Time for a Strong Macro Stimulus

PERU - In Brief 23 Apr 2017 by Roberto Abusada

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After a disappointing GDP growth in February (0.7% y/y), leading indicators suggest a much worse performance for March – the monthly impact of El Niño phenomenon at its peak. A negative growth rate for that month is expected, and we would not be surprised to see GDP dropping by as much as 1% y/y (thus reducing Q1 growth to just 1.5%). Feeble domestic demand has now been compounded by revelations of corruption scandals in past governments. The effects of El Niño on consumption will now add to an already weak private demand. In this context, a strong and speedy action by the authorities is eminent. We feel that the reaction will be stronger than anticipated by the consensus, particularly on the monetary side. As already suggested by the authorities, the government will use its powers to call for a more flexible fiscal policy allowing higher expenditures on investment and infrastructure maintenance (using for that purpose the escape clause of the fiscal responsibility law). Recognizing the lags of expenditure policy, particularly dealing with reconstruction processes, it is probable that the fiscal deficit will not exceed 3% of GDP this year, but it is likely it will do so throughout 2018 and 2019. Hence most of the reduction in the fiscal deficit towards the medium-term goal (of 1% of GDP) will have to be made by the next administration. In addition, given the abundant public financial assets, and to avoid surpassing the rule that limits the public debt to less than 30% of GDP, the government will finance most of these extra expenses by using existing funds, in particular the fiscal stability fund (FEF) designed for cases like the current one. The FEF´s outstanding stock...