of the last

### Past structural reforms set the stage for the investment and growth boom of the last

### Past reforms and recent performance
- Deep seated reforms in the pre-commodity boom period allowed the country to take advantage of the favorable external environment and improve productivity.
- Reform implementation slowed more recently, resulting in some stagnation or weakening in international competitiveness rankings.
- Peru fell from 61st to 65th place in the Global Competitiveness Ranking, given still weak human capital, labor market rigidities, and relatively low institutional capacity.
- Doing Business indicators have ticked up slightly, though methodological changes make comparisons over time difficult.

### Need for structural reforms after the commodity cycle
- With the end of the super commodity cycle, structural reforms are needed to boost growth potential and advance social inclusion.
- High informality is an overriding challenge, which limits firm size, human capital development, innovation, and financial deepening—all of which constrain productivity.
- Labor market rigidities, as reflected in legally-mandated high non-salary compensation compared to the region, are barriers to formality that negatively impact competitiveness.
- Bureaucratic red tape (tramitologia) increases costs and hampers investment; it was identified as an important impediment evident through the growth slowdown of last year.

### Authorities’ structural reform agenda
- The authorities’ broad-based structural reform agenda tackles important challenges.
- Noted measures and priorities:
  - Ambitious education reform and inclusion policies showing noteworthy results and recommended to stay their course within the framework of fiscal discipline.
  - Ongoing efforts to reform the civil service, streamline permit procedures, strengthen public enterprise governance, simplify public investment processes, enhance innovation, and diversify exports.
  - OECD Country Program with Peru could provide a useful new platform for designing reforms and strengthening policies.
- Staff emphasized persevering with labor market reform, focusing on reducing non-wage costs and streamlining work rules.
- Strong across-the-board political commitment is essential for fostering reform efforts in the short and medium term.

### Staff appraisal — macroeconomic outlook and policy recommendations
- Peru remains one of the best performing economies in Latin America, with solid macroeconomic policies and visible gains in poverty reduction.
- Challenging external conditions and domestic supply shocks were an important drag on economic activity in 2014.
- In the face of a widening negative output gap, loosening the macroeconomic policy stance was appropriate.
- Growth is expected to recover in 2015 and over the medium-term, contingent on:
  - production at new mines approaching capacity;
  - priority infrastructure projects proceeding according to plan;
  - external shocks fading.
- Important risks:
  - Downside risks from further slowdown in China, lower terms of trade, or a surge in global financial volatility.
  - Domestic downside risks from weak investment confidence and uncertainty given upcoming elections.
  - Upside risks from a faster unwinding of last year’s supply shocks or a more complete pass-through of lower global prices.
- Policy guidance if negative shocks materialize:
  - Exchange rate flexibility should be the main line of defense.
  - Liquidity could be provided to avoid an undue contraction in credit.
  - Monetary conditions could be eased if downside risks to inflation projections become evident.
- Fiscal posture:
  - While fiscal buffers are ample, the immediate priority is to follow through with the approved investment envelope rather than consider additional fiscal measures.
  - The 2015 fiscal stimulus was timely but should be gradually withdrawn.
  - Careful expenditure management and revenue mobilization are essential to return to the original fiscal path by 2018, while attending to social and infrastructure needs.
  - Hikes in non-priority current spending should be avoided given the need to finance structural reforms, carry through the civil service reform, increase allocations for physical and human capital investment, and protect social programs.
  - Over the medium term, it would be advisable to target a small structural fiscal surplus of ½ percent of GDP to preserve buffers in light of commodity shocks, natural disaster risks, and contingent liabilities.
  - Continued strong political commitment to the new fiscal framework is essential to maintain its credibility.
- Monetary policy:
  - Monetary policy has been adequately accommodative.
  - Inflation excluding food and fuel has stayed within the band and expectations remain well anchored.
  - Monetary policy should continue to respond to changes in inflation expectations and external developments.
  - Exchange rate flexibility will be key to cushion any additional external pressures; limited foreign exchange intervention may be necessary to smooth excessive volatility.
- De-dollarization and financial sector:
  - The new de-dollarization measures will help address a key structural vulnerability of the financial system, but financial market developments need to be monitored closely and measures implemented flexibly to ensure a smooth flow of credit.
  - Strengthening prudential requirements on dollar lending to un-hedged borrowers and improving data and analysis of private sector balance sheets could prove helpful.
  - Exchange rate flexibility would support de-dollarization by encouraging the private sector to hedge foreign currency exposures.
  - Deepening financial and capital markets should be an important component of the de-dollarization agenda.
  - Despite weaker economic conditions, the financial system remains stable.
  - Recent deterioration in the quality of the loan portfolio of non-bank financial institutions warrants close monitoring and supervision; these institutions are small and non-systemic but serve a large number of relatively vulnerable clients.
  - More effective use of existing programs to support small and medium-size enterprises could help mitigate the impact of the growth slowdown and the softening of labor market conditions.
  - Balance sheet information for medium and small firms and households should be collected to better assess risks from currency mismatches.

### Structural reforms: priorities reiterated
- Structural reforms are critical to boost growth potential and advance social inclusion.
- Potential growth may have fallen from the heights of the last decade due to the slide in metal prices, moderation of growth in China, and decline in investment.
- Boosting potential growth requires steadfast implementation of structural reforms to enhance productivity, investment, human capital, and formal employment.
- Streamlining legal requirements and red tape is a reform priority of the government.
- The ambitious education reform and inclusion policies should stay their course within the framework of fiscal discipline.
- Persevering with labor market reform remains a challenge.

