Peru Country Risk Report Q4 2020

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.

Key Risks


Executive Summary
Core Views
Key Risks
Major Forecast Changes
Country Risk Summary
Economic Risk Index
Political Risk Index
SWOT
Economic – SWOT Analysis
Political – SWOT Analysis
Economic Outlook
Economic Growth Outlook
Peru's Growth Outlook For 2020 Becomes More Dire
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
External Trade And Investment Outlook
Robust External Buffers Will Cover Peru's Current Account Deficits
Outlook On External Position
TABLE: TOP FIVE GOODS EXPORTS IN 2019
TABLE: TOP FIVE GOODS IMPORTS IN 2019
TABLE: CURRENT ACCOUNT BALANCE FORECASTS
Monetary Policy
Banco Central De Reserva Del Perú Will Extend Stimulus Measures Into 2021
Monetary Policy Framework
TABLE: MONETARY POLICY FORECASTS
Fiscal Policy And Public Debt Outlook
Wider Short-Term Fiscal Deficit Followed By Long-Term Uncertainty
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
TABLE: FISCAL AND PUBLIC DEBT FORECASTS
THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings’ Credit Ratings. Any comments or data included in the report are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.Peru Country Risk Q4 2020ContentsCurrency Forecast
Short-Term Growth Headwinds Will Keep Peruvian Sol In Weaker Range
TABLE: CURRENCY FORECAST
10-Year Forecast
The Peruvian Economy To 2029
Peru Likely To Regain Strong Growth Trajectory Over The Decade
TABLE: LONG-TERM MACROECONOMIC FORECASTS
TABLE: PRIVATE CONSUMPTION KEY TO GROWTH OUTLOOK
Political Outlook
Domestic Politics
Renewed Tensions Between Vizcarra And Congress Will Sideline Reform Agenda In Peru
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Corruption, Inequality And Mining Tensions Will Challenge Long-Term Stability
Operational Risk
TABLE: OPERATIONAL RISK
Labour Costs
TABLE: REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE
Legal Environment
TABLE: BUREAUCRATIC PROCEDURES AND BARRIERS
Global Macro Outlook
Recovery Taking Shape, But Headwinds Remain
TABLE: GLOBAL MACROECONOMIC FORECASTS (2019-2024)
TABLE: DEVELOPED MARKETS – REAL GDP GROWTH, % y-o-y
TABLE: EMERGING MARKETS – REAL GDP GROWTH, % y-o-y
Index Tables
TABLE: PERU – MACROECONOMIC DATA AND FORECASTS

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