Itaú BBA - PERU – Soft 2019 GDP, amid narrow fiscal and external accounts

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PERU – Soft 2019 GDP, amid narrow fiscal and external accounts

Fevereiro 21, 2020

Final domestic demand was dragged mainly by weak gross fixed public investment

Peru’s GDP slowed in the last quarter of 2019.  According to the Central Bank’s (BCRP) data, GDP grew 1.8% year-over-year in the 4Q19 (from 3.2% in 3Q19), taking the 2019 GDP to 2.2% (from 4.0% in 2018). At the margin, looking at the seasonally-adjusted data reported by the BCRP, the economy slowed down to 2.2% quarter-over-quarter (annualized) in 4Q19 (from 3.7% in 3Q19). 

Final domestic demand was dragged mainly by weak gross fixed public investment. Final domestic demand deteriorated to 2.0% year-over-year in 4Q19 (from 3.9% in 3Q19), dragged by public demand which contracted 0.5% (from 4.8%), while private demand slowed down to 2.5% (from 4.1%). Within public demand, gross fixed investment contracted 7.7% year-over-year in 4Q19 (from 1.1% in 3Q19), associated to weak public capital expenditure execution in local and regional governments, while public consumption stood at 3.2% (from 6.5%). In turn, private consumption and gross fixed investment decelerated to 3.0% year-over-year in 4Q19 (from 3.3% in 3Q19) and 0.9% (from 7.1%), respectively. Finally, exports recovered to 1.3% year-over-year in 4Q19 (from 0.6% in 3Q19), while imports slowed down to 1.8% (from 2.9%). 

We expect GDP to recover at a slow pace (3.3%) in 2020. The impact of the coronavirus outbreak on China’s economy will weigh on Peru’s economic activity. Nevertheless, we expect an economic recovery to be supported by a stronger local government public spending, an expansionary monetary policy and a less uncertain political environment.

On another note, Peru’s current account deficit (CAD) remained narrow, supported by lower net income payments. The current account deficit improved to 1.5% of GDP in 2019 (from a deficit of 1.7% of GDP in 2018), supported mainly by lower net income payments (mainly profits from foreign mining firms), which fell to 4.7% of GDP (from 5.2% of GDP), while remittances remained practically unchanged at 1.4% of GDP. At the  margin, using our own seasonally-adjusted series, the CAD remained stable, as it stood at 1.4% of GDP in 4Q19 (practically unchanged from 3Q19). On the other hand, the trade surplus and services deficit deteriorated to 2.9% of GDP in 2019 (from 3.2% of GDP in 2018) and 1.4% of GDP (from 1.2% of GDP). On the financing side, we note that Peru’s CAD is fully-funded by net foreign direct investment (3.5% of GDP in 2019). 

Finally, the nominal fiscal account narrowed further. Using 4-quarter rolling figures, the nominal fiscal deficit narrowed to 1.6% of GDP in 2019 (down from 2.3% of GDP in 2018), below the MoF’s fiscal cap of 2.9% of GDP and the government’s estimate of 2.2% of GDP (largely due to under execution of the investment budget at regional and local governments), while the primary deficit improved to 0.2% of GDP in 2019 from 0.9% of GDP in 2018. Looking at the breakdown, we see that total revenues increased by 4.2% year over year in real terms in 2019, with tax revenues growing by 3.7% year over year in real terms. Meanwhile, total primary expenditure grew by 1.0% year over year in real terms in 2019, supported by non-financial expenditure growth (3.1%), but with fixed capital expenditure declining by 6.3%. Turning to public debt ratios, gross debt increased slightly to 26.8% of GDP in 2019 (from 25.7% in 2018), while net debt reached 12.9% of GDP (from 11.3% 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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