The rebound has begun
Our latest base scenario is more upbeat. It expects the global economy to grow faster than 3.5% in coming years; for domestic conflicts to work themselves out; and for a more robust than expected domestic economic rebound from the damage caused by the El Niño and the Odebrecht shocks.
Significant recent growth in public investment and rekindling of private investment, especially in mining on the back of higher metals prices, are the main driving forces of rebound. Public investment is increasing in the last months by more than 20% y/y. Mining investment in H1 led to powerful acceleration in H2, and particularly in Q4, where we expect a rate higher than 5% y/y for private investment as a whole.
For 2018 we envisage a strong 16%+ increase in public investment, assuming the huge roster of post-El Niño projects won’t be affected by the change of the head of the reconstruction agency. Private investment is also likely to end its prolonged decline, and the recent surge in consumer confidence is likely to boost private consumption. These elements underpin our 4% growth estimate for 2018, though even this forecast could be conservative. For ensuing years, we expect growth of about 3.7%.
The decline in the total investment-to-GDP ratio should end next year. We see investment growing at an average of 6% per annum over the next three years, with its share in GDP reaching 24% by 2020. That’s still lower than the average annual share attained in the last 10 years.
Inflation has fallen toward 2%, the midpoint of the Central Bank’s target range, and we believe inflationary expectations will decline. We expect the sol to weaken only slightly in 2018. For 2019 and on, we see the exchange rate remaining stable.
The Central Bank has cut its policy rate by 100 bp ytd. We expect that the Bank will start to increase its policy rate gradually probably toward the end of 2018.
Peru’s export prices have risen even more than expected, up more than 12% for this year. That will cut the CAD, to 1.8% of GDP, down nearly 1 pp from last year, and a great improvement over the 4.6% CAD average of the three preceding years.
President Pedro Pablo Kuczynski’s approval rating jumped 6 pp after he named his new cabinet. But the recent confrontations with Congress, and a perception that reconstruction is moving too slowly, have cost him much of that gain.
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