### Box 1 — Peru: Fiscal and Structural Measures to Stimulate Growth and Investment
- In mid-2014, authorities announced stimulus packages with a total net cost of about 2 percent of GDP.
- About a ¼ percent of GDP was spent in 2014, with the rest planned for 2015. Some structural measures are awaiting approval by congress.
- Revenue side:
  - Authorities estimate the tax cuts would result in a revenue loss of about 0.7 percent of GDP in 2015.
  - Personal income tax rate was cut for the lowest income segment from 15 to 8 percent.
  - Corporate tax rate will decline gradually from 30 to 26 percent over the next four years.
  - Dividend tax will increase for payments to non-residents.
  - Gradual elimination of VAT withholding schemes and gradual reduction of the drawback mechanism were adopted.
  - Changes introduced to the temporary tax on net assets and to the General Sales Tax, along with other amendments to the Tax Code.
- Regulatory and investment acceleration measures (examples):
  - Maximum time for registrations, amendments and registration renewals required for large-scale investment projects will be reduced by 25 percent.
  - Changes in approval of archeological certificates expected to reduce discretion and add predictability.
  - Tax benefit and accelerated depreciation benefit for hydroelectricity generation extended until 2025, targeting investment of US$3 billion.
  - Increase in the depreciation rate from 5 to 20 percent introduced to spur housing construction.
  - Percentage of mining revenues that may be used for infrastructure maintenance increased from 20 to 40 percent.
- Other measures include:
  - Expedited land expropriation for infrastructure projects.
  - Greater funding and subsidies to encourage productivity in the small business sector.
  - More direct contracting between public sector and suppliers and between the Peruvian and foreign states in all sectors.
  - Standardized requirements for public procurement and prevention of price collusion.
- Fiscal arithmetic (In percent of GDP):
  - A. Taxes (2015) 0.7
  - B. Net expenditure (2014) 0.3
    - Bonuses and salary increases 0.3
  - C. Expenditure (2015) 0.9
    - Current expenditure 0.1
    - Capital expenditure 0.4
    - Repayment of debt in arrears 0.3
    - Social assistance 0.1
  - Total (A+B+C) 1.9
- Estimated macro effect:
  - For 2015, staff estimates the contribution of the fiscal measures to GDP growth at about ½ percentage point.
- Notes on fiscal multipliers cited:
  - BCRP (Inflation Report, 2012): increasing capital spending multiplier of ½–1½ in the short and medium terms; current spending multiplier of ¼–1.
  - IMF Working Paper 14/93 calculates a short-term multiplier of about ½ for middle income emerging economies like Peru.

### Box 2 — Peru: Measures to Foster De-Dollarization
- Background:
  - Financial dollarization was about 80 percent of credits and deposits by the end of the 1990s following instability and hyperinflation in the 1970–80s.
  - De-dollarization began in the early 2000s and continued through policy initiatives.
- Policy initiatives supporting de-dollarization:
  - Inflation targeting framework.
  - Prudential measures, including differential reserve requirements on local currency versus foreign currency deposits and additional provisioning, liquidity, and capital requirements for FX loans.
  - Development of capital markets in local currency and de-dollarization of public debt.
  - In December 2014, reserve requirement ratios were equalized across all types of local currency deposits.
- Dollarization statistics at end-2014:
  - 38 percent of credit denominated in U.S. dollars.
  - 43 percent of deposits denominated in U.S. dollars.
  - About 40 percent of transactions (estimated by payments and withdrawals from the banking system) conducted in U.S. dollars.
  - About 60 percent of credits to the corporate sector denominated in U.S. dollars at end-2014.
  - 2013 BCRP Survey: about 58 percent of the value of transactions in inputs/supplies among firms denominated in U.S. dollars.
- December 2014 BCRP measures to de-dollarize credit:
  - New Repos in nuevo soles to support the growth of credit in local currency and encourage substitution of foreign currency loans with local currency loans:
    - Expansion: financial institutions can conduct Repos in local currency with the BCRP up to the equivalent of 10 percent of their required foreign currency reserves, using these reserves as collateral, to expand new credits in local currency.
    - Substitution: financial institutions can access liquidity in local currency from the BCRP to convert foreign currency loans into local currency loans.
  - Higher reserve requirements on foreign currency deposits:
    - Marginal reserve requirement on foreign currency deposits increased by 10 percentage points effective in January and by another 10 percentage points effective in March, 2015 to 70 percent.
    - Additional reserve requirements will be applied to financial institutions that do not meet de-dollarization targets:
      - Institutions that do not reduce the balance of their foreign-currency loans by 5 percent (by June 2015) or by 10 percent (by December 2015), compared to the balance in September 2013, will face additional reserve requirements on foreign currency deposits.
      - Additional reserve requirements will apply on dollar deposits if mortgage and vehicle credits in foreign currency do not fall by more than 10 percent by June and 15 percent by December 2015, compared to levels in February 2013.
- Structural market weaknesses and reforms:
  - Efforts to develop the local capital market increased the share of local currency debt to total public debt from 10 percent in 2004 to over 50 percent in 2013, and extended the average duration of local currency debt from 4 years to 8 years.
  - Important weaknesses remain: the secondary market for bonds remains thin and illiquid, with an average turnover ratio of about 0.4 percent in 2014, compared to about 56 percent in Chile.
  - FX trading in Peru is dominated by spot transactions; the share of transactions in FX derivatives is the lowest among regional peers and very low compared to the average for emerging economies.
  - Recent initiatives include new regulations on repo markets, improving the safety of securities clearing and settlement systems, and creating a reference rate (interbank overnight rate) based on effective transactions.
- Comparative statistic cited:
  - Share of FX Derivatives to Total FX Trade, April 2013: (Mexico, Brazil, Chile, Colombia, Peru, Emerging economies) — charted but numeric series not provided in text.

