Itaú BBA - PERU – Domestic demand improved in 2018, amid solid fiscal and external fundamentals

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PERU – Domestic demand improved in 2018, amid solid fiscal and external fundamentals

February 22, 2019

Nominal fiscal deficit improved more than expected by the Ministry of Finance

Peru’s GDP economy grew 4.0% in 2018.  According to the Central Bank’s (BCRP) data, GDP grew 4.8% year-over-year in the 4Q18 (from 2.4% in the 3Q18), taking the 2018 annual growth rate to 4.0%. At the margin, looking at the seasonally-adjusted data reported by the BCRP, the economy expanded 11.9% (annualized) in 4Q18 (from -8.3% qoq/saar in the previous quarter).

Final domestic demand accelerated in 4Q18.  Final domestic demand grew 3.8% year-over-year in the 4Q18 (from 3.0% in the 3Q18). Looking at the breakdown, public demand recovered, with public consumption growing 2.2% year-over-year (from -0.7%), while gross fixed public investment accelerated to 17.0% (from -1.61%), associated to an increase in transport infrastructure expenditure and construction of infrastructure for the Pan-American sports games. Private demand also improved, with private consumption up by 3.8% year-over-year (from 3.3%), supported by a resilient labor market and consumer credit. Gross fixed private  investment expanded by 2.1% year-over-year (from 1.6%). Finally, exports grew 2.6% year-over-year (from -0.6% in the 3Q18), while imports decreased 1.7% year-over-year (from 1.2% in the 3Q18).

We expect GDP growth of 4.0% for 2019, assuming that trade tensions dissipate (benefiting metal commodity prices and, consequently, investment) and a still-expansionary monetary policy, which would offset lower fiscal impulse. The main risk to our macro outlook is the possibility of a further escalation in the trade dispute between the U.S. and China (Peru’s top two trading partners). Another downside risk is a sharp deceleration of public investment at the subnational and regional levels, as most of the newly elected officials that took office in 2019 lack experience (affecting budget execution).

On another note, Peru’s current account deficit (CAD) deteriorated in 2018, but remained narrow and fully funded by FDI. The current account deficit deteriorated to 1.5% of GDP in 2018 (from a deficit of 1.2% in 2017), dragged by a slightly wider services deficit (1.1% of GDP, from 0.7% of GDP) and higher net income payments (mainly profits from foreign mining firms), while trade balance remained practically unchanged at 3.1% of GDP. On the financing side, we note that Peru’s CAD is fully-funded by net foreign direct investment (2.9% of GDP in 2018). 

Finally, the nominal fiscal deficit improved in 2018.  The nominal fiscal deficit narrowed to 2.5% of GDP in 2018 (from 3.1% of GDP in 2017) due to an improvement of fiscal revenues, reflecting activity recovery. The 2018 nominal fiscal deficit was below the 3.0% of GDP estimate in the macro-framework published in August 2018 by the Ministry of Finance (MoF). Looking forward, the MoF targets a nominal fiscal deficit of 2.7% of GDP for 2019 and a gradual reduction to 1.0% of GDP by 2021. Turning to public debt ratios, gross debt increased to 25.7% of GDP in 2018 (from 24.9% of GDP in 2017), while net debt reached 11.4% of GDP (from 9.5%). Gross Debt ratio comply with Peru’s fiscal rule, which dictates that the gross public debt to GDP cannot exceed 30%. 

Julio Ruiz


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