Itaú BBA - PERU – Narrow CAD, amid weak GDP and deteriorating fiscal accounts in 1Q20

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PERU – Narrow CAD, amid weak GDP and deteriorating fiscal accounts in 1Q20

Maio 22, 2020

Fiscal accounts to deteriorate further due to a large fiscal stimulus and weak economic outlook

GDP in 1Q20 deteriorated amid COVID-19. According to the Central Bank’s (BCRP) data, GDP contracted 3.4% year-over-year in 1Q20 (from 1.8% in the 4Q19), taking the 4-quarter rolling growth to 0.8% year-over-year in 1Q20 (from 2.2% in 4Q19).  At the margin, looking at the seasonally-adjusted data reported by the BCRP, the economy contracted 22.9% quarter-over-quarter (annualized) in (from -1.7% in 4Q19).

Final domestic demand deteriorated in 1Q20. Final domestic demand contracted 1.2% year-over-year in 1Q20 (from 1.9% in 4Q19) dragged by private demand (-5.0%, from 2.5%), with consumption (-4.9%, from 3.0%) and investment (-19.6%, from 0.9%) contracting sharply amid social distancing measures and uncertainty over the economic outlook. In contrast, public demand expanded 8.4% (from -0.2%), with both investment (23.8%, from -5.8%) and consumption (10.1%, from 2.6%) accelerating. Public consumption growth is explained by an increase in expenditure towards skill training, security and cleaning (due to the outbreak), while public investment is due to a recovery in fixed capital expenditure execution in regional and local governments in the first two months of the year. Finally, exports contracted 13.6% year-over-year in 1Q20 (from 1.3% in 4Q19), while imports contracted 6.4% (from 1.7%).

We expect 2020 GDP to contract 3.7% dragged by a negative shock from COVID-19, but with a downside bias given weak economic activity in 1Q20. A bold fiscal stimulus and an expansionary monetary policy will help to support the economic recovery in the second half of the year. 

On another note, Peru’s current account deficit (CAD) remained narrow in 1Q20 amid COVID-19. Using 4-quarter rolling figures, the current account deficit improved slightly to 1.4% of GDP in 1Q20 (from 1.5% of GDP in 4Q19), supported by lower net income payments (mainly profits from foreign mining firms) which stood at 4.1% of GDP (from 4.7% of GDP). In turn, the trade surplus deteriorated to 2.6% of GDP (from 2.9% of GDP), while the services deficit remained practically unchanged (1.4% of GDP). On the financing side, we note that Peru’s CAD is fully-funded by net foreign direct investment (3.1% of GDP in 1Q20, from 3.5% of GDP in 4Q19), also using 4-quarter rolling figures.

Finally, fiscal balance starts to show a deterioration amid weak economic activity and a large fiscal stimulus. Using 12-month rolling figures, the nominal fiscal and primary deficit deteriorated to 3.7% of GDP in April (from 2.1% of GDP in February pre-COVID) and 2.2% of GDP (from 0.6% of GDP), respectively. The deterioration in the fiscal accounts is explained by lower tax revenues (-16.3% year-over-year in real terms YTD in April) due to weakness in economic activity and tax relief measures amid the outbreak. In turn, current expenditures increased 13.2% year-over-year in real terms YTD in April, also associated to the fiscal stimulus to mitigate the impact from COVID-19. Turning to public debt ratios, gross debt and net debt remained practically unchanged at 26.2% of GDP and 13.2% of GDP, respectively, in 1Q20 as the fiscal deterioration started in April. Amid the weak economic outlook and large fiscal stimulus (8.8% of GDP), we expect the fiscal balances to deteriorate further (nominal fiscal deficit of 8.5% of GDP for 2020), putting upward pressure to gross public debt (35% of GDP expected for the end of 2020).

Julio Ruiz

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