*Source: IMF staff assessment and chapter content as provided in the document.*

### Box 3. Peru: Reassessing Potential Growth After the Investment Boom

### Box 3. Peru: Reassessing Potential Growth After the Investment Boom

### Background and recent performance
- During 2003−13 growth averaged 6.2 percent—with investment contributing around half of the total.
- Peru’s estimated potential growth rate rose from around 4 percent in 2003 to about 6 percent in 2013.
- From a simple growth accounting exercise, approximately half of the expanded capacity stemmed from an increase in the contribution from total factor productivity (TFP), with the remaining evenly split between capital and labor additions.
- The surge reflected a series of structural reforms and the implementation of solid macroeconomic and investment frameworks, combined with a sizable and prolonged improvement in its terms of trade and historically low global interest rates.

### Rationale for reassessment
- Two secular factors that provided a strong tailwind—positive terms of trade changes and low U.S. interest rates—have started to reverse, and investment growth has softened.
- Staff undertook a reassessment by projecting factors of production and estimating a TFP regression model based on changes in terms of trade and an index of structural reforms to forecast future TFP movements.

### Methodology and key assumptions for 2015–20
- Capital: capital accumulates at the rate of investment growth in staff’s baseline macroeconomic outlook.
- Labor: employment grows at the current (2014) 2 percent rate.
- Human capital: human capital growth remains at its historical rate of 0.3 percent.
- TFP: predicted TFP values are based on the regression coefficients of the TFP model, WEO terms of trade projections, and staff assumptions on how structural reforms may evolve.

### Scenarios and projected potential growth
- Baseline scenario: staff’s baseline scenario estimates potential growth at 4½ percent, assuming structural reforms proceed at a slightly faster pace in line with the authorities’ reform plans (with their contribution to TFP partially offset by lower metal prices).
- Slower-reform scenario: if structural reforms were to improve at the same rate as during the commodity boom—a period with few incentives to make structural improvements—potential growth would only be 3.2 percent.

### Key findings
- The reversal of favorable external conditions and the softening of investment imply a reduction in potential growth relative to the 2013 peak.
- TFP remains a central determinant: historically it accounted for about half of the expanded capacity during the boom, and future TFP evolution (influenced by terms of trade and structural reforms) drives the projected differences across scenarios.
- Under the baseline assumptions on capital accumulation, employment, human capital, and TFP, potential growth moderates to 4½ percent for 2015–20.

*Prepared by K. Ross and M. Tashu; based on Fund staff estimates and projections.*

### Appendix I. Peru: Social and Financial Inclusion

### Appendix I. Peru: Social and Financial Inclusion

### Overview and recent progress
- Over the last decade, Peru has made significant strides in reducing poverty and inequality.
- Poverty rate declined from 59 percent in 2004 to 23 percent in 2014.
- About ⅓ of the population has moved into an expanding middle class since mid-2000.
- Extreme poverty fell to about 4 percent by 2014 from 20 percent in 2004.
- Income distribution improved, with the Gini coefficient declining to 44 by 2014.

### Remaining challenges
- Social conflicts have nearly tripled from 76 in late 2006 to 211 by March 2015; approximately half of these have entailed violence at some stage.
- Over 65 percent of conflicts are related to socio-environmental disputes in mining or other extractive industry activities.
- Many mineral and hydrocarbon deposits are located on or near lands owned by peasant and indigenous communities, creating risks of displacement and increased pressure on land and water resources crucial for local livelihoods.
- High rural poverty, malnutrition, and youth unemployment persist:
  - Poverty rate in rural areas is over 46 percent versus 15 percent in urban settings.
  - Some 15 percent of children suffer from chronic malnutrition.
- Approximately half of past poverty reduction is attributed to growth, the remaining portion to redistributive policies; therefore, stronger efforts will be needed to continue advancing social inclusion in a lower growth environment.

### Social programs and education policy
- Government initiatives to promote social inclusion and poverty reduction include:
  - Increased allocations for social programs. Peru’s social safety net consists of 5 programs focused on:
    - (i) the provision of school meals (Qali Warma)
    - (ii) human capital development of female headed households (Juntos)
    - (iii) elderly support (Pension 65)
    - (iv) rural assistance (Haku Winay, Foncodes, FONIE)
    - (v) early infant development (Cuna Mas)
  - These programs are woven within a national social inclusion and development strategy (Incluir para Crecer), which covers all stages of life.
  - Social spending in 2015 will be raised by 26 percent to fund an expansion in the coverage of Juntos and Pension 65 programs.
- 2015 Social Programs (figures as presented):
  - Qali Warma: 0.243 million children
  - Juntos: 0.18800,000 families
  - Pension 65: 0.13520,000 elderly
  - Rural assistance: 0.1020,000 households
  - Cuna Mas: 0.0670,000 infants
  - Total: 0.71 Over 5 million people
- Education reforms:
  - Focus on improving infrastructure, instruction, learning processes, and school administration at primary and secondary levels.
  - Plans include raising basic compensation based upon annual teacher evaluations and additional training; increasing performance-based teaching grants and bonuses; major investments in new school construction and renovation of older facilities.
  - Lengthening the school day in pilot schools and gradual nationwide introduction of English language classes.
  - The goal is to raise education spending—from the current level of below 3 percent to around 4 and 6 percent by end-2016 and 2020, respectively—through annual ½ percentage point of GDP increments.

