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Peru Business Forecast Report Q3 2014

  • June 2014
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views

While we expect real GDP growth to level off at around 5.0% over the coming years, below its recent trend, significant mineral wealth, attractive investment opportunities at the sector level and a growing consumer story underpin our view that Peru will remain one of the most dynamic economies in Latin America in the coming years. We remain below-consensus for 2014 growth, when we are forecasting 5.1% real economic expansion. Given our Asia Country Risk team's expectation that Chinese real GDP growth will trend lower in the coming years as the economy rebalances away from an investment-led growth model to one in which private consumption plays a larger role, we anticipate that Peru will continue to be hit hard by weaker Chinese demand, lower average metals prices and more moderate capital expenditure plans by major mining firms. Given these factors, we remain below consensus on real GDP growth in Peru in the next few years, and we anticipate that these dynamics will precipitate a widening of the country's current account deficit, place downward pressure on the budget balance and result in a weaker currency.


Major Forecast Changes

We have adjusted our current account deficit forecasts given indications that export volumes have begun to fall, exacerbating the expected impact of lower commodity prices. We are forecasting a shortfall of 5.7% of GDP in 2014, compared with our previous projection of 5.2%.

Table Of Contents

Peru Business Forecast Report Q3 2014
Executive Summary. 5
Core Views..5
Major Forecast Changes5
Key Risks To Outlook5
Chapter 1: Political Outlook. 7
SWOT Analysis.. 7
BMI Political Risk Ratings 7
Domestic Politics . 8
Mining Sector Tensions And Rising Disapproval To Increase Political Risk8
President Ollanta Humala's approval rating has fallen to an all-time low, in part due to his perceived failure to address poverty and a
intensifying crackdown on the country's informal mining sector. While political risk will remain an important source of investor concern
over the coming quarters, we continue to believe that strong economic growth and attractive mineral deposits will help to maintain robust
levels of foreign investment.
Table: Political Overview .8
Long-Term Political Outlook 9
Mining Disputes Main Threat To Stability9
Peru's long-term political stability is undermined by key structural risks, most prominently associated with mining and hydrocarbons
exploration in the country's Amazon region. Concerted efforts will be needed to address this issue, along with the ongoing problems of
corruption and coca cultivation, if the country is to counter the increasing threat from populism. Nevertheless, our core scenario is for
the country's ongoing export-led growth to raise living standards, creating a core of middle-class stability that will act as a buffer against
other risks.
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings... 13
Economic Activity .. 14
Real GDP Growth To Ease Amid Weaker Trade Balance..14
We maintain our view that growth in the Peruvian economy will slow in 2014 and remain below its historical average in the coming
years. This will in large part be due to structural declines in the demand for the country's key exports. Nevertheless, growth in private
consumption and investment is expected to be supported by a burgeoning middle class and the government's renewed commitment to
infrastructure upgrades.
Table: Economic Activity..14
Balance Of Payments . 16
Current Account Deficit To Widen On Weaker Exports.16
Lower average prices for precious and industrial metals, combined with weaker production in the mining sector, will weigh on Peruvian
exports over the coming months. As such, we forecast the current account deficit to widen from 4.9% of GDP in 2013 to 5.5% in
Table: Current Account...16
Monetary Policy .. 18
Despite Inflationary Uptick, Authorities To Retain Dovish Bias...18
We expect the Peruvian benchmark interest rate to remain at 4.00% throughout the remainder of the year, with a modest tightening
cycle unlikely to begin before 2015. Although inflation has remained above the central bank's target since the beginning of the year,
growth has also disappointed, and authorities will likely seek to avoid creating additional headwinds.
Table: Monetary Policy18
Fiscal Policy 19
Lower Metals Prices To Weigh On Fiscal Surplus.19
Although some of Peru's revenues, such as mining royalties, will likely be constrained by lower metals prices, we believe that prudent
fiscal management and a favourable outlook for consumption taxes will help support the country's fiscal account. We are forecasting the
budget surplus to narrow but remain in positive territory in 2014, at 0.4% of GDP, compared with 0.7% in 2013.
Table: Fiscal Policy19
Exchange Rate Policy 21
PEN: Central Bank Actions To Offset Depreciatory Pressure..21
Table: BMI Peru Currency Forecast21
Chapter 3: 10-Year Forecast... 23
The Peruvian Economy To 2023 23
Solid Growth Ahead.23
Economic growth in Peru will cool to an average growth rate of 5.0% between 2014 and 2023 as a slowdown in Chinese economic
growth dampens metals demand and prices in the short term, while fixed investment and private consumption growth moderate from
their recent highs. That said, we believe solid macroeconomic policies, substantial commodity wealth and a growing consumer base will
continue to drive investor interest in Peru over the forecast period.
Table: Long-Term Macroeconomic Forecasts23
Chapter 4: Business Environment. 25
SWOT Analysis 25
BMI Business Environment Risk Ratings.. 25
Business Environment Outlook. 26
Institutions... 26
Table: BMI Business And Operation Risk Ratings26
Table: BMI Legal Framework Rating.27
Infrastructure... 28
Table: Labour Force Quality..28
Market Orientation... 29
Table: Trade And Investment Ratings.29
TABLE: LATIN AMERICA - ANNUAL FDI INFLOWS.30
Operational Risk.. 31
Chapter 5: Key Sectors.. 33
Power ... 33
Table: Total Electricity Generation Data and Forecasts, 2012-2017... 34
Table: Total Electricity Generation Data and Forecasts, 2018-2023... 35
Pharmaceuticals and Healthcare... 37
Table: Pharmaceutical Sales, Historical Data and Forecasts, 2010-2018.. 37
Other Key Sectors... 41
Table: Oil and Gas Sector Key Indicators..41
Table: Telecoms Sector Key Indicators41
Table: Infrastructure Sector Key Indicators...42
Table: Food and Drink Sector Key Indicators..42
Table: Autos Sector Key Indicators...42
Table: Freight Key Indicators42
Chapter 6: BMI Global Assumptions. 43
Global Outlook. 43
Emerging Market Deceleration43
Table: Global Assumptions.43
Table: Developed States, Real GDP GrowtH, %...44
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %. 44
Table: Emerging Markets, Real GDP Growth, %..45

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