Itaú BBA - PERU – GDP rebounded in 3Q20, amid narrowing current account deficit and deteriorating fiscal balanc

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PERU – GDP rebounded in 3Q20, amid narrowing current account deficit and deteriorating fiscal balanc

November 20, 2020

Final domestic demand recovery is supported by public and private demand

GDP rebounded in 3Q20. According to the Central Bank’s (BCRP) data, GDP recovered to -9.4% year-over-year in 3Q20 (from -29.8% in the 2Q20).  At the margin, looking at the seasonally adjusted data reported by the BCRP, the economy rebounded 30.1% quarter-over-quarter (non-annualized) in 3Q20.

Recovery in final domestic demand in 3Q20 was supported by the easing of distancing measures and fiscal stimulus. Final domestic demand recovered to -8.6% year-over-year in 3Q20 (from -26.8% in 2Q20), supported by both private (-9.1%, from -30.4%) and public (-3.9%, from -26.9%) demand. Within private demand, private consumption fell by 9.7% (from -22.1%), while private investment stood at -7.1% (from -60.2%). In turn, government consumption registered a positive annual expansion in 3Q20 (4.3%, from -8.8% in 2Q20), while public investment stood at -24.5% (from -70.7%). Finally, exports recovered to -23.2% (from -41.6%), while imports fell by 21.0% (from -30.4%).

We expect GDP to fall by 12.6% in 2020. The large fiscal and monetary stimulus will support the recovery during the rest of the year and 2021 (we expect a GDP expansion of 9.6%). However, political turmoil (including its effect on fiscal-policy execution) is a downside risk to economic recovery.

On another note, Peru’s current account deficit (CAD) narrowed in 3Q20, supported by an improvement in the trade surplus and lower net income payments. Using 4-quarter rolling figures, the current account deficit improved further to 0.1% of GDP in 3Q20 (from a deficit of 0.7% of GDP in 2Q20), supported by an improvement in the trade surplus (3.0% of GDP, from 2.4% of GDP) and lower net income payments (mainly profits from foreign mining firms) which stood at 3.1% of GDP (from 3.3% of GDP). In contrast, the services deficit (1.9% of GDP, from 1.7% of GDP) deteriorated. On the financing side, using 4-quarter rolling figures, net foreign direct investment deteriorated further to 2.3% of GDP in 3Q20 (from 2.7% in 2Q20).  

Finally, fiscal accounts deteriorated as of October amid the sharp fall in activity and the large fiscal stimulus due to the COVID-19. Using 12-month rolling figures, the nominal fiscal and primary deficits deteriorated to 7.3% of GDP in October (compared to 6.2% of GDP in September and 2.1% of GDP in February before the outbreak) and 5.6% of GDP (from 4.6% of GDP in September and 0.6% of GDP in February), respectively. The deterioration in the fiscal balances is explained by lower tax revenues (-18.2% YTD yoy in October) due to weakness in economic activity and tax relief measures amid the outbreak. In turn, total expenditure increased 8.5% YTD in October (compared with the first 10 months of 2019), pressured mainly by expenditure transfers (59.3% in October) due to the fiscal stimulus. Turning to public debt ratios, gross debt and net debt deteriorated to 32.1% of GDP in 3Q20 (from 30.3% of GDP in 2Q20) and 18.5% of GDP (from 15.2% of GDP), respectively. We expect the nominal fiscal deficit and gross public debt to reach 10.7% of GDP and 36.5% of GDP in 2020, respectively. 

Julio Ruiz

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