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No exception

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Eco Emerging // 1 quarter 2021  
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PERU  
NO EXCEPTION  
Peru is one of the Latin American countries to have suffered most from the Covid-19 crisis. After a sharp contraction  
in Q2 2020, the recovery that began in Q3 has continued. This said, economic activity is unlikely to regain its pre-  
crisis level before the end of 2022. The economic contraction and the massive stimulus programme introduced by the  
government have hit public finances, but the deterioration is likely to remain manageable, for the short term at least.  
However, the deterioration of the political climate seen over the past few years is affecting the medium-term outlook.  
A VERY SEVERE RECESSION  
FORECASTS  
Peru is one of the countries that has suffered most from the Covid-19  
crisis. The very strict lockdown measures introduced in mid-March  
proved unable to limit transmission or protect the restricted capacity of  
the healthcare system. In all, the country has seen more than a million  
cases since the beginning of 2020 (for a population of 32 million), and its  
mortality rate is amongst the highest (ranking sixth according to World  
Bank figures). Having peaked in August (at nearly 8,000 new cases per  
day on average), the number of new daily cases has fallen since early  
September, stabilising at around 1,600 in December. However, it has  
been climbing again since early January, averaging 2,300 per day over  
the first ten days of the month.  
2019  
2020e  
2021e  
2022e  
Real GDP growth (%)  
2.2  
2.1  
-12.0  
1.8  
8.0  
2.1  
3.5  
1.9  
Inflation (CPI, year average, %)  
Central Gov. balance / GDP (%)  
Public debt / GDP (%)  
-3.0  
26.8  
-1.5  
34.7  
68.4  
19.4  
3.3  
-7.5  
35.4  
0.7  
-7.5  
37.1  
1.7  
-3.5  
36.8  
1.5  
Current account balance / GDP (%)  
External debt / GDP (%)  
44.7  
71.5  
25.1  
3.6  
42.2  
70.0  
18.5  
3.7  
41.7  
72.0  
18.0  
3.6  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDPEN (year end)  
On the economic front, the recession in 2020 was severe. Real GDP  
is estimated to have fallen by 12%, having risen by 2.2% in 2019 and  
by 3.2% over the previous five years. By way of comparison, the IMF  
estimates that the region as a whole saw an average recession of 8%  
in 2020.  
TABLE 1  
e: ESTIMATE & FORECASTS  
SOURCE: BNP PARIBAS ECONOMIC RESEARCH  
Real GDP plummeted in the second quarter, dropping 30% year-on-year,  
following lockdown measures that ran from mid-March to end-June. In  
April alone, monthly GDP and the industrial production index collapsed  
by 40% and 53% y/y respectively. All sectors, including mining, saw only  
a very gradual recovery from the end of May.  
REAL GDP  
1
00 = Dec 2019  
110  
Good macroeconomic fundamentals allowed a massive intervention  
by the authorities, in order to prevent an even more spectacular  
collapse in GDP and support the growth recovery that began in Q3.  
At the beginning of 2020, external debt and government debt were  
modest (at 35% and 27% of GDP respectively), the current account  
deficit was largely covered by inflows of foreign direct investment and  
reserves were at a comfortable level (more than 15 months of imports  
in December 2019).  
100  
90  
80  
70  
60  
50  
40  
The central bank cut its policy rate by 200 basis points to 0.25%  
and promised to provide substantial liquidity. At the same time, the  
government has put in place a vast stimulus package, comprising  
both short-term measures (worth some 8% of GDP), aimed mainly  
at supporting the most vulnerable households and companies as  
well as increasing healthcare spending, and longer-term measures  
12/2019  
02/2020  
04/2020  
06/2020  
08/2020  
10/2020  
CHART 1  
SOURCE: NATIONAL ACCOUNTS  
those who have not contributed over the preceding 12 months.  
Meanwhile, at the end of June, the IMF approved a Flexible Credit Line,  
a financing facility (for USD11 billion with a two-year term) designed  
to help deal with crises (Peru can trigger this credit line if its economic  
(
worth around 4% of GDP) to help support growth. The government  
also introduced a programme of lending to business, ‘Reactiva Peru’,  
financed by the central bank and equivalent to 8% of GDP.  
Lastly, in order to support the recovery in household consumption, in and financial situation worsens significantly) and reserved for coun-  
May Congress approved a law to enable beneficiaries to withdraw up tries with particularly solid macroeconomic fundamentals .  
