Overall, there is a great consensus among the candidates’ proposals (see Figure 1). Most aim to preserve the current macroeconomic policy framework, including: A responsible fiscal policy; an independent monetary policy enforced by the central bank; and the promotion of private investment. All candidates will pursue a tax reform, as they seek to increase revenues and the formalization of the economy. And only Toledo and Humala want to increase the royalty taxes that mining companies pay to the government, in order to support social spending.
The central bank of Peru (BCRP) increased rates by 25 bps as expected by the market and RGE, taking the policy rate to 3.75% on March 10. Similar to the previous month, the press release highlights that the hike is preventive in a scenario of high international food and energy prices, and seeks to limit the impact of supply-side shocks on private expectations, in the context of strong domestic demand.
Colombia’s central bank (Banrep) increased the benchmark rate by 25 basis points to 3.25% at its February 25 meeting, the first hike after maintaining the rate at 3% for nine consecutive months. The decision surprised the markets and RGE as expectations were tilted toward an unaltered monetary policy rate. In its communiqué, Banrep said that the conditions keeping the rate at a low level had changed as domestic demand and credit dynamics had improved, economic growth is approaching its long-term trend, inflation projections are close to the middle of the target range and inflation expectations have deteriorated. Still, Banrep maintains that the new rate level is supportive of economic and employment growth and helps to keep inflation within the target range.
Banrep, the Colombian central bank, said that for Q4 2010 it expects similar growth to the 3.6% registered during Q3, driven mainly by external demand. Adverse weather conditions during late 2010 affected the agriculture sector, as well as construction, gross fixed capital formation and mining exports, which were reduced due to problems with extraction and transport. Borrowing, corporate debt and investment in machinery and equipment expanded at high rates as nominal and real interest rates are at historical lows. Household consumption continued to develop positively, reflected by improved consumer confidence and benefiting from a rise in formal employment for skilled workers. Foreign trade dynamics showed exports growing 19.5% annually by November, driven by mining, energy and coffee exports, while imports rose 34.5% during the same period.
Peru’s economy likely grew by 8.8% y/y in December, compared with a 9.6% y/y 3MMA, bringing average growth to 8.8% in 2010 from 0.9% y/y in 2009. Strong domestic demand (11.1% y/y) and a beneficial external backdrop—as reflected by higher commodity prices—underpins the strong economic performance, although a high base should start to kick in. At the sector level, the economic activity should benefit from solid expansion in construction (16% y/y), manufacturing (9% y/y), retail sales (9.6% y/y), and services (9.1% y/y); however, all of these have decelerated from the buoyant growth in previous months. Mining should print its first positive reading since August, as indicated in the national statistics institute’s (INEI) advance report on economic activity.
Expectations for Peru’s 2010 GDP remain in line with RGE’s own expectations. For 2011, higher inflation is consistent with stronger growth, which continues to be revised upward, but still falls slightly short of our expectations for 2011. These revisions, however, do not affect the exchange rate, signalling that analysts expect the central bank to continue with strong intervention to prevent sharp appreciation of the currency. Analysts also show heightened optimism for 2012, while we still have a more conservative view as the global economic recovery remains fragile and monetary and fiscal authorities continue to remove excessive stimulus from the economy.
RGE expects Peru’s inflation to increase by 0.28% m/m to 2.36% y/y in January (2.08% y/y in 2010) and core ex-food inflation to increase 0.03% m/m to 1.82% y/y (1.38% y/y in 2010). Higher food, energy and fuel prices, as well as strong domestic demand, likely exerted upward pressures on prices, despite stronger currency. The central bank’s target is 2% (+ / -1%).
Peru’s economic activity accelerated in November as GDP advanced by 1.5% m/m in seasonally adjusted (SA) terms, after declining by 0.2% m/m in October and growing by 0.9% m/m in September, pushing the three-month moving average (3MMA) reading to 0.73% from 0.51% through October. Seven out of nine categories gained momentum, with construction (11.2% m/m), agriculture (2.5% m/m) and services (2% m/m) leading the economic activity, followed by retail sales (0.6% m/m), utilities (0.5% m/m) and import duties (0.4% m/m). Fishing (-22.4% m/m), mining (-3.3% m/m) and manufacturing (-0.8% m/m) registered an overall weaker result. Construction benefited from strong cement sales and advances in infrastructure projects, while services profited from solid growth in the financial sector.
Colombia’s industrial production and retail sales likely continued to show divergent paths in November. RGE expects industrial production to grow by 2.4% y/y (3.5% y/y three-month moving average (3MMA) through September), constrained by external demand, especially from Venezuela; an overvalued currency; low industrial confidence (5.2% y/y) and still-weak energy demand (1.2% y/y). Meanwhile, retail sales likely expanded robustly by 17.7% y/y (15.2% y/y 3MMA through September), driven by the still-high but falling consumer confidence (25.9% y/y), strong car sales (80% y/y) and improving consumer credit conditions (11.8% y/y). This has certainly contained Colombia’s economic growth in H2 2010.
Peru’s central bank released its January monthly survey, where inflation expectations for 2011 remained anchored at 2.5% y/y for the fourth straight month (RGE: 2.9% y/y), while inflation for 2012 was revised down to 2.30% y/y (RGE: 2.3%) from 2.50% y/y. Meanwhile, GDP expectations for 2010 were revised up to 8.7% y/y (RGE: 8.8% y/y) from 8.5% y/y and for 2011 to 6.3% y/y (RGE: 7.3% y/y) from 6% y/y. Analysts expect a stronger exchange rate for year-end 2011 than in the last survey, closing at USD/PEN2.75 (RGE: USD/PEN2.76) from USD/PEN2.78 previously.