Itaú BBA - PERU – Deteriorating fiscal accounts and narrow CAD in 2Q20, amid a GDP collapse

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PERU – Deteriorating fiscal accounts and narrow CAD in 2Q20, amid a GDP collapse

August 21, 2020

Higher public debt expected for 2020 amid weak GDP and large fiscal stimulus

GDP in 2Q20 collapsed due to mobility restrictions linked to COVID-19. According to the Central Bank’s (BCRP) data, GDP contracted 30.2% year-over-year in 2Q20 (from -3.5% in the 1Q20).  At the margin, looking at the seasonally adjusted data reported by the BCRP, the economy contracted 71.1% quarter-over-quarter (annualized) in 2Q20.

Final domestic demand deteriorated in 2Q20 dragged by both public and private demand. Final domestic demand contracted 26.7% year-over-year in 2Q20 (from -2.3% in 1Q20), with private and public demand falling by 30.3% (from -5.0%) and 23.2% (from -7.8%), respectively. Within private demand, private consumption fell by 22.1% (from -1.7%), while private investment deteriorated by even more (-60.2%, from -16.9%). In turn, public investment fell by 70.0% (from 14.8%) reflecting mainly the interruption of public infrastructure projects, while public consumption stood at -3.9% (from 6.0%). Finally, exports contracted 43.6% (from -9.7%) year-over-year in 2Q20 amid a weak external demand, while imports fell by 30.5% (from -5.8%).

We expect GDP to fall by 11.9% in 2020. We expect a recovery in 2H20, supported by a large fiscal stimulus and an expansionary monetary policy, besides looser mobility restrictions. However, the recent acceleration of Covid cases could slow down the reopening of the economy. 

On another note, Peru’s current account deficit (CAD) remained narrow in 2Q20, supported by lower net income payments. Using 4-quarter rolling figures, the current account deficit improved to 0.8% of GDP in 2Q20 (from 1.1% of GDP in 1Q20), supported by lower net income payments (mainly profits from foreign mining firms) which stood at 3.3% of GDP (from 4.0% of GDP). In contrast, the trade surplus (2.3% of GDP in 2Q20, from 2.8% of GDP from 1Q20) and the services deficit (1.7% of GDP, from 1.5% of GDP) deteriorated and curbed the improvement in the CAD. On the financing side, using 4-quarter rolling figures, net foreign direct investment deteriorated to 2.7% of GDP in 2Q20 (from 3.2% in 1Q20) but is still more than enough to fund the CAD.  

Finally, the nominal fiscal balances and public debt deteriorated amid weak economic activity and the large fiscal stimulus due to the outbreak. Using 12-month rolling figures, the nominal fiscal and primary deficit deteriorated to 5.2% of GDP in July (compared to 4.7% of GDP in June and 2.1% of GDP in February before the outbreak) and 3.6% of GDP (from 3.2% of GDP in June and 0.6% of GDP in February), respectively. The deterioration in the fiscal balances is explained by lower tax revenues (-19.7% year-over-year in real terms YTD in July) due to weakness in economic activity and tax relief measures amid the outbreak. In turn, total expenditure increased 0.5% yoy YTD in July: while expenditure transfers increased 34.6% yoy YTD in July (due to the fiscal stimulus), the sharp increase was mitigated by a fall in total capital expenditure (-42.6% yoy YTD) as public infrastructure projects were interrupted. Turning to public debt ratios, gross debt and net debt deteriorated to 30.2% of GDP in 2Q20 (from 26.3% of GDP in 1Q20) and 15.1% of GDP (from 13.0% of GDP), respectively. We expect the nominal fiscal deficit and gross public debt to reach 10.1% of GDP and 36.5% of GDP in 2020, respectively. 

Julio Ruiz

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