Things Are Looking Up

PERU - Forecast 06 May 2016 by Roberto Abusada

Due to better domestic and external conditions, our economic outlook is more optimistic than at the time of our last Quarterly, on February 1st. Growth is rebounding powerfully, driven by expansion of primary activities, which in turn have been spurred by the activities of two mega mines.
For 2017, we expect exports to increase significantly, with a continued boost from mining. Fiscal spending will also be higher – the latter issue already acknowledged by both presidential candidates. So we are projecting 2017 growth at 4.4%, with domestic demand growing 3%. But we expect growth to drop off to 3.7% in 2018 and 2019.
The volatile sol has rebounded against the dollar, in tandem with the behavior of the currencies of peer countries. But we foresee only 1% sol depreciation for this year, vs. last year’s 14% plunge. We believe inflation will slow, and be running at about 3.3% by yearend – still above the upper boundary of the Central Bank’s inflation target. If monetary and fiscal policies are prudent, we think inflation will keep declining in 2017, to above 2.5%, the midpoint of the target. We believe the Bank will keep intervening in markets to address currency volatility. But we expect interest rates to rise only once more this year, by another 25 basis points. Commercial bank lending is expected to steadily decrease.
We foresee the higher-than-expected 2015 4.4% current account deficit to fall to 3.9%, given a strong rise in export volumes, and modest imports. We see the fiscal deficit at 2.8% this year (vs. 2.1% in 2015), just a little above government projections. It is domestic spending that’s booming, even as revenues decline.
Both presidential candidates in the runoff, Keiko Fujimori and Pedro Pablo Kuczynski, are perceived as market friendly, and are expected to maintain the main pillars of the economic model that has delivered dynamic growth over the past 25 years. It’s now a close race: though most former candidates have refrained from making endorsements, it’s clear that many of their constituents support Kuczynski. Though the winner will, in either case, have to deal with the forces of the other, we think it will be fairly easy to forge economic agreements, especially during the first five-year presidential term.

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