A Challenging Climate for the Next Administration
The international and the domestic milieus are unpromising, in terms of helping Peru recover the dynamic growth it has enjoyed for the past decade. But our base scenario is moderately optimistic, given slightly rising growth—likely ending 2015 at around 3%—with better performance in mining and fishing, particularly in the Q4. We project 2016 growth at 3.3%, though with greater downside than upside risks.
For 2017, we envisage growth rising to likely above 4%—on the back of the new mines achieving full capacity, and a lower decline in private investment amid improved business confidence. Such growth could not be maintained in 2018 without urgent structural reforms, especially in the labor market. Absent those, we put 2018 growth at 3.7% and trend growth of about 3.5%.
Headline inflation in 2015 remained above the 1%- 3% target, ending the year at 4.4%. More worrisome, core inflation is also above target. If we exclude food and energy items, inflation ended the year at 3.5%. Part of the increase can be attributed to supply shocks in domestic foodstuffs, but now the main driver seems to be local currency depreciation. We see depreciation continuing in 2016, though only about half as fast. The concerned Central Bank tightened by 75 bp in the last four months in its policy interest rate; we expect to see another 50-75 bp hike by yearend.
We expect fiscal revenues to stagnate this year, dropping by at least 0.3 pp in relation to GDP. New mining projects will report profits and eventually generate important income tax revenues, but only starting in 2020. Our scenario does not contemplate the tax changes several candidates are talking about, such as VAT tax cuts, and benefits directed towards small firms. But we do expect central government spending to rise powerfully, with faster execution of big infrastructure works. Petroperu will also start building a new refinery. The new administration that steps in after July 28th could of course shift investment priorities.
We believe that only five of the 19 presidential candidates running in the April 10th national elections have a real chance of making it to the subsequent runoff: Keiko Fujimori, Pedro Pablo Kuczynski, Cesar Acuña, Julio Guzman and Alan Garcia. The next president will likely maintain a generally market-friendly and globally open economic thrust, though is unlikely to command a congressional majority. Given this, the business sector is perhaps unreasonably pessimistic.
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