### Financial inclusion: status, obstacles, and initiatives
- Access and usage:
  - Only ¼ of adults in Peru have a bank deposit account.
  - Credit and deposit-to-GDP ratios have increased gradually but, at under 35 percent, still remain low by regional standards.
- Obstacles to financial inclusion (survey percentages as presented):
  - Limited financial literacy 73
  - Unsustainable growth 60
  - Product costs 59
  - Limited understanding of customers needs 55
  - Poor business practices 54
- Opportunities for improving financial inclusion (survey percentages as presented):
  - Financial education 78
  - Expanding the range of products 55
  - Mobile phone banking 53
  - Correspondent banking 52
  - Provision of no-frills accounts 48
- Key barriers cited: geographic isolation, high costs, and lack of trust in the banking system.
- Policy and regulatory actions:
  - The Superintendence of Banks, Insurance, and Pension Funds (SBS) has implemented measures to expand access and usage of financial services through improved regulation and supervision, transparency, consumer protection, and financial education.
  - In 2013, a training program for teachers on financial issues was implemented.
  - In late 2014, SBS unveiled a “financial inclusion opportunities map,” an interactive tool providing detailed geographical information on more than 150 indicators regarding access and use of financial services.
  - SBS promoted the creation of more low cost savings products within the financial system.
- Technological and market initiatives:
  - The banking system is promoting a “Peruvian model” based on electronic e-money legislation passed in 2012 and a new unified mobile payments platform linking financial institutions, telephone service providers, and customers.
  - The goal is to leverage the high penetration of mobile telephone in Peru (over 75 percent) and create a system of mobile payments based on electronic money that can become an access point for other financial services.
  - The platform is expected to become operational by mid-2015 with simple utility payments and transfers allowed in the first stage.

*Prepared by K. Ross.*

### 3.      In the original 2015 medium-term framework, the authorities chose an indicative

### _cr15133 - 3. In the original 2015 medium-term framework, the authorities chose an indicative

### Fiscal framework, targets, and outlook
- Authorities originally chose an indicative structural deficit target for the nonfinancial public sector of 1 percent of GDP for the next three years; targets were revised in April 2015 due to exceptional economic circumstances and the expected effect of new tax measures. The expenditure ceilings for the general government remained binding.
- Gradual fiscal consolidation would commence in 2016, returning to the 1 percent structural fiscal deficit by 2018.
- Staff projection implications:
  - Maintaining the targeted structural deficit would reduce savings as a share of GDP by about 2 percentage points by 2020.
  - Over 2014−20:
    - Real growth rate of government spending will average about 5 percent.
    - Structural revenue will decline by more than 1 percentage point.
  - General government debt-to-GDP ratio will increase slightly and then hover at slightly above 20 percent of GDP.
- Projection assumptions and alternatives:
  - Projections assume any fiscal surplus is saved and any deficit is financed by new debt, with no saving withdrawals, except in 2015.
  - Alternatively, part of fiscal savings could be used to finance fiscal deficits, leaving the stock of debt unchanged.

Key statistics (as presented)
- Total Structural Revenue of the GG, percent of GDP: 20.3, 21.9, 20.9, 21.1, 20.7, 20.7, 20.9, 20.8 (rows correspond to periods shown in source).
- Natural Resource Related Revenue, percent of GDP: 3.5, 2.6, 1.9, 2.0, 2.2, 2.2, 2.2, 2.1.
- Real GDP Growth, in percent: 6.1, 2.4, 3.8, 5.0, 5.5, 4.8, 4.5, 4.5.
- Output Gap, in percent: -1.0, -1.7, -1.2, -0.3, 0.0, 0.0, 0.0.
- Commodity price gap, in percent: 34.5, 26.8, 20.3, 14.8, 10.2, 6.4, 3.2 (labelled 1/ in source).
- Structural Balance, NFPS (percent of GDP): 0.3, -0.7, -2.5, -2.0, -1.5, -1.0, -1.0, -1.0.
- Overall Balance, NFPS (percent of GDP): 1.5, -0.2, -2.0, -1.7, -1.4, -1.0, -1.0, -1.0.
- Gross debt (percent of GDP): 23.3, 19.8, 20.7, 21.5, 21.4, 20.9, 20.6, 21.2.
- Average real interest rate (in percent): -2.1, -2.4, -2.6, -2.5, -2.8, -3.1, -3.2, -3.3.
- Change in savings (percent of GDP), from end 2013: --, -0.3, -1.2, -1.1, -1.4, -1.6, -1.9, -2.1.
- Share of natural resources saved (+)/used (−): 32.3, -6.4, -10, 7.7, -8.5, -1.0, -6.5, -8. The source table displays labelled calculations and footnotes (preserve original tabular context).

Policy recommendation (authorities' and staff view)
- More conservative targets advisable to preserve fiscal buffers:
  - A structural fiscal balance of around ½ percent of GDP, achieved through careful expenditure prioritization and revenue mobilization, would preserve the current level of savings as a share of GDP and conserve buffers against macro shocks and contingent liabilities.
  - To avoid sudden adjustments in the real growth rate of government spending and to protect fiscal space for structural reforms (education, poverty programs, civil service), a gradual move to a more conservative target is recommended.
- Revenue-mobilization measures suggested:
  - Widen the tax base.
  - Streamline exemptions.
  - Promote formalization.
  - Boost collection of local property taxes.
  - Review excise taxes to address negative externalities.

### Macroeconomic assumptions and fiscal revenue implications
- Macroeconomic assumptions and fiscal revenue implications are presented using the authorities' methodology (source footnotes preserved).
- Footnote highlights:
  - During 2008−2013, Peru saved on average the equivalent of a third of its natural revenue, contributing to a fast decline in net debt and accumulation of overall public savings of about 15½ percent of GDP by 2014.
  - Projections assume saving of surpluses and financing of deficits by new debt, with exception of 2015, reflecting authorities' preference to accumulate fiscal buffers and parsimonious use of the Fiscal Stabilization Fund.

