Economic Analysis
Peru

Peru

Population 31,148 million
GDP per capita 6 167 US$
A4
Country risk assessment
B
Business Climate
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2014 2015 2016 (e)  2017 (f)
GDP growth (%) 2.4 3.3 3.9 3.0
Inflation (yearly average) (%) 3.2 3.5 3.5 2.5
Budget balance (% GDP) -0.2 -2.2 -3.0 -2.9
Current account balance (% GDP) -4.0 -4.3 -3.7 -3.1
Public debt (% GDP) 20.7 23.9 26.2 26.4

 

(e) Estimate (f) Forecast

STRENGTHS

  • Strong growth potential
  • Membership to the Pacific Alliance
  • Mining, energy, agricultural and fishing resources
  • Low public debt
  • Independence of central bank and sound banks
  • Tourism attractiveness 

WEAKNESSES

  • Dependence on commodities and Chinese demand
  • Sensitivity to climate and seismicity
  • Regional disparities (poverty in Andean and Amazon regions)
  • Shortfalls in infrastructure, health and education
  • Importance of the coca culture and cocaine production
  • Massive huge informal sector (75% of employment) not favouring learning 

RISK ASSESSMENT

Resilient activity in 2017

In 2016, growth in Peru was among the strongest in the region. This was driven mainly by the increase in mining production, thanks notably to expansion and the start-up of the Cerro Verde and Las Bambas mines, but also the recovery in public investment and ongoing productivity gains in the agricultural sector. In 2017, activity should remain resilient, boosted mainly by robust performances in the mining sector. The sector is also likely to benefit from the increase in demand and metals prices (copper especially) if the infrastructure programme planned by the new US president were to materialise.
Domestic demand should be stimulated by private and public investment, thanks to red tape reduction, momentum in privatisation which should be continued by the new government and progress in major public infrastructure works (airport and line 2 of Lima underground in particular). Household consumption (around 60% of GDP) should grow at a modest pace, underpinned by growth in employment and the decline in the unemployment rate noted since mid-2015. It should also benefit from the decline in poverty and the expected fall in inflation thanks to the dissipation of the El Niño effects, which affected food product prices in 2016.

 

The state should continue to use budgetary leeway to back growth in the short term

As soon as he came to power in July 2016, the Peruvian president Pedro Pablo Kuczynki requested and obtained permission from Congress for an exception to the budgetary rule that stipulates that the fiscal deficit must not exceed 1% of GDP. The government’s aim is to be able to underpin growth in the short term before returning to the deficit target set by Congress in 2021, the last year of the Kuczynski government. The 2017 budget therefore plans for growth in spending in the fields of education, security and access to drinking water and sanitation. Education spending should reach 4% of GDP vs. an average of 2.5% previously. In terms of security, the government is planning an increase in police wages, as well as the construction and improvement of around 20 prisons. The government is also planning to reduce VAT and certain corporate tax expenses in order to prompt small and medium-sized companies to declare their revenues. This is aimed at reducing the size of the informal sector in the economy and, hence, increasing collection of tax revenues. In this backdrop, public debt is set to rise, while remaining at a low level. The country is also likely to dip into its stabilisation fund (equivalent of almost 5% of GDP) in order to ensure that public finances remain on track.

 

Improvement in current account deficit

In terms of foreign trade, the current deficit is set to narrow on the back of higher copper production and exports following the opening of new mines. Exports should also benefit from productivity gains in the agricultural and fishing sector thanks to the dissipation of the effects of El Niño. Peru should therefore maintain its position as the leading global producer of fish meal. Services trade and the balance of revenues should remain in the red due to activity by foreign companies (repatriating profits, transport services). This deficit is comfortably financed by foreign investments. Even if the central bank can rely on a very comfortable stock of exchange rate reserves (around 15.5 months of imports), it will keep a close eye on changes in US monetary policy, in order to avoid excessive volatility on the ground.

 

Numerous challenges for the new president

On 5 June 2016, Pedro Pablo Kuczynki the candidate for the Peruanos por el cambio party narrowly won the Peruvian presidential elections with 50.1% of votes, against rival Keiko Fujimori, daughter of the former president Fujimori of the Fuerza Popular party. His pro-markets economic programme aims especially at attracting private investment destined mainly for the non-mining sector by cutting red tape and via tax incentives (gradual decline in VAT from 18% to 15%). He is also planning to reduce tax expenses for small and mid-sized companies in order to encourage formal employment and intends to make progress in structural reforms (tax, pensions, legal system). The new president’s work is not set to be easy however: his party only has 18 out of the 130 seats in Congress and will have to forge ties with the other parties, especially the Fuerza Popular (pro-Fujimori) which has the majority (73 out of 130 seats). The business climate is nevertheless tending to improve with the red tape reductions and the anti-corruption decree, which now bans people involved in corruption affairs from holding a civil service position on a national, state or local level.

 

Last update: January 2017

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