IMF Executive Board Concludes 2016 Article IV Consultation with Peru
IMF News, July 15, 2016
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- Published: July 15, 2016
Main findings and context
- On June 20, 2016, the Executive Board concluded the Article IV consultation with Peru and considered and endorsed the staff appraisal without a meeting.
- As a result of prudent macroeconomic management, Peru has navigated the commodity cycle and the 2008–09 global financial crisis and "still leads growth among large Latin American economies."
- The new government takes office on July 28, 2016 and will inherit an economy with a solid foundation, good institutional frameworks, and structural reforms underway.
- Important challenges: metal prices have entered a slump since their 2011 peak, hurting exports, investment, and fiscal revenues.
Recent macroeconomic developments
- Growth:
- After a sharp and unexpected drop in 2014, growth picked up in 2015, reaching 3.3 percent largely owing to higher metals production and fishing, and a partial recovery in services and commerce.
- Inflation and output gap:
- Despite a widening negative output gap, inflation increased by more than 1 percentage point to 4.4 percent, y-o-y, in December 2015, reflecting food supply shocks, regulatory adjustments to energy prices, and pass-through from currency depreciation.
- External sector:
- The external current account reached a deficit of 4.4 percent in 2015 despite the sol depreciation.
- Monetary and exchange rate policy response:
- The central bank raised the policy rate since September 2015 by a full percentage point to 4.25 percent aiming at re-anchoring inflation expectations.
- The sol was allowed to depreciate 14 percent with respect to the U.S. dollar, while volatility was contained.
- Fiscal stance in 2015:
- Authorities eased adjustment to commodity price shocks through an expansionary fiscal policy in 2015, but capital spending continued to suffer delays.
Executive Board assessment and outlook
- Growth outlook:
- Peru is positioned to grow faster in the next two years as mining production reaches full capacity and large infrastructure projects advance.
- Activity is expected to accelerate further in 2016 and 2017, while inflation continues to decline.
- Risks:
- Risks to the outlook are balanced.
- Downside external risks: weaker-than-projected growth in China (and hence softer metal prices), adverse spillovers from other countries in the region, sharp asset price adjustments in advanced and emerging economies, and an even stronger dollar.
- Domestic upside risks: pick-up in sub-national investment and possible larger-than-projected increases in confidence and investment after the presidential election.
- Policy response to shocks:
- The response should be through further exchange rate flexibility and easing liquidity conditions to support credit activity.
Monetary and financial sector recommendations
- Monetary policy stance:
- Following monetary tightening, the BCRP should now maintain a wait-and-see stance—given declining inflation and medium-term inflation expectations, the fact that it is too soon to evaluate the effect of past monetary tightening, and uncertainties about the cyclical position of the economy.
- A possibly steeper interest rate path in the United States than currently priced by the financial market could trigger the need for further monetary tightening in Peru.
- Exchange rate and de-dollarization:
- Greater exchange rate flexibility in 2015 was welcome with no noticeable impact on firms’ and banks’ balance sheets.
- Further exchange rate flexibility would support development of hedging instruments to reduce currency risk and help accelerate the de-dollarization process.
- Further decline in credit de-dollarization has been achieved not least due to measures introduced by the BCRP.
- Financial markets:
- Recent measures to deepen Peru’s equity market are welcome.
- Banks’ balance sheets remain healthy and profitable.
Fiscal policy recommendations
- Gradual fiscal consolidation:
- A gradual fiscal consolidation in the next few years is advisable to maintain healthy debt dynamics and to protect fiscal buffers.
- With the output gap closing around end 2017, there is no case for loosening fiscal policy.
- Priorities to create fiscal space:
- Contain current spending that is not complementary to capital expansion and structural reforms (including in health and education).
- Raise the low revenue collection through streamlining administration, reducing informality and exemptions, and protecting Peru’s tax base from possible international profit shifting by multinational corporations.
- Public investment execution:
- Reducing bottlenecks to public investment and improving management would enable full execution of budgeted spending and support private investment.
- Other fiscal considerations:
- Fiscal consolidation is important for ensuring pension sustainability and defending against natural disasters and realization of contingent liabilities.
Structural reform priorities
- Productivity and potential growth:
- With the end of commodity-driven growth, growth-spurring structural reforms have become a higher priority to boost potential growth, which is otherwise estimated to be 3.5 percent in the absence of continued reforms.
- Labor market and informality:
- Long-standing challenges include reducing informality; labor market reforms should aim at lowering the costs of hiring and firing workers.
- Competitiveness and infrastructure:
- Spur investment in non-extractive industries through improving competitiveness and infrastructure.
- Decentralization and public investment:
- Peru’s current decentralization framework should be improved, as it constrains full execution of planned capital expansion and better allocation of resources.
- Education and financial inclusion:
- Low quality of education remains a crucial challenge; ongoing reforms will need to continue.
- Efforts to raise financial inclusion are commendable, including the National Financial Inclusion Strategy and the private sector-led e-money platform.
- Trade:
- Free trade agreements provide an opportunity for boosting and diversifying long-term growth.
Key policy messages to authorities
- Staff appreciation and engagement:
- Staff relay appreciation to the outgoing administration for the constructive dialogue and look forward to working with the new government.
- Recommended policy mix:
- Maintain cautious monetary stance (wait-and-see), preserve exchange rate flexibility, pursue gradual fiscal consolidation, remove public investment bottlenecks, and implement structural reforms to raise potential growth and reduce informality.