### Macro-financial stability assessment — summary findings
- Overall staff assessment: Peru’s macro-financial system is stable, with no signs of imminent systemic risk. Financial sector vulnerability risk is medium due to structurally high dollarization, but prudential buffers remain ample.
- Noted developments and risks:
  - Some signs of increased macroeconomic, inward spillovers, credit, and market and liquidity risks relative to 2012, but levels consistent with corresponding global risks reported in April 2015 GFSR.
  - Increase in market and liquidity risks reflects widening foreign exchange funding spreads and falling stock market turnovers.
  - Risk appetite declined since Q3 2013 (post-U.S. Fed tapering announcement) but remained higher than pre-QE3 levels.

### Financial sector risk assessment and indicators
- Financial sector vulnerability risk: medium.
- Dollarization and FX credit exposure:
  - Credit dollarization is high at about 38 percent.
  - SBS estimates only 13 percent of total credit (about 5 percent of GDP) is exposed to FX credit risk.
- Prudential and supervisory measures:
  - SBS regulatory requirements against FX credit risk include:
    - (i) a minimum package of management measures to identify, assess, and mitigate FX credit risk;
    - (ii) additional provisions if management measures prove insufficient; and
    - (iii) additional capital requirement for operations subject to FX credit risk.
  - To build buffers against potential over-indebtedness of households and micro- and small enterprises, SBS requires lower loan-to-value ratios and higher risk weighting of assets held by these clients.
- Financial system composition (end-2014, percent of total assets):
  - Banks: 89.0%
  - Financial companies: 4.6%
  - Municipality microfinance: 5.3%
  - Rural microfinance: 0.7%
  - Other: 0.5%
- Financial soundness indicators (selected, as presented):
  - FX liabilities % (of total liabilities): 55.9, 53.0, 44.8, 43.9, 38.2, 43.6, 43.6, 43.4 (time series shown in source).
  - FX loans % (of total loans): 54.1, 47.5, 47.3, 45.8, 44.4, 41.1, 38.4.
  - NPL ratio (percent): 1.5, 1.9, 1.9, 1.8, 2.2, 2.6, 2.9.
  - Deposit-to-loan ratio: 105.1, 105.5, 102.8, 95.3, 95.3, 95.2, 98.1, 90.5 (time series shown in source).
  - ROA: 2.6, 2.3, 2.3, 2.3, 2.2, 2.0, 1.9.
  - ROE: 30.0, 23.6, 22.9, 23.5, 21.5, 20.0, 18.2.

### Financial sector exposures and resilience
- Funding and commodity exposure:
  - Over 90 percent of banks’ funding source is deposits, limiting exposure to tightening of external financing, although deposit-to-loan ratio has come down recently.
  - Banks’ direct exposure to the commodity sector is relatively low: about 10 percent of banks’ credit goes to agriculture and mining sectors.
- Concentration:
  - Credit portfolio is relatively concentrated with firms, exposing the financial system to corporate weaknesses and indirect macroeconomic impacts of commodity price shocks.
- Supervisory assessment:
  - Regulation, supervision, and safety net assessed as high quality and well developed by the 2010 FSAP update.
  - Peru’s legal framework for bank resolution is in line with best practices.
  - Further legislation needed to establish a special resolution regime for systemic situations in line with FSAP recommendations.

### Corporate and household balance sheets
- Corporate international issuance and FX exposure:
  - During 2012−14, Peruvian companies issued about 7½ percent of GDP debt in the international market.
  - Corporate issuance by sector (2012-14):
    - Total: 14.8 (In billions of US$), 7.3 (In percent of 2014).
    - Non-financial: 9.3, 4.6
    - Tradable sectors: 4.4, 2.2
      - Agriculture: 0.5, 0.3
      - Fishing: 0.3, 0.1
      - Manufacturing: 1.4, 0.7
      - Mining: 1.8, 0.9
    - International trade: 0.5, 0.3
    - Non-tradable sectors: 4.8, 2.4
      - Construction: 1.1, 0.6
      - Energy (production and distribution): 2.5, 1.3
      - Retail: 0.7, 0.3
      - Transport: 0.5, 0.3
    - Financial: 5.5, 2.7
  - FX mismatches created large FX asset-to-liability gaps in some sectors; a 10 percent depreciation of the nuevo sol in 2015 could lead to estimated losses (percent of 2014 sales) ranging from 1.3 percent for manufacturing sector firms to 4.3 percent for construction sector firms (Figure 1).
  - At the aggregate level, the corporate sector would gain in net terms from such a shock as gains by the mining and financial sectors would more than offset losses by other sectors.
- Corporate liquidity and debt-at-risk:
  - Corporate sector remains current on obligations; ratio of current assets to current liabilities about 2.
  - Peru has one of the lowest corporate debt-at-risk ratios among emerging economies.
- Small and medium firms, and household vulnerabilities:
  - NPL ratios:
    - Small and micro firms (held about 14 percent of total assets as of end-2014): NPL increased about 2½ percentage points since end-2012 to 7¾ percent at end-2014.
    - Medium firms (held about 18 percent of total assets as of end-2014): NPL increased about 2 percentage points to 4¾ percent at end-2014.
    - Consumer and mortgage NPL ratios remained relatively low and stable.
  - Dollarization of household credit:
    - Dollarization of consumer credit is low: 9⅓ percent at end-2014.
    - Dollarization of mortgage loans high: 34 percent at end-2014 — main vulnerability to household balance sheets.
  - Growth of private consumption remained robust at about 4 percent in 2014, when overall economic growth was 2.4 percent.

