Peru: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, February 12, 2021
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- Published: February 12, 2021
Recent developments, outlook, and risks
- Pandemic shock and health system capacity:
- Peru was hit hard by the COVID-19 pandemic in 2020; limited health-system capacity forced a very strict lockdown that, together with large contact-intensive sectors and limited teleworking capacity, caused a deep recession despite strong policy stimulus.
- The containment measures could not halt soaring infections; combined with health-system weaknesses this produced one of the highest mortality rates globally.
- Policy response in 2020:
- Fiscal: Broad-based fiscal policy response included direct support to health, households, businesses, and a sizable credit-guarantee program (Reactiva Perú) that was successful in supporting many businesses, including small ones.
- Limitations: Support to household incomes was limited and initially hampered by administrative problems; allowing withdrawals from private pension funds was not as effective for vulnerable groups and compromised pension-system integrity.
- Monetary/FX: The Banco Central de Reserva del Perú (BCRP) reduced the benchmark rate to a record low, provided liquidity via guaranteed-credit repo operations under Reactiva Perú, extended security and currency repo operations, fostered credit reprogramming, lowered reserve requirements, provided foreign currency liquidity, and concluded an agreement with the New York Fed to access a dollar repo line. The IMF approval of the FCL in May helped reassure markets.
- Second wave and baseline outlook:
- A second wave began in January 2021 with excess deaths climbing to May 2020 levels; authorities are taking targeted measures with more limited economic impact.
- Baseline scenario: If the health emergency is brought under control by end-March, restrictions could be eased in Q2, activity could regain momentum, and GDP growth would reach 8.5 percent in 2021.
- Output recovery: Output returns to pre-pandemic level only in 2022; a large negative output gap is expected to persist, dampening inflation pressures.
- Current account: After a mild surplus in 2020, the current account balance is projected to return to a deficit of 1.6 percent of GDP in the medium term.
- Risks and buffers:
- Downside risks: More acute/prolonged second wave, delays in vaccination, political uncertainty, social unrest, changes to institutional framework, global reversal in trade integration, sudden change in foreign investor sentiment, intensification of natural disasters due to climate change.
- Upside risk: Significant increase in public investment execution.
- Buffers: International reserves over 37 percent of GDP, low public debt, access to a two-year Flexible Credit Line (FCL) arrangement with the IMF, other funding sources, and a strong financial sector.
Policy recommendations (high-level)
- Maintain supportive macroeconomic policies given heightened health risks and reduced activity.
- Fiscal policy: Use ample fiscal space to address the health emergency and sustain household incomes to reduce poverty and insure against downside growth risks.
- Monetary policy: With no inflationary pressures, maintain accommodative monetary conditions.
- Structural reforms: Target productivity, governance, and social safety nets to address weaknesses exposed by the pandemic.
Fiscal policy (detailed)
- Fiscal position and projections:
- Fiscal deficit expected to fall from 9 percent of GDP to 5.2 percent of GDP in 2021.
- Public debt would peak at about 38 percent of GDP in 2025 before declining toward the 30-percent-of-GDP ceiling.
- Gross debt and debt-burden indicators are well below benchmarks for emerging economies.
- Market access evidenced by century-bond issuance in November.
- Recommendation on stimulus:
- Maintain policy support until pandemic is under control and recovery consolidated; second wave and downside risks argue against premature withdrawal.
- Additional support to households is necessary; World Bank preliminary estimates indicate poverty increased significantly in 2020.
- Proposal: A third round of the Bono Universal would help reduce poverty to pre-pandemic levels.
- Prepare contingency measures if downside risks materialize, including accelerating execution of the public investment budget.
- Finalize special health-sector projects urgently; consider similar vehicles for water, sanitation, and housing investment.
- Anchoring fiscal policy:
- Converging back to targets after 2020–21 suspension of fiscal rules will take time and requires a credible medium-term framework.
- A new Marco Macroeconómico Multianual (MMM) should be based on conservative growth projections, identify contingency measures, and guide the 2022 budget.
- The MMM should close the revenue gap of 0.7 percent of GDP identified in the recent Informe Pre-Electoral by outlining specific tax policy, revenue administration, and spending rationalization measures.
Monetary and exchange rate policies
- Monetary stance:
- Monetary conditions should remain supportive; the BCRP’s December forward-guidance highlighted that easy conditions are likely to persist for an extended period.
- In the absence of inflationary pressures, continued monetary accommodation would facilitate gradual return to normality as extraordinary measures taken in 2020 dissipate.
- BCRP created new security repos conditional on expansion of long-term lending to enhance monetary transmission and allow further easing if necessary.
- FX intervention:
- The BCRP will continue to smooth excess volatility in foreign exchange markets; intervention need likely to decline in the medium term.
- With reserve levels adequate, the BCRP has intervened on both sides of the foreign currency market since the pandemic began, reducing volatility relative to regional peers.
- As dollarization continues to decline, FX intervention need will weaken, allowing the exchange rate to act more as a shock absorber and facilitating financial-market development.
Financial sector policies
- Strengthening oversight and reforms taken:
- Expanded oversight of financial co-operatives by Superintendencia de Bancos, Seguros y AFPs (SBS).
