Mitigation efforts in times of coronavirus
The Peruvian government was among the first in the region to order stringent social distancing measures, despite a relatively low number of cases at the time. As of April 4th, only 17,841 tests had been applied, 1,746 people had tested positive and 73 people had died. The number of cases is expected to spike, as 1.6 million new tests the government bought from China are applied.
An initial quarantine to April 12th has been extended, and could be extended further. An Ipsos Perú poll, showed broad popular support for government decisions: more than 95% favored the curfew and mandatory social distancing, and 83% supported the government’s handling of the crisis. President Martín Vizcarra’s approval rating is at an all-time high, of 87%.
The powerful global spread of COVID-19, the collapse in commodity prices, greater international risk and commercial disruptions have all devastated demand – especially for exports. But it has been exacerbated by production shutdowns. We expect economic growth to fall at least 20% y/y in March, which would mean a GDP decrease of around 5% in Q1. Rebound will likely be very gradual. We expect a contraction of 30% y/y in April and about 13% for Q2. It’s obviously premature to look beyond H1 with any kind of precision. If the virus is basically controlled in Peru and globally toward midyear – a relatively optimistic scenario – GDP decline for 2020 would be about 5%.
Peru has a strong financial capacity to mitigate this enormous shock.
The Central Bank cut interest rates by 100 bps, to 1.25%, and is likely to cut again, by at least 25 bp before April 16th, and additional cuts could be on the horizon. The BCRP agreed with the Ministry of Finance to allow the injection of the equivalent to 4% of GDP of loans to the banks, to allow them to lend to clients with government guarantees. This is certainly the most aggressive BCRP measure, and among the most ambitious in the region. The BCRP is also finishing negotiations with the IMF in a precautionary credit line program.
The Executive branch, to which Congress granted legislative powers for 45 days, is adopting urgent measures for immediate relief. Measures so far include expansion of health spending, special subsidies to the poorest families and small and medium-size businesses; loan provisions; and postponement of tax payment requirements. Economy Minister is also preparing a strong post-quarantine economic revitalization fiscal package. She has referenced a package for another S/30 billion to be granted in the next 12 months.
The fiscal stabilization fund has $5.5 billion (2% of GDP) at the BCRP in safe assets. The government also has $2.1 billion of contingency loans from the World Bank and IDB, available for immediate use. Optimistically, we see an equivalent of $2.9 billion in other potential available assets, that would provide a total of 5% of GDP. Yet additional funds will be still needed. Sources could include new loans from the IFIs, and domestic and international bond issues.
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