*Italic: Source: IMF staff report content provided in the supplied PDF text.*

### 7.      There are no signs of asset price bubbles. After a significant appreciation during the

### _cr15133 - 7.      There are no signs of asset price bubbles. After a significant appreciation during the

### Asset price assessment
- Conclusion: There are no signs of asset price bubbles.
- Lima Stock Exchange:
  - After a significant appreciation during the commodity price boom, the Lima Stock Exchange price index has moderated recently and is in line with the trend average.
  - Chart reference: "Lima stock price index (1991=100), real" with actual and HP filtered series shown (2005Q1–2014Q4).
- Corporate valuations:
  - The average price-to-earning (PE) ratio of Peruvian firms was 15 percent and was the lowest among regional peers in 2013, indicating no signs of over pricing.
- Housing market:
  - Housing prices continued to increase, but there is no evidence of misalignment from the trend average.
  - The housing price-to-rent ratio was 15 percent―one of the lowest in the region.
  - Chart reference: "Median apartment prices in residential areas of Lima (In nuevo soles, constant price, per square meter)" (2005Q1–2014Q4).

### Comparative metrics (regional context, 2013)
- Corporate price-to-earning ratios, 2013:
  - Peru: 15 percent
  - (Implied peers shown in chart: Mexico, Colombia, Brazil, Chile — Peru reported as lowest)
- Housing price-to-earning (price-to-rent) ratios, 2013:
  - Peru: 15 percent
  - (Implied peers shown in chart: Mexico, Colombia, Brazil, Chile)

### Data sources and representation
- Sources cited: Corporate vulnerability utility (IMF), Global property guide, Reserve Central Bank of Peru, and Fund staff calculations.
- Visuals presented: time series charts for Lima stock price index (real, HP filtered), median apartment prices in Lima (constant nuevo soles per sq. meter, actual and HP filtered), and bar charts for corporate PE ratios and housing price-to-rent ratios (2013) across regional peers.

*Prepared by The Western Hemisphere Department (In consultation with other departments).*

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

### 2008. The mission completed the work on the SRF for the central bank and developed a bridge table linking the source data reported by banks to the BCRP to the report form 2SR (other depository corporations). The mission identified shortcomings in the management of the database that generate the accounts of the other depository corporations sector at the BCRP. Although the two technical assistant missions finalized the groundwork for the migration to the SRFs, the BCRP has not yet started reporting monetary data using the SRFs. No set date is foreseen for the migration to the SRFs.

### Monetary statistics and SRF migration
- Mission outcomes:
  - Completed work on the SRF for the central bank.
  - Developed a bridge table linking source data reported by banks to the BCRP to the report form 2SR (other depository corporations).
  - Identified shortcomings in the management of the database that generate the accounts of the other depository corporations sector at the BCRP.
- Migration status:
  - Two technical assistant missions finalized groundwork for migration to the SRFs.
  - The BCRP has not yet started reporting monetary data using the SRFs.
  - No set date is foreseen for the migration to the SRFs.

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

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

### Key data dissemination frequencies and data quality assessments (as of March 31, 2015)
- Selected reporting frequencies and latest observations:
  - Exchange Rates: Latest Observation 03/30/15; Date Received 03/31/15; Frequency of data D; Frequency of reporting M; Frequency of publication D.
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Latest Observation 12/31/14; Date Received 03/09/15; Frequency of data D; Frequency of reporting M; Frequency of publication W.
  - Reserve/Base Money: Latest Observation 12/31/14; Date Received 03/09/15; Frequency of data W; Frequency of reporting M; Frequency of publication W. Data quality: O, LO, LO, LO; Accuracy/Reliability: O, O, O, O, O.
  - Broad Money: Latest Observation 12/31/14; Date Received 03/09/15; Frequency of data W; Frequency of reporting M; Frequency of publication W.
  - Central Bank Balance Sheet: Latest Observation 12/31/14; Date Received 03/09/15; Frequency of data W; Frequency of reporting M; Frequency of publication W.
  - Consolidated Balance Sheet of the Banking System: Latest Observation 12/31/14; Date Received 03/09/15; Frequency of data W; Frequency of reporting M; Frequency of publication W.
  - Interest Rates: Latest Observation 12/31/14; Date Received 03/09/15; Frequency of data D; Frequency of reporting M; Frequency of publication D.
  - Consumer Price Index: Latest Observation 03/30/15; Date Received 04/01/15; Frequency of data M; Frequency of reporting M; Frequency of publication M. Data quality methodological soundness: O, LO, LO, LO. Accuracy/reliability: LO, LO, O, O, O.
  - Revenue, Expenditure, Balance and Composition of Financing – CG and GG: Latest Observation Q4 2014; Date Received 03/12/15; Frequency of data Q; Frequency of reporting Q; Frequency of publication Q. Data quality methodological soundness: O, LO, O, O. Accuracy/reliability: O, O, O, LO, O.
  - Stocks of CG Debt: Latest Observation Q4 2014; Date Received 03/12/15; Frequency Q; Frequency of reporting Q; Frequency of publication Q.
  - International Investment Position: Latest Observation Q4 2014; Date Received 02/20/15; Frequency Q; Frequency of reporting Q; Frequency of publication Q.
  - External Current Account Balance: Latest Observation Q4 2014; Date Received 02/20/15; Frequency Q; Frequency of reporting Q; Frequency of publication Q. Data quality methodological soundness: O, LO, LO, LO. Accuracy/reliability: LO, LO, O, O, O.
  - Exports and Imports of Goods and Services: Latest Observation Q4 2014; Date Received 02/20/15; Frequency M; Frequency of reporting M; Frequency of publication M.
  - GDP/GNP: Latest Observation Q4 2014; Date Received 3/05/15; Frequency Q; Frequency of reporting Q; Frequency of publication Q. Methodological soundness: LO, LO, LO, LO. Accuracy/reliability: LNO, LNO, LNO, LO, LO.
  - Gross External Debt: Latest Observation Q4 2014; Date Received 02/20/15; Frequency Q; Frequency of reporting Q; Frequency of publication Q.
- Footnotes and clarifications:
  - Every Friday the Central Bank disseminates daily net international reserves, and weekly International Reserve Assets and Reserve Liabilities.
  - Interest rates include both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
  - Central government (CG) and General government (GG) revenue and expenditure data are available monthly; composition of financing available quarterly.
  - General government consists of central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
  - International Investment Position includes external gross financial asset and liability positions vis-à-vis nonresidents.
  - Frequency codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA).
  - Data quality methodological soundness indicators reflect the 2003 ROSC assessment: fully observed (O), largely observed (LO), largely not observed (LNO), not observed (NO), not available (NA).
  - Data quality accuracy and reliability indicators refer to source data, statistical techniques, assessment/validation, and revision studies.

