Itaú BBA - PERU – Domestic demand weakened in 3Q18, amid narrow twin deficits

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PERU – Domestic demand weakened in 3Q18, amid narrow twin deficits

November 23, 2018

Nominal fiscal deficit improved, while current account deteriorated somewhat

Peru’s GDP lost momentum in 3Q18.  According to the Central Bank’s (BCRP) data, GDP grew 2.3% year-over-year in 3Q18 (from 5.5% in 2Q18). At the margin, looking at the seasonally-adjusted data reported by the BCRP, the economy fell by 9.7% (annualized) in 3Q18 (following a 13.1% qoq/saar gain the previous quarter).

Final domestic demand decelerated in 3Q18, although it still expanded at a decent pace on an annual basis. Final domestic demand decelerated to 2.2% year-over-year in 3Q18 (from 4.9% in 2Q18). Looking at the breakdown, public consumption (-1.8% in the 3Q18, from 0.4% in the 2Q18) and gross fixed public investment (-1.6% in the 3Q18, from 8.4% in the 2Q18) decelerated the most, associated to a base effect and some delays in fiscal expenditure execution. Private sector demand also weakened, with private gross fixed investment expanding 1.4% year-over-year, from 8.5%, although private consumption remained somewhat resilient (growing 3.3% year-over-year, from 4.4%), consistent with the growth rate of real wage bill and consumption credit. Finally, exports (-0.6% year-over-year in the 3Q18, from 4.2% in the 2Q18) and imports (0.7% year-over-year in the 3Q18, from 6.6% in the 2Q18) also decelerated.

We expect GDP growth at 4.0% both in 2018 and 2019 (from 2.5% in 2017). However, recent data suggests downside risks for the number. Specifically, the persistence of copper prices at lower levels, due to trade war risks, could keep growth at a slower pace than we currently expect.

On another note, Peru’s current account deficit (CAD) deteriorated in 3Q18, but remained narrow and fully funded by FDI. The rolling 4-quarter current account deficit deteriorated to 1.7% of GDP in the 3Q18 (from 1.4% in the 2Q18), dragged by a smaller trade balance surplus (3.2% of GDP in 3Q18, from 3.5% of GDP), higher net income payments (mainly profits from foreign mining firms) and a slightly wider services deficit. Likewise, according to our calculations, the quarterly seasonally adjusted CAD deteriorated to 1.9% of GDP in 3Q18 (from 1.2% of GDP in 2Q18). On the financing side, we note that Peru’s CAD is fully-funded by net foreign direct investment (whose rolling 4-quarter measure posted 4.3% of GDP in the 3Q18, from 4.0% of GDP in the 2Q18). 

Finally, nominal fiscal deficit improved somewhat, although public debt increased. The rolling 4-quarter nominal fiscal deficit narrowed to 2.1% of GDP in 3Q18 (from 2.2% of GDP in 2Q18) with revenues more than offsetting the increase of expenditures. Nominal deficit is on track to reach the fiscal target of 3.0% of GDP in 2018. Despite this improvement, public finances will require consolidation in the coming years to reach the fiscal target for 2021 (a deficit of 1% of GDP). Turning to public debt ratios, gross debt increased slightly to 23.8% of GDP in 3Q18 (from 23.6 in the 2Q18), while net debt also increased to 9.4% of GDP (from 8.5% in 2Q18). Debt ratios comply with Peru’s fiscal rule, which dictates that the gross public debt to GDP ratio cannot exceed 30%. 

Julio Ruiz


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