Itaú BBA - PERU – Soft 1Q19 GDP, with solid fiscal and external accounts

Macro Latam

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PERU – Soft 1Q19 GDP, with solid fiscal and external accounts

mayo 24, 2019

Final domestic demand was dragged mainly by a fall of public demand

Peru’s GDP weakened in 1Q19.  According to the Central Bank’s (BCRP) data, GDP grew 2.3% year-over-year in the 4Q18 (from 4.7% in the 4Q18), taking the 4-quarter rolling basis to 3.8% year-over-year in 1Q19 (from 4.0% in 2018). At the margin, looking at the seasonally-adjusted data reported by the BCRP, the economy contracted 4.5% (annualized) in 1Q19 (from 10.9% qoq/saar in 4Q18).

Final domestic demand decelerated in 1Q19.  Final domestic demand decelerated to 1.7% year-over-year in 1Q19 (from 3.5% in 4Q18), dragged mainly by public consumption (-2.5%, from 2.2%) and gross fixed investment (-10.9%, from -15.3%) associated to a delay in expenditure execution mainly at the regional level. In turn, private demand moderated its growth pace, with private consumption growing to 3.4% year-over-year in 1Q19 (from 3.8% in 4Q18), supported by an improvement in the labor market, while private gross fixed investment improved to 2.9% (from 2.1%). Finally, exports grew 1.6% year-over-year in 1Q19 (from 2.9% in the 4Q18), while imports decreased 0.5% (from -1.8% in the 4Q18).

We expect GDP growth of 3.8% for 2019, reflecting an escalation of the US/China trade war. Besides global factors, another downside risk for the economy is a prolonged deceleration of public investment at the subnational and regional levels, as most of the newly elected officials who took office in 2019 lack experience. In turn, we expect an expansionary monetary policy support economic activity, which would offset a lower fiscal impulse.

On another note, Peru’s current account deficit (CAD) deteriorated slightly in 1Q19, but remained narrow and fully funded by FDI. Using 4-quarter rolling figures, the current account deficit deteriorated to 1.8% of GDP in 1Q19 (from 1.6% in 4Q18), dragged by a deterioration in the trade balance (2.9% of GDP, from 3.2% of GDP), while services balance, net income payments (mainly profits from foreign mining firms) and  remittances remained practically unchanged at 1.1%, 5.2% and 1.4% of GDP, respectively. On the financing side, we note that Peru’s CAD is fully-funded by net foreign direct investment (2.8% of GDP in 1Q19). 

Finally, the nominal fiscal deficit improved in 1Q19. Using 4-quarter rolling figures, the nominal fiscal deficit narrowed to 1.7% of GDP in 1Q19 (from 2.3% of GDP in 4Q18) supported by an improvement of fiscal revenues. Looking forward, the Ministry of Finance is now targeting a sharper fiscal consolidation process that would reduce the non-financial public sector (NFPS) nominal deficit to 2.2% of GDP (down from the previous target of 2.7%) in 2019 and 1.8% in 2020 (down from 1.9%). Turning to public debt ratios, gross debt decreased slightly to 25.3% of GDP in 1Q19 (from 25.8% of GDP in 4Q18), while net debt reached 10.6% of GDP (from 11.3% of GDP). Gross Debt ratio complies with Peru’s fiscal rule, which dictates that the gross public debt to GDP cannot exceed 30%. 

Julio Ruiz

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