A deep recession in 2020, but a strong rebound in 2021
We are keeping unchanged our forecast for a 17% y/y contraction in the real GDP growth rate in 2020 and a 6.5% y/y rebound in 2021. Compared with the market consensus and the International Monetary Fund’s (IMF) forecasts, we are more downbeat in the near term but similarly upbeat on the 2021 rebound. However, relative to the most recent estimates published by the Banco Central de Reserva del Perú (BCRP, the central bank) in its June Inflation Report, we are more downbeat in both the near term and in respect of the 2021 rebound. There are three differences that may explain this divide. First, a positive one: stronger external demand. Second, a negative one: a more gradual reopening of the economy than anticipated by the BCRP’s forecasts. Finally are our more pessimistic aggregate demand estimates.
The major risk to our forecast is a renewed wave of the coronavirus (Covid-19), as has occurred in countries that are further advanced in the fight against the pandemic. This risk is not yet factored into our forecasts. Through an Executive Order issued on June 26th, the government decreed an end to the lockdown period enforced from March 16th. The government started its third phase of economic reopening in July, and has brought forward the reopening of certain sectors, such as retail (shopping malls) and public transport, which were due to reopen in the fourth phase.
External conditions have turned more positive for Peru, and our forecast anticipates that overall economic growth will pick up in the current quarter and be sustained through the rest of this year and into 2021. Two drivers add to overall growth and one subtracts from it. First is total demand from Peru’s trading partners. China being Peru’s main trading partner and having already rebounded from the Covid-19 shock illustrates the pull effect from the latter’s trading partners. Second, prices of commodities to which Peru is exposed have returned, or are about to return, to pre-Covid-19 levels. This is the case for copper, zinc, silver, and gold prices. Finally, the factor that subtracts from overall growth is capital flows.
The Covid-19 outbreak resulted in simultaneous aggregate supply and demand shocks, the latter as a result of the public lockdown. It is apparent that government policy has more influence on the supply side; on the demand side, we anticipate government policy to be less effective. It is true that the government’s deploying a large portion of its Treasury savings should help pull up aggregate demand; however, the shock is so massive that the fiscal impulse will prove marginal. Using our 2020 forecasts, the drop in private consumption and investment together will subtract 20% from GDP in 2020, and the government has announced a fiscal-stimulus program equivalent to 17% of GDP.
Our forecasts anticipate the fiscal deficit’s widening to 10% of GDP in 2020 and then narrowing to 5% in 2021. To this end, we are assuming one additional cash transfer to the same group of families that received the last round, whom the government has labelled the “vulnerable” families, and which includes low- and middle-income families. To this, we should add the 8 percentage points contributed by the net lending program that uses government guarantees. The true fiscal impact of the latter will only become apparent once the guarantees are exercised (loans are repaid over three years, with the first payment due following a one-year grace period).
The BCRP’s monetary policy response to Covid-19 has been critical, and our forecast anticipates that this will remain in place for 2020, unwinding gradually from 2021. Unlike other central banks in the region, the BCRP has followed the US Federal Reserve (the US central bank) in responding with a mix of interest-rate cuts, an expansion of its balance sheet via quantitative easing (QE), and net lending to the private sector. Our forecast anticipates a gradual unwinding of the monetary and financial stimulus, starting with a gradual increase in policy rates in 2H21. The QE unwinding will take longer, probably about three years. The total value of BCRP repurchase agreements (repos) with the financial system increased to PEN44.8bn (US$12.8bn) at end-June from PEN17.4bn (US$4.2bn) at end-February.
Our forecast anticipates that market asset prices will remain well-anchored. With exports taking the lead in the recovery, a narrow current account deficit, and a heavily interventionist central bank in the FX market, we anticipate the PEN:USD exchange rate to end 2020 stronger, at 3.3, sliding marginally to 3.4 in 2021. We are less positive on the soles and dollar bond markets. We forecast the 10-year soles bond to widen to 5.5% at end-2020 from 4.24% in December 2019 and then to narrow somewhat to 5% at end-2021. Similarly, dollar-denominated are forecast at 3.5% and 3.23%, respectively.
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