### Technical assistance in 2013−14 (departmental objectives)
- FAD:
  - Treasury management
  - Macro-fiscal framework and fiscal rules
  - Tax policy and administration
  - General Tax Policy
- MCM:
  - Payment systems
  - Capital market regulation
  - Developing fixed income swap markets
  - Risk based supervision of securities markets
- STA:
  - Government finance statistics

### IMF Staff Representative statement (May 20, 2015) — key findings and near-term outlook
- Additional information since the staff report; does not alter staff appraisal.
- Headline indicators broadly consistent with staff baseline:
  - Advance estimates: mining up 8.7 percent (y/y) in March; fishing up 17.7 percent (y/y) in March.
  - Electricity production up 5.8 percent (y/y) in April — highest rate in over a year.
  - Regional public investment grew 31.5 percent (y/y) in April — highest rate since February 2014.
  - Headline inflation fell slightly to 2.98 percent (y/y) in April, within central bank target range. Inflation excluding food and fuel was 2.6 percent (y/y).
- Authorities’ policy steps broadly in line with staff recommendations:
  - Reduced import tariffs for a group of key agricultural products to better align international and domestic prices (potential to ease inflationary pressures and support activity if reductions are passed to consumers).
  - Approved law to facilitate budget reallocations and transfers to accelerate execution of the 2015 budget.
  - Decree enabling issuance of sovereign bonds (for about 0.2 percent of GDP) to finance 174 investment projects.
  - Draft law to extend some measures until end-2015, including:
    - Suspension of pension and social security tax payments on holiday bonuses.
    - Flexible use of excess funds in unemployment insurance accounts.
    - Monthly updates of oil price stabilization bands.
- Central bank measures to increase liquidity, promote de-dollarization, and smooth FX volatility:
  - Implement a new repo operation with banks’ loan portfolios and auction public sector deposits at the central bank to provide liquidity in local currency at fixed rates and longer maturities.
  - Instituted an additional reserve requirement on dollar deposits for institutions that do not meet certain de-dollarization targets compared to December 2014.
  - Instituted an additional reserve requirement on FX derivatives to moderate excess FX volatility.

### Statement by Oscar Hendrick, Alternative Executive Director for Peru (May 20, 2014) — key points
- Economic performance and social outcomes:
  - Economic growth averaged 6.2 percent in the 2003-13 period.
  - Growth expected to recover to around 4 percent in 2015 and to reach growth rates above full potential of about 5.0 percent over the medium term.
  - Inflation expectations expected to fluctuate around the mid-point of the inflation targeting range of 1-3 percent in 2015 and beyond.
  - Net international reserves equivalent to 30 percent of GDP.
  - Fiscal savings equivalent to 15 percent of GDP accumulated during peak of cycle.
  - Unemployment rate at historical low level of 5.9 percent by end-2014.
  - Net public debt at 5 percent of GDP.
  - Poverty rate reduced from near 59 percent in 2004 to 23 percent in 2014; Gini coefficient declined to 44 percent by 2014.
- Challenges and policy framework:
  - Main near-term challenge: sustain economic recovery; medium-term: boost potential growth amid uncertainty in trading partners and commodity prices.
  - Policy framework to boost potential growth based on three axes:
    - Building up human capital and reducing informality.
    - Boosting investment to reduce the infrastructure gap.
    - Reducing red tape and lowering cost overruns.
  - Authorities noted progress toward "second generation" reforms to improve long-term growth.

### Recent economic developments and outlook (staff and authorities’ analysis)
- Growth and recent performance:
  - Real GDP grew 2.4 percent in 2014, down from 5.8 percent in 2013.
  - About half of the decline in 2014 explained by temporary supply shocks in fishing, mining, agriculture and a larger-than-expected drop in sub-national public investment, partly offset by central government national public investment growth of 17 percent.
  - Lower growth in China and reduced metal prices contributed to deceleration.
  - Countercyclical fiscal and monetary measures in 2014 and early 2015 aimed at supporting domestic demand.
  - High-frequency indicators in March–April 2015 show turning point:
    - March GDP grew 2.7 percent — highest record in the last 11 months.
    - April electricity production grew 5.8 percent (y/y) — highest in 13 months.
    - Credit in domestic currency grew 19.9 percent (y/y) as of 15th April — highest in 9 months.
    - Regional public investment grew 31.5 percent in April 2015 — highest since February 2014.
- Inflation:
  - Headline inflation was slightly above 3 percent upper limit at times in 2014; expected to remain within 1-3 percent target band in 2015 and beyond.
  - Central Bank survey shows inflation expectations well anchored within 1-3 percent.
  - Headline inflation fell in April 2015 to 3.02 percent (y/y).
- External position and exchange rate:
  - Net international reserves grew to US$ 61.5 billion by May 5, 2015, equivalent to 30 percent of GDP.
  - Reserve adequacy assessed as adequate by IMF composite metric and above regional peers.
  - Authorities will continue FX interventions and macro-prudential measures to contain excessive exchange rate volatility.
- Fiscal position and policy considerations:
  - Overall public sector deficit of 0.3 percent in 2014 despite weaker tax revenues and expansionary central government policy.
  - NFPS balance averaged a surplus of 1.7 percent of GDP during 2011-13.
  - Net public debt at 5 percent of GDP.
  - Authorities recognize challenge of withdrawing transitory fiscal stimulus while preserving fiscal buffers and increasing revenues as percent of GDP to peer levels.
  - Taxation chapter in Selected Issues discusses widening tax base, streamlining exemptions, promoting formalization, boosting local property tax collection, reviewing excise taxes, and increasing public expenditure efficiency.
  - Recent policy actions:
    - Bill submitted to Congress in April 2015 with policies to provide additional disposable income.
    - Congress approved a law to accelerate execution of the 2015 budget via budgetary reallocations and transfers.
    - Supreme Decree approved to issue bonds to finance important public investment projects.
    - Authorities indicated that the Fiscal Council will be established in 2015 as a sign of commitment to the new fiscal framework.

