A Tough Row to Hoe
We’ve revised our growth forecasts downward to 3.6% for 2017 and 3.8% for 2018- 2019. Albeit less rosy than official forecasts, our outlook for the Peruvian economy remains upbeat.
The government is striving to speed along previously delayed PPP projects, while cutting red tape for investment, especially for small firms. We are expecting private investment to remain flat after three years of negative growth, despite the severe blow of the cancellation of the Southern Gas Pipeline project over the Odebrecht construction firm bribery scandal.
We expect inflation to fall slightly this year, albeit remaining around 3% during H1 due to abnormal weather, still-rising fuel prices, and sticky inflationary expectations. Despite the strong appreciation seen so far we are assuming a reversal in this trend latter in the year.
Exports should continue to increase in 2017, due to higher export volumes and higher export prices, resulting in a 3% improvement in terms of trade. This will more than compensate for the foreseeable increase in imports from the expected moderate rise in domestic demand. We expect a further CAD decline. For 2018 and 2019, higher domestic demand and slower exports increase, coupled with stable terms of trade, will sustain a CAD increase to about 3% of GDP.
We expect a boost in fiscal revenues equivalent to 0.5% of GDP in 2017, but due to transitory elements. First, the very high VAT rebates driven by mining projects last year will decline. Second, the tax amnesty for repatriation of capital will bring in a one-off amount of fiscal resources at the end of the year. We think the government emphasis on increasing public investment will result in higher fiscal outlays, and difficulties to adhere to the planned program of fiscal consolidation, particularly starting in 2018.
Since the revelation last December that Odebrecht had since 2004 handed out $29 million in bribes to Peruvian high officials to secure contracts, Peru’s media has become an unending source information on corruption practices involving the administrations of former presidents Alejandro Toledo, Alan Garcia and Ollanta Humala. On February 9th, a Peruvian judge issued an international arrest warrant for Toledo. The scandals dampen this year’s growth prospects, and could hamper the signing of new large PPP projects. Business confidence is declining, and President Pedro Pablo Kuczynski’s popularity rating has fallen steadily, to below 40%. Given this climate, the previously expected large rebound in private investment is unlikely to materialize.
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