domingo, 10 de diciembre de 2017

Peruvian Economy Improves in 2018 with 4.2% Growth

The Peruvian economy during 2017 came with a "lukewarm" growth after several years of an exponential increase in GDP of around 8%. Starting in 2008 - just when the international financial crisis hit several of the most powerful countries in the world - Peru experienced the well-known "Peruvian economic miracle".

The causes of this fall in 2017 had to do with exogenous factors such as the fall in the price of metals (some of Peru's main economic livelihoods), and the lower demand for traditional and non-traditional products from the country's two main trading partners: the United States and China.

Peruvian economy 2018, mining sector 2018, Mining 2018, Mining 2018

However, internal factors were the ones that hit this 2017 that is leaving with greater impetus. The natural disasters that devastated the northern part of the country at the beginning of the year were compounded by other mitigating factors such as the well-known case of corruption Lava Jato (who sprayed the main construction companies in the country) and the lack of understanding between the executive and legislative branches (the latter dominated by the Fujimori party) that ended with the change of cabinet.

All of this paralyzed the main infrastructure works that were being carried out, slowed spending and fostered mistrust among foreign investors, who saw a State unable to cope with all these disasters that undermined its response capacity.

By 2018, the situation seems to be coming to an end. According to the Quarterly Macroeconomic Report of the Economic Studies Area of the Banco de Crédito del Perú (BCP), the growth estimate for 2018 is 4.2% of GDP, if the international economic environment remains favorable.

In addition, domestic demand and private investment could grow to 5% and 6%, respectively. The construction sector -which had remained in standby for the aforementioned reasons- will advance 9% and profits and investment in the Mining sector will be favored by higher international prices.

An important factor for this result will be the expansion of the mining projects currently under way: Toquepala Phase II (copper) and Marcona (iron). In addition, it is expected that next year works will begin on the Mina Justa copper projects (US$ 1,270 million) and the expansion of Toromocho (US$ 1,300 million).

Peruvian economy 2018, mining sector 2018, Mining 2018, Mining 2018

Of note in the construction sector is the reconstruction of the coastal El Niño phenomenon, the construction works for the 2019 Pan American Games, the progress on Line 2 of the Metro (U$ 400 million) and Talara Refinery (U$ 1.1 billion), as well as the land removal works for the expansion of the Jorge Chávez International Airport (US$ 100 million), to begin in the second half of 2018.

In addition, the real estate market would benefit from a reduction in the initial quota for the purchase of a second home. As for private investment, this will grow by about 6%, while private consumption will grow by 3.3%.

World Cup qualifier generates greater domestic consumption

Peru's recent ranking for the 2018 Football World Cup in Russia may contribute to higher household consumption, but this will not be generalized, so it is estimated that the Commerce sector will grow around 3% next year.

Regarding inflation, the bank assures that it will go from 1.6% in 2017 to 2.5% in 2018. In addition, it forecasts that the exchange rate for next year will remain within the range of S/ 3.20 and S/ 3.25, with risk even to appreciation.

Regarding monetary policy, the base scenario considers that the reference rate will remain at its current level of 3.25% in the coming months, although with a probability of up to 30% that the Central Bank will surprise with a new rate cut.

Finally, the BCP's Quarterly Macroeconomic Report indicates that GDP for 2018 could be lower than projected (4.2%), if political noise increases and business confidence deteriorates significantly, there is a significant under-execution in public investment destined for reconstruction by El Niño or an abrupt reversal of capital flows is generated.

For all these reasons I think we can say that we are at a good time to invest in Peru; at a time when after a brief period of recession, it seems that the country is taking encouragement to reach quotas that positioned it a few years ago, as one of the best countries to carry out an international investment.

Esteban García, Peru Travels Blog
December 2018

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