Countervailing winds
Strong Q4 recovery trend
Metal prices
Strong macro balances
Political turbulence
Second COVID-19 wave
Elections
COVID-19 second wave
Mortality per million: 1,200 (the world average is 280 per million).
- Timing of second-wave restrictions much later than in first wave.
Status of vaccines
Procurement of 85 mn doses.
1 mn have arrived, 2 mn in March, 10 mn by June.
Government goal: 15 mn vaccinated by July.
160,000 health professionals have been vaccinated (0.5% of the population).
New measures restrict mobility, not production
- 95% of the economy allowed to operate, versus 44% at height of 2020 lockdown.
- Our GDP growth forecast of 8.7% y/y for 2021 in line with 6.8 weeks of restrictions.
- New support measures represent 2.5% of GDP in resources for households.
- Difference between electricity demand and mobility trends: government restrictions have affected mobility, but not production.
Support measures:
- PEN 600 transfer to over four million families.
- One-month postponement on the payment of income, sales, and other taxes.
- PEN 2 bn small-business support program (similar to Reactiva), and a PEN 0.2 bn tourism support program.
2020: the recovery was better than expected
Q4 especially strong
Domestic demand did not contract.
Surprisingly strong private investment turnaround.
December: positive growth ahead of expectations.
6 of 12 major sectors rose (fishing, construction, resource processing, government services, telecom, and financial services).
An encouraging improvement in private demand—investment
Technological transformations.
Booming real estate.
Companies adapting to new consumption patterns.
Terms of trade (high metal prices) have traditionally given strong support to macro accounts and business confidence.
Infrastructure investments are slow, but progressing
An encouraging improvement in private demand—consumption
Government measures (5.5% of GDP).
Rebound in employment.
New (virtual) sources of service income.
Sales tax revenue above pre-COVID-19 levels reflects robust sales, but also new activities and the formalization of informal sales through digitalization.
Resources available to boost domestic demand
In 2020, government transfers and access to savings helped sustain consumption.
Resources that will be available in 2021: +5% of GDP.
Household deposits at banks up by PEN 30 bn (15%) between March and December 2020.
lower spending on restricted activities + resources from AFP withdrawals + Reactiva.
Nearly PEN 19 bn in pension withdrawals, government transfers.
Employment is also recovering, albeit still under past levels
Construction is booming
Cement sales have risen 19%–20% y/y each month from October 2020 to January 2021.
Construction GDP is currently significantly above pre-COVID-19 levels.
Part of construction growth is government spending, but most involves a booming real estate market.
Low interest rates is probably the most likely source
The reference rate will remain low well into 2022, although rising inflation merits monitoring.
Metal prices are changing external outlook
External accounts are very, very strong, and are set to get even stronger in 2021 as metal prices move higher.
2020 Current Account: 0.5% of GDP.
Net international reserves: USD 74.7 bn, or 25 months of imports.
Every one cent increase raises exports by USD 50 mn.
A copper price of USD 4.00/lb would increase exports by over USD 3 bn.
Metal prices could lower 2021 fiscal deficit
Current 2021 forecast: -5.4% GDP, with avg copper price of USD 3.35/lb.
Every one cent increase raises income tax revenue by USD 10 mn.
A copper price of USD 4.00/lb would increase income tax revenue by USD 650 mn to USD 800 mn.
This would bring down the fiscal deficit by 0.4 ppts to 0.5 ppts.
PEN is not aligned with regional peers
Corporate demand for USD liquidity has shifted from bank loans to FX market
Elections are in seven weeks
Health crisis + credibility crisis + political crisis + economic crisis may bolster anti-establishment vote.
A quarter of voters are undecided.
Votes will shift from lagging to leading candidates as elections near.
Key issues regarding new authorities
Forsyth no party; city mayor.
Lescano no executive experience; Congress.
Fujimori political experience; no executive experience.
Mendoza no party; no executive experience.
Urresti no party; no executive experience.
Guzmán new party; no government experience.
No candidate has significant governing experience or proven management capacity.
New cabinet head: will define political priorities and governance.
New finance minister: will define policy quality and continuity.
New BCRP Board: will define monetary solvency and confidence.
The new Congress will include many members with little experience (new law prohibits re-election).
Governability is at issue (again!)
Vacunagate has renewed governability risk—the risk of an empowered Congress
Exceptional times: health crisis + credibility crisis + economic crisis.
Why is Peru in a state of seemingly perpetual political turbulence?
The difference between Peru and other countries is the weakness of political institutions and of the rule of law.
Political parties neither represent voters (no constituencies) nor do they develop future leaders.
The application of the law is unpredictable.
State management capabilities have deteriorated.
Economic institutions are strong, but the above puts them at risk.
Legislative legacy
Constitutional Court has struck down:
1. road tolls elimination;
2. reimbursement of public pension funds; and
3. automatic worker promotion in State institutions.
Pension fund reform
Mining law
Interest rate caps
Possible future initiatives:
Wealth tax
Education reform
The bright spot
After the Presidential elections are concluded, the economy could soar:
Electoral uncertainty resolved
New authorities with the credibility of having been elected
A vaccinated population in a vaccinated world
Renewal of correlation between metal prices and private investment
Pent-up investment and consumption (high level of savings)
Robust macro accounts
Infrastructure investment already tendered
- A more digitalized world
Key: adequate governance, continuity in economic policy, no sharp decline in metal prices
Estudios Económicos – Scotiabank (Peru)
Guillermo Arbe
51.1.211.6052 (Peru)
Scotiabank Peru
guillermo.arbe@scotiabank.com.pe
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