Peru’s economy continues to be a leader in high growth and low inflation in the region, which has been achieved through a prudent macroeconomic policy implementation, a far-reaching structural reform agenda and taking advantage of the benign external environment. No least due to these factors, the economy came out virtually unscathed from the 2008‒09 global financial crisis, with growth rebounding to 8.8 percent in 2010 and then being sustained at high levels in 2011–12. After reaching 4.7 percent in 2011, end-period inflation fell to 2.6 percent in 2012, within the 1-3 percent target range. Stimulative monetary and fiscal policies played an instrumental role in supporting the recovery, and were smoothly unwound as growth accelerated and the negative output gap was closed.
Activity has slowed this year on the heels of adverse external shocks and a decline in domestic confidence. Real GDP is expected to have grown around 5 percent in 2013.
Activity has slowed this year on the heels of adverse external shocks and a decline in domestic confidence. Real GDP is expected to have grown around 5 percent in 2013.
Inflation remained within the 1-3 percent target range, reaching 2.9 percent by end-2013 due to increases in food and fuel prices and some pass-through from the exchange rate depreciation. Private credit growth slowed in real terms to 12.5 percent at end-2012 (from 14.0 percent at end-2011) due to macro-prudential measures aimed at mitigating the impacts of surges in capital flows. The financial sector remains sound, profitable and well-capitalized, supported by the authorities’ pro-active use of prudential measures.
The outlook remains favorable in the near term despite challenging external conditions. The projected growth deceleration in China (one of Peru’s main trading partners) and the unwinding of monthly purchases of securities by the U.S. Federal Reserve will result in a lower external demand and terms of trade deterioration. Against this background, real GDP growth is projected to be 5.5 percent in 2014, slightly below potential, while inflation is projected to decline to about 2.5 percent as expectations are well-anchored owing to the strong inflation targeting framework. The current account deficit is projected to remain elevated at 4.8 percent of GDP in 2014, but will decline gradually over the medium-term on account of expected pickup in mining exports.
In concluding the 2013 Article IV consultation with Peru, Executive Directors endorsed staff’s appraisal, as follows:
The overall state of the economy remains strong despite lower metal prices and recent market turbulence. Peru continues to be one of the most dynamic economies in the region, and one with the largest buffers thanks to past strong policy implementation. With an economy growing somewhat near potential, macroeconomic policies should remain relatively neutral, unless additional turbulence in markets emerges or other downside risks materialize. Preserving policy flexibility by continuing with a good track record of appropriate policy responses to adverse circumstances remains instrumental to addressing future challenges. Risks are balanced. While external risks are tilted to the downside, domestic risks are on the upside. Significant terms of trade gains could be reversed if growth deteriorates in main trading partners, reducing income, investment, and growth. Sudden stops and reversal of some non-Foreign Direct Investment (FDI) capital flows to Peru (due to tightening of global financial conditions) could put pressure on the financial system and further decelerate growth.
While vulnerabilities have increased, current buffers are sufficient to address possible short-term shocks. Increased risk aversion due to the expected “tapering” of asset purchases by the USFR could lead to a reversal of capital inflows, necessitating the central bank to deploy resolute actions to maintain confidence and ensure orderly functioning of markets as was done during the global financial crisis in 2008–09. Slower global growth could lead to lower external demand and deterioration in terms of trade, the exchange rate should work as a shock absorber, although there are risks given the dollarization of the financial system. Monetary and macro-prudential policies should be relaxed to support economic activity. If the economic slowdown is too pronounced, consideration could be given to use a measured and temporary fiscal impulse.
