IMF Executive Board Concludes 2015 Article IV Consultation with Peru
Peru remains one of the best performing economies in Latin America, with solid macroeconomic policies and fundamentals and visible gains in poverty reduction. However, like most of the region, Peru faced a challenging external environment in 2014. Lower metal prices and weaker demand from trading partners were a major drag on private investment and exports. On the domestic front, an unexpected drop in subnational public investment level and temporary supply disruptions in mining, fishing, and agriculture compounded external shocks. Against this background, real GDP growth slowed to 2.4 percent in 2014, from 5.8 percent a year earlier. Headline inflation closed the year slightly above the upper band of the central bank’s target range due to supply shocks, but expectations remained well anchored. The high external current account deficit declined slightly despite lower commodity prices and sluggish external demand.
A strong policy framework and solid fundamentals allowed the authorities to loosen the macroeconomic policy stance. The authorities embarked on a series of fiscal and structural packages, including tax cuts, increases in fiscal spending, and structural measures to support investment, consumption, and growth. Monetary conditions were also eased against a widening negative output gap and stable inflation expectations, helping to lower lending rates and providing support to credit to the private sector. New de-dollarization measures were launched at the end of 2014.
Real GDP is projected to expand at about 3.75 percent this year, contingent on the reversal of last year’s supply shocks and policy stimulus. Growth is expected to rise in 2016?17, assuming new mines come on stream, large infrastructure projects are implemented, and terms of trade shocks fade, with the output gap closing by 2018. Inflation is projected to converge towards the mid-point of the target range by end-2015, and the current account deficit will narrow gradually over the medium term as mining exports gain ground. Important risks loom on the horizon, but ample buffers place Peru in a comfortable position to respond to future shocks.
Executive Board Assessment2
Executive Director commended the authorities for the country’s solid macroeconomic policies and fundamentals and visible gains in poverty reduction, which have made Peru one of the best performing economies in Latin America. While noting that risks to the outlook are tilted to the downside, Directors considered that Peru is in a comfortable position to respond to shocks, given the ample buffers in place. They concurred that if negative shocks materialize, exchange rate flexibility should be the main line of defense, and liquidity could be provided to avoid an undue contraction in credit, while acknowledging that Peru’s dollarized economy increases the risks from exchange rate volatility. Looking ahead, Directors encouraged the authorities to continue to implement ambitious structural reforms to sustain inclusive growth and diversify the economy, including through further de-dollarization.
Directors agreed that the 2015 fiscal stimulus was timely, and concurred that the immediate priority is executing the existing package with a focus on boosting investment, rather than developing new measures. Directors welcomed the authorities’ intention to gradually withdraw the stimulus from 2016. They encouraged the authorities to implement careful expenditure management and revenue mobilization to return to the original fiscal path by 2018. Directors emphasized that hikes in non-priority current spending should be avoided, given the need to finance structural reforms, carry through the civil service reform, increase allocations for physical and human capital investment, and protect social programs. They agreed that, over the medium term, targeting a small structural fiscal surplus would be advisable to preserve buffers. Continued strong political commitment remains essential to maintain the credibility of the new fiscal framework.
Directors supported the accommodative monetary policy stance that has kept inflation expectations well anchored. Looking ahead, they concurred that monetary policy should remain responsive to inflation expectations and external developments, while limited foreign exchange rate intervention could be necessary to smooth excessive volatility in a still highly dollarized economy.
Directors welcomed the new de-dollarization measures. They agreed that strengthening prudential requirements on dollar lending and encouraging the private sector to hedge its foreign currency exposure could further support the de-dollarization process, along with deepening financial and capital markets. Directors supported enhancing data collection and analysis of corporate and household balance sheets to better assess risks from currency mismatches.
Directors observed that the financial system remains stable, although the recent deterioration in the quality of the loan portfolio of non-bank financial institutions warrants close monitoring and supervision. A more effective use of existing programs to support small and medium-sized enterprises could help mitigate the impact of the growth slowdown.
Directors underscored the importance of steadfast implementation of structural reforms to boost potential growth and foster social inclusion. They welcomed the authorities’ priority on streamlining legal requirements and red tape. Directors concurred on the need to pursue ambitious education reform and inclusion polices within the framework of fiscal discipline.
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