Selected economic indicators and key statistics (as presented)
- Growth and demand (Annual percentage change):
- Real GDP: 2011: 6.0; 2012: 2.4; 2013: 3.3; 2014: 3.7; 2015: 4.1
- Real domestic demand: 2011: 7.2; 2012: 7.3; 2013: 2.2; 2014: 2.9; 2015: (not listed)
- Prices:
- Consumer Prices (end of period): 2011: 4.7; 2012: 2.6; 2013: 3.2; 2014: 4.4; 2015: 2.5
- Consumer Prices (period average): 2011: 3.4; 2012: 2.8; 2013: 3.5; 2014: 3.8; 2015: (not listed)
- External sector (annual percentage change unless indicated):
- Exports: 2011: 29.5; 2012: -9.6; 2013: -7.8; 2014: -13.4; 2015: -1.0; 2016 (proj): 7.1
- Imports: 2011: 28.9; 2012: 10.4; 2013: -3.1; 2014: -8.9; 2015: -4.5; 2016 (proj): 3.9
- Terms of trade (deterioration -): 2011: -2.6; 2012: -5.2; 2013: -5.4; 2014: -6.3; 2015: -1.7; 2016 (proj): -0.1
- Real effective exchange rate (depreciation -): 2011: -1.4; 2012: 8.1; 2013: -0.2; 2014: -1.6; 2015: 0.8
- Money and credit:
- Broad money: 2011: 15.1; 2012: 12.5; 2013: 15.3; 2014: 9.5; 2015: 11.6; 2016 (proj): 13.7; 2017 (proj): 14.0
- Net credit to the private sector: 2011: 21.6; 2012: 13.3; 2013: 18.3; 2014: 13.2
- Public sector (percent of GDP):
- NFPS Revenue: 2011: 27.2; 2012: 27.7; 2013: 24.6; 2014: 24.3; 2015: 24.8
- NFPS Primary Expenditure: 2011: 24.0; 2012: 26.8; 2013: 25.7; 2014: 25.1
- NFPS Primary Balance: 2011: 2.0; 2012: -1.1; 2013: -0.9
- NFPS Overall Balance: 2011: 2.3; 2012: 0.9; 2013: -0.3; 2014: -2.1
- External current account balance (percent of GDP):
- 2011: -1.9; 2012: -2.7; 2013: -4.2; 2014: -4.0; 2015: -4.4; 2016 (proj): -3.9; 2017 (proj): -3.5
- Gross reserves (millions of U.S. dollars):
- 2011: 48,859; 2012: 64,049; 2013: 65,710; 2014: 62,353; 2015: 61,537; 2016 (proj): 62,230; 2017 (proj): 62,930
- Reserve coverage ratios:
- Percent of short-term external debt: 2011: 559; 2012: 494; 2013: 539; 2014: 508; 2015: 554; 2016 (proj): 601
- Percent of foreign currency deposits at banks: 2011: 228; 2012: 300; 2013: 274; 2014: 258; 2015: 224; 2016 (proj): 222; 2017 (proj): 209
- Debt:
- Total external debt (percent of GDP): 2011: 25.6; 2012: 27.3; 2013: 29.7; 2014: 33.7; 2015: 37.7; 2016 (proj): 36.5
- NFPS Gross debt (including Repayment Certificates) (percent of GDP): 2011: 23.0; 2012: 21.2; 2013: 20.3; 2014: 20.7; 2015: 25.9
- External (percent of GDP): 2011: 11.4; 2012: 9.8; 2013: 8.8; 2014: 8.7; 2015: 11.1; 2016 (proj): 12.4; 2017 (proj): 12.1
- Domestic (percent of GDP): 2011: 11.5; 2012: 12.0; 2013: 12.9; 2014: 13.5; 2015: (not listed)
- Savings and investment (percent of GDP):
- Gross domestic investment: 2011: 26.0; 2012: 27.9; 2013: 26.4; 2014: 24.2
- Public sector (percent of GDP): 2011: 4.8; 2012: 5.4; 2013: 5.8; 2014: 5.0; 2015: 4.9
- Private sector: 2011: 19.1; 2012: 20.1; 2013: 19.3
- National savings: 2011: 23.4; 2012: 23.7; 2013: 22.3
- Public sector (percent of GDP; note labeling in source): 2011: 7.5; 2012: 7.0; 2013: 16.4; 2014: 16.6; 2015: 17.9; 2016 (proj): 17.4; 2017 (proj): 16.7
- Memorandum items:
- Nominal GDP (S/. billions): 2011: 469.9; 2012: 507.7; 2013: 546.0; 2014: 576.0; 2015: 612.0; 2016 (proj): 647.2; 2017 (proj): 688.3
- GDP per capita (in US$): 2011: 5,731; 2012: 6,396; 2013: 6,629; 2014: 6,586; 2015: 6,168; 2016 (proj): 5,548; 2017 (proj): 5,811
- Social indicators (selected):
- Life expectancy at birth (years): 2011: 73.8; 2012: 74.0; 2013: 74.2; 2014: 74.4; 2015: 74.6
- Infant mortality (per thousand live births): 2011: 16.0; 2012: 17.0; 2013: 17.6
- Adult literacy rate: 2011: 92.9; 2012: 93.8; 2013: 93.7
- Poverty rate (total) 1/: 2011: 27.8; 2012: 25.8; 2013: 23.9; 2014: 22.7; 2015: 21.8
- Unemployment rate: 2011: 7.7; 2012: 6.8; 2013: 5.9; 2014: 6.5
IMF Communications Department — Press Release No. 16/342, July 15, 2016