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Peru Country Risk Report Q4 2016

  • September 2016
  • -
  • Business Monitor International
  • -
  • 39 pages

Core Views

The Peruvian economy will strengthen in the coming years, driven by production growth in the extractive sector, robust private consumption and infrastructure investment. The incoming administration of President Pedro Pablo Kuczynski will boost infrastructure spending, bolstering the country’s long-term growth. The central government will post persistent, though narrowing, fiscal shortfalls due to lower government revenue growth.Major Forecast Changes With exports outperforming our expectations and investor sentiment turning increasingly positive, we expect the Peruvian sol to trade higher in the coming quarters, although it will average lower on the year.

Table Of Contents

Peru Country Risk Report Q4 2016
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook ....................................................................................................................................... 8
Accelerating Growth Will Continue In The Coming Years...........................................................................................................8
Peru will see economic growth accelerate in the coming years, spurred by strong copper production and increased government-led
fixed investment. Moderating inflation and improving employment prospects will support household consumption, providing tailwinds to
growth.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: GDP GROWTH FORECASTS......................................................................................................................................................................9
TABLE: PRIVATE CONSUMPTION FORECASTS....................................................................................................................................................9
TABLE: GOVERNMENT CONSUMPTION FORECASTS.........................................................................................................................................9
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................10
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................10
Fiscal Policy And Public Debt Outlook.................................................................................................................. 10
Capital Expenditures Will Underpin Modest Fiscal Deficits......................................................................................................10
Peru will maintain modest fiscal deficits over the coming years as incoming President Pedro Pablo Kuczynski seeks to bolster growth
through infrastructure investment and tax reductions. Nonetheless, Peru's sovereign credentials will remain intact in light of a bright
growth outlook, favourable debt profile and credible policy environment.
Structural Fiscal Position........................................................................................................................................ 11
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.............................................................................................................................11
External Trade And Investment Outlook................................................................................................................ 12
Mining Exports To Narrow Current Account Deficit..................................................................................................................12
Peru's current account deficit will narrow in 2016 and 2017 as exports increase on the back of growth in the extractive sector. Given its
strong appeal to investors, capital inflows will fund Peru's current account deficit and reinforce its stable external position.
Outlook On External Position.................................................................................................................................. 13
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................14
TABLE: TOP 5 GOODS IMPORTS IN 2014............................................................................................................................................................14
TABLE: TOP 5 GOODS EXPORTS IN 2014...........................................................................................................................................................15
Monetary Policy ....................................................................................................................................................... 15
Moderating Price Pressures Support Rate Hold........................................................................................................................15
The Banco Central de Reserva del Perú will keep its policy rate on hold through the end of the year as inflation moderates. In 2017,
robust economic activity growth will encourage modest rate hikes.
Monetary Policy Framework.................................................................................................................................... 16
Currency Forecast.................................................................................................................................................... 17
PEN: Modest Appreciation On The Horizon................................................................................................................................17
The Peruvian sol will modestly appreciate in H216 and 2017, supported by capital inflows and improving trade dynamics. President
Pedro Pablo Kuczynski's infrastructure programme will bolster capital inflows and support higher average exchange rates over the
coming quarters.
TABLE: BMI CURRENCY FORECAST....................................................................................................................................................................18
Chapter 2: 10-Year Forecast................................................................................................................... 19
The Peruvian Economy To 2025............................................................................................................................. 19
Robust Growth Ahead As Economy Diversifies........................................................................................................................19
Peru will see robust economic growth in the coming years as its mining-driven economy gradually diversifies. Private consumption will
increasingly drive growth, while fixed investment flows will lead to improving infrastructure.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................19
Chapter 3: Political Outlook................................................................................................................... 21
SWOT Analysis......................................................................................................................................................... 21
BMI Political Risk Index........................................................................................................................................... 21
Domestic Politics .................................................................................................................................................... 22
Kucyznski Will Solidify Peru's Business-Friendly Reputation.................................................................................................22
Incoming President Pedro Pablo Kuczynski will solidify Peru's business-friendly reputation and commitment to orthodox macroeconomic
policy. Substantial overlap in policy objectives and a gradually improving relationship between Kuczynski and the Fuerza Populardominated
legislature will support the passage of key legislation over the coming quarters.
TABLE: POLITICAL OVERVIEW ............................................................................................................................................................................ 22
Long-Term Political Outlook................................................................................................................................... 23
Mining Disputes Main Threat To Stability...................................................................................................................................23
Peru's long-term political stability is undermined by key structural risks, most prominently associated with mining and hydrocarbon s
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 not to be under 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 4: Operational Risk................................................................................................................... 25
SWOT Analysis......................................................................................................................................................... 25
Operational Risk Index............................................................................................................................................ 25
Operational Risk....................................................................................................................................................... 26
TABLE: OPERATIONAL RISK................................................................................................................................................................................. 26
Market Size And Utilities.......................................................................................................................................... 27
TABLE: LATIN AMERICA - MARKET SIZE AND UTILITIES RISK......................................................................................................................... 28
Labour Costs ........................................................................................................................................................... 30
TABLE: REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE..............................................................................................................31
Chapter 5: BMI Global Macro Outlook................................................................................................... 35
Global Macro Outlook.............................................................................................................................................. 35
EMs Past The Worst, But Structural Problems Persist.............................................................................................................35
TABLE: GLOBAL ASSUMPTIONS..........................................................................................................................................................................35
TABLE: DEVELOPED STATES - REAL GDP GROWTH, %.................................................................................................................................. 36
TABLE: EMERGING MARKETS - REAL GDP GROWTH, %................................................................................................................................. 37
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................39

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