Strong growth prospects, but politics could hamper business confidence

PERU - Forecast 12 Nov 2018 by Roberto Abusada and Jose Valderrama

Strong recovery in H1 was mainly due to a favorable base effect, after the H1 2017 slowdown caused by the El Niño disasters. Though we expect growth of just 2.5% in Q3, growth should speed up in Q4, taking into account the start of the fishing season, and strong public investment. Under these conditions, we expect 3.8% GDP growth for 2018, with recovery in non-primary activity linked to domestic demand. The H1 rally in private investment will slow in H2, but better consumption performance will compensate for that.

We are moderately confident that non-mining investment will accelerate in 2019, also, two mining expansions, of Toquepala (copper) and Marcona (iron) have been commissioned. These leads us to expect slightly faster growth, of 3.9%, in 2019. Two downside risks are that new subnational authorities taking office only in January are in charge of more than half of public investment, and that recent negative political events (the implosion of Fuerza Popular and the jailing of its leader, Keiko Fujimori) will likely hit business confidence.
As we envisaged, 12-month inflation has continued to rise from its very low March level. By yearend, we expect inflation to reach 2.3%. For 2019, we see inflation at or slightly above the 2018 level, reflecting a lower output gap and possible currency depreciation effects. We expect both headline and core inflation to remain stable, at 2.2%-2.5%, in 2019-2021.

We continue see the Central Bank to raise its policy rate, after Q1 2019.

Due to recent metal prices declines, we now expect an average annual increase of 6% this year (about half the increase expected last July). Factoring in the rise in oil prices, terms of trade will increase by just under 1%. This, coupled with the increase in domestic demand, will bring the CAD to 1.7% of GDP this year, up from 1.1% in 2017and 2% by 2021.
The official fiscal deficit target, initially 3.5% of GDP, then cut to 3%, won’t be realized. We expect the deficit to be about 2.6% this year. However, we see unlikely for the deficit to fall below 2% by 2021.

Following a surprising string of events, President Vizcarra has gone from weak and bewildered to a powerful leader. But recent events have produced a climate of intense political tension that has weakened business confidence, and businesspeople fear prolonged tensions could depress investment. Furthermore, the severe weakening of Fuerza Popular could encourage an anti-system presidential candidate in 2021.

Now read on...

Register to sample a report