For LatAm, QE3 Impact on Financial Risk Is Key

The Fed’s QE3 will have varying effects by country in LatAm; however, there are a few broad strokes that color the region. QE3 comes at a moment when growth is weak across the board and policy action is widely needed. What QE3 signifies for LatAm, in this context, is not only related to the added […]

Policy Continuity: Most Likely Outcome for Peru Election

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.

Peru’s Central Bank Tightens Further

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.

Economic Activity Surges in Peru

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 backdropas reflected by higher commodity pricesunderpins 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.

Economic Expectations in Peru

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.

Rising Inflation in Peru

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%).

Robust Growth in Peru

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.

Peru Expected to Grow 6.3% in 2011

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.

Peru’s Economy Expected to Grow by 8.8% in 2010

Peru’s economy likely grew by 9.2% y/y in October, compared with a 9.4% y/y three-month moving average (3MMA), bringing the year-to-today reading to 8.7% in 2010 from a decline of 0.3% YTD in 2009. Strong domestic demand (12.5% y/y)—although growing less robustly than in previous months—and beneficial external backdrop, as reflected by higher commodity prices, underpins the strong economic performance. At the sector level, the economic activity should benefit from solid expansion in manufacturing (17.5% y/y), retail sales (10.4% y/y), construction (10.3% y/y) and services (9% y/y). Mining, however, declined by 0.6% y/y, as indicated in the national statistics institute’s (INEI) advance report on economic activity. We expect Peru to expand by a solid 8.8% in 2010.

Peru’s Central Bank Expected to Stay on Hold

RGE expects the central bank to stay on hold at 3% at the November 11 monetary policy meeting as inflation surprised heavily on the downside in October (-0.14% m/m) and the inflation outlook has improved, despite GDP still growing above potential. Moreover, the central bank will avoid worsening the currency outlook by widening interest rate differentials, given heavy injections in global liquidity by the U.S. Fed (QE2).