Itaú BBA - PERU – GDP remained soft in 2Q19, with sound fiscal and external accounts

Macro Latam

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PERU – GDP remained soft in 2Q19, with sound fiscal and external accounts

agosto 23, 2019

Narrower current account was supported by an improvement in the trade balance

GDP remained soft in 2Q19. According to the Central Bank’s (BCRP) data, GDP grew 1.2% year-over-year in 2Q19 (from 2.4% in the 1Q19), taking the 4-quarter rolling basis growth to 2.7% year-over-year in 2Q19 (from 3.8% in 1Q19). At the margin, looking at the seasonally-adjusted data reported by the BCRP, the economy expanded 3.1% quarter-over-quarter (annualized) in 2Q19 (from -2.5% in 1Q19).

Final domestic demand improved in 2Q19, supported by a recovery in public demand. Final domestic demand improved to 2.1% year-over-year in 2Q19 (from 1.6% in 1Q19), supported by government consumption (1.7%, from -2.7%) and public investment (6.1%, from -10.7%), associated to a recovery in fiscal expenditure execution. In turn, private consumption decelerated to 2.5% in 2Q19 (from 3.2% in 1Q19), while private gross fixed investment accelerated to 5.1% (from 2.9%). Finally, exports contracted 2.9% year-over-year in 2Q19 (from 2.6% in 1Q19) associated partly to lower mining production, while imports grew at a soft pace (0.2%, from -0.4%).

We expect GDP growth of 2.8% for 2019. The weakness in the global economic outlook will weigh on Peru’s small and open economy, while political uncertainty will likely affect business confidence and investment outlook. On the other hand, expansionary monetary policy, which could be eased further, will help to support growth in 2020.

On another note, Peru’s current account deficit (CAD) deteriorated in 2Q19, but remained narrow and fully funded by FDI. Using 4-quarter rolling figures, the current account deficit deteriorated to 1.9% of GDP in 2Q19 (from 1.7% in 1Q19), dragged by deterioration in the trade surplus (2.5% of GDP, from 2.9% of GDP), while services balance remained practically unchanged at 1.1% of GDP. In turn, net income payments (mainly profits from foreign mining firms) fell to 4.9% in 2Q19 (from 5.2% of GDP in 1Q19), while remittances improved slightly to 1.5% of GDP  (from 1.4% 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 2Q19), also using 4-quarter rolling figures. 

Finally, the nominal fiscal deficit narrowed in 2Q19. Using 4-quarter rolling figures, the nominal fiscal deficit narrowed to 1.5% of GDP in 2Q19 (from 1.7% of GDP in 1Q19), associated to a delay in capital expenditure execution (although it improved in 2Q19 to 5.2% year-over-year in real terms, YTD public capital expenditure still fell by 6.0%) and an increase in tax revenues. The Ministry of Finance has a fiscal target for the non-financial public sector (NFPS)  of 2.2% of GDP for 2019 and of 1.8% of GDP for 2020. Turning to public debt ratios, gross debt increased slightly to 25.8% of GDP in 2Q19 (from 25.3% of GDP in 1Q19), while net debt reached 10.2% of GDP (from 10.6% of GDP). Gross Debt ratio complies with Peru’s fiscal rule, which dictates it cannot exceed 30% of GDP. 


Julio Ruiz

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