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to 25% of their assets from private pension funds. After acrimonious  
The monthly indicator of economic activity has recovered continuously  
debate in parliament, further withdrawals were authorised at the end  
since July, but in October was still 11% below its end-2019 level  
of November, covering beneficiaries affected by certain illnesses or  
(
chart 1). Driven by rising metals prices (mainly for gold and copper,  
1
To date, only five countries have been offered this facility: Chile, Colombia, Mexico, Peru and Poland.  
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the latter still accounting for nearly one-third of exports), favourable  
growth prospects in China (the main destination for exports since 2014)  
and the government’s stimulus plan, the economic recovery should  
continue throughout 2021 and 2022. Real GDP growth is projected at  
BUDGET DEFICIT AND PUBLIC DEBT  
%
5
GDP  
3
8
% and 3.5% respectively. At this pace, the economy is unlikely to regain  
External  
Domestic  
Deficit  
its pre-crisis level before the end of 2022.  
30  
2
2
1
1
5
0
5
0
5
0
DETERIORATION OF THE POLITICAL CLIMATE  
The risks are on the downside. In particular, the worsening of the  
political climate seen over a number of years gathered pace at the end  
of 2020 and will weigh on short-term growth prospects, and probably  
on economic fundamentals over the medium term.  
On the one hand, a lack of clarity on the supply of vaccines and the  
effective commencement of the vaccination campaign limits growth  
prospects for 2021. The Health Minister initially announced that the  
campaign would begin in the first quarter of 2021. According to the  
local press, it seems, however, that the political crisis in October  
and November not only delayed the rollout, but also prevented  
the finalisation of orders for vaccines. The start of the vaccination  
programme might end up being pushed back to the beginning of the  
second half.  
-5  
-
10  
2014  
2015  
2016  
2017  
2018  
2019  
2020  
CHART 2  
SOURCE: MINISTRY OF FINANCE  
be delayed still further. In the longer run, political instability and the  
lack of reforms could hit potential growth and the attractiveness of the  
country to foreign investors.  
On the other hand, structural weaknesses in governance worsened  
over the course of the latest mandate (since 2016), concerning mainly  
parliament’s defiance of the government and numerous corruption  
scandals. The mandate has thus seen a succession of four presidents  
(
three in November 2020) who were removed from office or forced THE SHORT-TERM INCREASE IN GOVERNMENT DEBT IS  
to resign following their implication in corruption scandals, two  
parliaments and a high rate of turnover in ministerial offices. However,  
under the Peruvian constitution, the duration of presidential and  
parliamentary mandates remains fixed. The next general elections  
NOT WORRYING  
presidential and legislative) will therefore take place as planned at  
The government estimates that after increasing to 8.5% of GDP in 2020  
(
from 1.6% in 2019), the government deficit will fall to 6.5% in 2021. We  
(
think that the figure is likely to be closer to 7.5% in both years. Tensions  
between parliament and government prevented the implementation of  
a number of measures in the stimulus package – including several pu-  
blic investment projects – which will therefore be delayed until 2021.  
The deficit is then likely to shrink, given the temporary nature of the in-  
crease in public spending. Government debt is estimated to have risen  
from 27% of GDP in 2019 to 35% in 2020 and then should rise further  
to 37% in 2021. It will therefore remain moderate  
the end of the current mandate.  
In mid-November, parliament elected Francisco Sagasti, a deputy and  
founder of the centrist Morado party, as interim President. He will re-  
main as interim President until elections are held. He has committed  
to respecting the electoral calendar, thus to hold the first round of  
elections on 11 April of this year, and to leave power on 28 July, when  
the next presidential mandate begins. However, this has not calmed  
the political climate. Relations between parliament and the interim  
government will remain extremely tense, particularly if the country  
faces a further wave of infections.  
.
Completed on 11 January 2021  
Hélène DROUOT  
helene.drouot@bnpparibas.com  
At present, given the large number of candidates, it is difficult to pre-  
dict the likely winner of these elections and any majority in the next  
parliament. However, all candidates seem to agree on a degree of  
continuity in economic policy, concerning for example the respect of  
fiscal discipline that has been seen for a number of mandates now.  
Between 2015 and 2019, the government deficit remained limited to  
2
.2% of GDP on average, despite the collapse in copper prices and se-  
veral natural disasters.  
It is likely, however, that relations between government and parliament  
will remain strained during the next mandate. The budget targets for  
the short term (stimulus measures in 2021, consolidation from 2022)  
and the medium term (increase in receipts through a reform of the col-  
lection system), and reforms designed to boost Peru’s potential growth  
(
labour market reform, tackling the informal economy), could  
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