Peru Country Risk Report Q4 2020
Government restrictions on economic activity due to Covid-19 and weakened external demand will cause a substantial recession in Peru. We forecast real GDP to contract by 10.7% y-o-y in 2020 as sustained pessimism about economic conditions suggest a sluggish recovery beginning towards the end of 2020. Peru is one of Latin America's better-positioned economies to rebound from Covid-19 due to its competitive industrial sector and ample fiscal space to support growth. We forecast real GDP growth of 5.3% y-o-y in 2021 and 3.7% in 2022.
We forecast Peru's budget deficit to widen to 8.9% of GDP, an all-time high, in 2020 as the government implements significant fiscal stimulus measures to mitigate the economic impact of Covid-19. A deep economic contraction, combined with temporary tax relief measures, will undermine revenue growth and weigh on the country's fiscal position in the short term.
The Banco Central de Reserva del Perú (BCRP) will keep interest rates at an all-time low of 0.25% over the coming quarters to support domestic liquidity during the pandemic. Anchored inflation expectations and a dovish US Federal Reserve will facilitate the BCRP's accommodative stance into 2021, and the central bank will maintain an active role in supporting Peruvian businesses via a low-interest lending programme.
Peruvian exports and imports will severely decline as the Covid-19 shock weighs on domestic production, consumption and investment. The country's current account deficit will begin to narrow as the economy recovers in 2021, although rebounds in exports, imports and primary income outflows will largely offset one another. We forecast that Peru's current account deficit will be 1.8% of GDP in 2020 and 1.5% in 2021. Robust foreign capital inflows will fund these moderate shortfalls.
Ongoing political battles between President Martín Vizcarra and Congress will impair Vizcarra's ability to translate public support into his preferred reforms. The likely passage of pension withdrawal legislation and the debate over ending immunity for public officials will increase risks to the country's investor-friendly economic model and political institutions ahead of the April 2021 general election.
We forecast the Peruvian sol to trade sideways in H220 but remain close to multi-year lows amid significant short-term growth headwinds and ongoing investor risk aversion. The unit will depreciate at a modest pace against the US dollar in the coming years as structurally wider fiscal deficits and political risks surrounding the 2021 election limit capital inflows and outweigh a more positive medium- to long-term growth outlook.
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