*Source: _cr15133 - 2008. The mission completed the work on the SRF for the central bank and developed a bridge table linking the source data reported by banks to the BCRP to the report form 2SR (other depository corporations).*

### 9.      We share the staff’s assessment that Peru is in a strong position to respond to

### _cr15133 - 9.      We share the staff’s assessment that Peru is in a strong position to respond to

### Resilience to shocks and near-term risks
- Staff and authorities assess Peru is in a strong position to respond to shocks should downside risks dominate.
- The Peruvian financial system is described as very resilient to:
  - changes in output growth;
  - exchange rate movements;
  - volatility induced by the liftoff in the U.S. interest rates;
  - other factors.
- Severe stress test scenarios suggest the system as a whole can manage very large shocks.
- Historical "acid test": 2008-09 global financial crises — the Peruvian economy had positive growth and a strong rebound in the following year.
- Domestic political risk: 2016 Presidential elections are not seen as a relevant domestic risk.
- Noted downside risks:
  - Stronger than expected El Niño weather phenomenon.
  - Continuing social tensions in mining regions.
- Authorities’ confidence: ongoing infrastructure projects and projects in the pipeline to be financed under private public partnership schemes would create the basis for additional private investment and increasing growth potential.

### Fiscal policy framework and consolidation
- Authorities value staff policy advice and technical assistance, including on the design of the new Fiscal Rule.
- Key changes in the new Fiscal Rule (as explained in Appendix III of the staff report):
  - New methodology based on ex ante structural fiscal balance.
  - Provides three years expenditure ceilings for budget formulation.
- Authorities are assessing staff suggestions to use conservative targets to preserve fiscal buffers.
- Temporary deviation from the fiscal rule has been done under escape clauses considered in the new Fiscal Rule.
- A gradual consolidation will take place beginning in 2016.

### Dollarization, monetary measures, and market development
- Continued gradual progress to reduce dollarization, including new measures introduced by the Central Bank in December 2014.
- Inflation and dollarization statistics:
  - Inflation: less than 3 percent annual average (for more than a decade).
  - By end 2014: 38 percent of credit and 43 percent of deposits were denominated in U.S. dollars.
  - Historical comparison: down from about 80 percent of credits and deposits by the end of the 1990s.
  - Past hyperinflation: 7,650 percent in 1990.
- Central Bank measures to accelerate de-dollarization and reduce currency-mismatch risk:
  - Issued new repos in domestic currency to support expansion of credit in nuevo soles and to substitute foreign currency loans with local currency loans.
  - Increased the marginal reserve requirement on foreign currency deposits by 10 percentage points twice to 70 percent, effective in January and March 2015.
- Authorities note deepening financial and capital markets could be an effective way to achieve lasting de-dollarization.
- Several missions from the Capital and Monetary Market Department have provided technical assistance; process is gradual and will take time.

### Financial system stability and oversight
- Authorities agree with staff that Peru’s macro-financial system is stable with no signs of imminent systemic risks.
- High dollarization of financial assets and liabilities remains a key structural risk, but risks are contained due to large buffers in the financial system.
- Regulatory and supervisory banking authority actions:
  - Built safeguard mechanisms by putting in place regulatory requirements above international standards.
- Banks’ exposure to commodity sector:
  - Only about 10 percent of banks’ credit goes to the agriculture and mining sectors.
- 2010 FSAP second update findings:
  - Regulation, supervision, and safety net of the banking system are of high quality and well developed.
  - Peru’s legal framework for bank resolution is in line with best practices.

### Growth, inclusion, and structural reform priorities
- Central development question: how to keep sustained economic growth and further reduce poverty to transition from an emerging market to a more advanced economy.
- Strategy points:
  - Continue creating right conditions for private investment to lead economic expansion.
  - Strengthen regulatory agencies to protect public interest and the general public.
- Areas of progress: civil service, infrastructure, education, health, protection to private property, capital market.
- Ongoing and planned structural reforms include:
  i) Strengthening human capital and reducing informality through higher public resources allocated to Education and Health sectors, civil service reform, Competitiveness Agenda 2014-2018, Productive Diversification Plan, etc.
  ii) Boosting investment to reduce the infrastructure gap through higher use of PPP schemes.
  iii) Reducing “red tape” and lowering cost overruns.
- Authorities are working toward incorporation to the OECD as motivation and political-economy framework to advance the strategy for sustained and inclusive growth, low inflation, and modernization.
- Time horizon reminder: it has taken 25 years of continued implementation of sound economic policies to reach the current point.

*Source: IMF staff and Peruvian authorities assessment as presented in the provided chapter text.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15133.pdf_