- Monitoring of banks’ off-balance-sheet exposures; new risk-monitoring tools; risk-based supervision for insurers and brokers; strengthened crisis preparedness and management; enhanced emergency liquidity assistance framework.
- Measures being prepared: higher capital surcharges for systemically important banks; enhanced supervision of financial groups; requirements for recovery and resolution planning for domestic systemically important banks and financial groups.
- System resilience and vulnerabilities:
- Top-down stress tests indicate a resilient financial system with limited solvency problems even under adverse scenarios.
- Default rates are expected to rise significantly in the microfinance sector.
- Peru’s corporate sector performance weakened in 2020 but remained robust relative to global and regional trends.
- Macroprudential guidance:
- Policies could shift to encourage banks to emphasize client viability and direct resources to viable but illiquid firms.
- For unviable firms, efficient bankruptcy frameworks are needed; authorities should aim to reduce lengthy administrative proceedings and encourage out-of-court restructurings.
- SBS had reduced the countercyclical capital buffer and allowed loan-term adjustments without changing loan classification at the onset of the pandemic.
Structural reforms
- Pandemic-exposed fragilities to address:
- Weaknesses in health care contributed to high mortality and stringent containment measures that depressed growth.
- Poverty, low financial inclusion, high informality, political instability, low digitalization, large contact-intensive industries, and limited teleworking aggravated the economic and social impact.
- Multi-pronged reform strategy (priorities):
- a) Boost productivity:
- Improve health and education, enhance infrastructure, facilitate labor reallocation, improve the business climate in line with the National Plan for Competitiveness and Productivity launched in 2019.
- The new agriculture promotion law and its regulations should, while gradually removing fiscal incentives to create a level playing field, preserve flexibility in labor contracts important to the agro-export sector’s success.
- b) Enhance social protection while reducing incentives to informality from the tax-benefit system:
- Invest in health care, education, and adequate social security, including pensions; moving to universal health care should be accompanied by measures that reduce adverse incentive effects.
- c) Strengthen governance:
- Increase transparency in the public sector, including at the local level, and strengthen anti-corruption enforcement to improve the business climate.
- Provide sufficient resources and adequate training for the newly created Offices of Institutional Integrity.
Selected economic indicators (highlights from table)
- Real GDP (annual percent change): 2019: 2.2; 2020: -11.4; 2021: 8.5; 2022: 5.3; 2023: 4.8.
- Output gap (percent of potential GDP): 2019: -1.7; 2020: -7.5; 2021: -3.3; 2022: -1.6; 2023: -0.2.
- Consumer prices (end of period): 2019: 1.9; 2020: 1.8; 2021: 2.0.
- Exports (annual percent change): 2019: -2.8; 2020: -12.3; 2021: 25.8; 2022: 4.3; 2023: 4.4.
- Imports (annual percent change): 2019: -1.9; 2020: -15.5; 2021: 17.6; 2022: 6.0; 2023: 5.0.
- External current account balance (% of GDP): 2019: -1.5; 2020: 0.1; 2021: -0.6; 2022: -0.9; 2023: -1.1.
- Gross reserves (In billions of U.S. dollars): 2019: 68.4; 2020: 74.9; 2021: 74.7; 2022: 74.5; 2023: 74.2.
- Percent of short-term external debt: 2019: 433; 2020: 543; 2021: 519; 2022: 518; 2023: 522.
- Broad money (annual percent change): 2019: 8.9; 2020: 25.3; 2021: 14.8; 2022: 9.9; 2023: 8.2.
- Net credit to the private sector (annual percent change): 2019: 6.4; 2020: 13.7; 2021: 4.0; 2022: 7.7.
- NFPS revenue (percent of GDP): 2019: 24.8; 2020: 22.4; 2021: 22.7; 2022: 23.5.
- NFPS primary expenditure (percent of GDP): 2019: 25.0; 2020: 29.8; 2021: 25.1; 2022: 24.4.
- NFPS overall balance (percent of GDP): 2019: -9.0; 2020: -4.9; 2021: -3.5; 2022: -2.9.
- Total external debt (percent of GDP): 2019: 34.7; 2020: 43.2; 2021: 38.9; 2022: 36.4; 2023: 34.4.
- NFPS gross debt (percent of GDP): 2019: 27.1; 2020: 35.5; 2021: 36.0; 2022: 36.9; 2023: 37.3.
- Composition of NFPS gross debt (percent of GDP): External 2019: 14.1; 2020: 13.0; 2021: 12.4; 2022: 11.7; Domestic 2019: 18.6; 2020: 21.4; 2021: 22.9; 2022: 24.5; 2023: 25.6.
- Gross domestic investment (percent of GDP): 2019: 19.2; 2020: 20.5; 2021: 21.6; 2022: 22.1.
- National savings (percent of GDP): 2019: 19.9; 2020: 19.4; 2021: 20.7; 2022: 21.0.
- Nominal GDP (S/. billions): 2019: 770; 2020: 701; 2021: 798; 2022: 857; 2023: 914.
- GDP per capita (in US$): 2019: 6,958; 2020: 5,976; 2021: 6,522; 2022: 6,878; 2023: 7,223.
Peru: Staff Concluding Statement of the 2021 Article IV Mission, February 12, 2021.