Tough Road for a Rebound

PERU - Forecast 30 Jun 2017 by Roberto Abusada and joval

The surprising severity of the El Niño phenomenon, and the worsening relations between Congress and the Executive branch, have moved us to revise our 2017 growth estimate. Still, these negative events are assumed to be improving with time, and the efforts for reconstruction after the climatic disasters will help boost domestic demand.

We expect growth to start picking up in May and June. Yet H1 2017 growth is expected to be just 2%, and still be supported by robust performance in primary sectors. Non-primary activities grew very modestly in H1, probably not more than 1.3%. Total economic growth will hover around 2.5% this year. We expect a strong increase in public investment in 2018, probably at about 20% y/y, and a likely but still week recovery in consumption and private investment, with GDP growing about 4%. For the ensuing years, we are forecasting GDP growth at about 3.7%.

Given declining inflation, we think inflationary expectations will also decline, allowing the Central Bank to again cut its policy rate, following the 25 pp cut in May. Banks’ reserve requirements will also continue to decline. But, we do not see a succession of further policy rate cuts.

Lower GDP growth and fiscal revenues in relation to the authorities forecasts, lead us to believe that the fiscal deficit cannot fall below 3% during this administration. It’s very likely that once again the fiscal responsibility law will be modified, as we do not see likely this administration adopting a new tax reform that increase revenues.

The tense relations between Congress and the Executive branch thawed for a brief two months during the El Niño emergency. But the confrontational climate has returned. Members of the majority Fuerza Popular party have insisted on bringing ministers to Congress for impeachment, while the Comptroller is currently being accused of serious misconducts. We expect an outcome soon, as the public is calling for dialogue to end a situation hurting growth, employment and governability.

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