The Peruvian economy has experienced two distinct phases of economic development since the turn of the century. Between 2002 and 2013, Peru was one of the fastest-growing countries in Latin America, with an average GDP growth rate of 6.1 percent annually. A favorable external environment, prudent macroeconomic policies and structural reforms in different areas created a scenario of high growth and low inflation. The strong growth in employment and income sharply reduced poverty rates. The poverty rate (the percentage of the population living on US$ 5.50 a day) fell from 52.2 percent in 2005 to 26.1 percent in 2013. This is equivalent to 6.4 million people escaping poverty during that period. Extreme poverty (the population living on US$ 3.20 a day) declined from 30.9 percent to 11.4 percent in the same period.
Between 2014 and 2017, GDP growth slowed to an average rate of 3.1 percent, mainly owing to the decline in international commodity prices, including copper, the leading Peruvian export commodity. This led to lower private investment, less fiscal income and weak consumption. Two factors attenuated the impact of this external shock on GDP, enabling continued growth, albeit at a slower pace. The first was the prudent fiscal policy management in terms of monetary and exchange policies. This enabled the country to endure the decline in fiscal income without drastically adjusting spending and to have international reserves for an ordered adjustment of the exchange rate. Second was the surge in mining production as projects implemented during the boom years matured, which increased exports and offset the deceleration in domestic demand. In this context, the current account deficit diminished rapidly, from 4.8 percent of GDP in 2015 to 1.1 percent in 2017. Net international reserves remained stable at 27 percent of GDP in August 2018. Average headline inflation was 2.8 percent in 2017, within the Central Bank’s target range.
As part of the adjustment, the fiscal deficit has increased in recent years, reaching 3.1 percent of GDP in 2017. The higher deficit stems from a decline in revenues resulting from lower commodity prices and the economic slowdown, and an increase in recurrent expenditures in recent years, especially for goods and services and wages. Notwithstanding, at 23.7 percent of GDP, Peru’s (net) gross public debt remains one of the lowest in the region.
For 2018, GDP growth is expected to accelerate to a rate of approximately 4 percent, driven by a recovery in domestic demand. Additionally, higher commodity prices are leading to stronger investment in mining. Rising business confidence, increased loan placement and increased formal job creation are expected to support private consumption. Public investment is also expected to accelerate in response to increased fiscal spending. In the medium term, growth will remain at around 4 percent annually. In this context, the process of fiscal consolidation will lead to a convergence of the public deficit toward a level of 1 percent GDP in 2021.
Growth projections are vulnerable to external shocks such as a decline in commodity prices or changes in international financial conditions. Events that could trigger these effects include trade protectionism, a deceleration of China’s growth or increased uncertainty regarding the financial viability of other emerging economies. The economy is also exposed to natural risks, including recurrent weather phenomena such as El Niño. To address these risks, the Peruvian economy has established monetary, exchange-rate and fiscal cushions to mitigate their impact.
Last Updated: Sep 26, 2018