The Peruvian economy has experienced different 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 (US$5.50 a day, 2011 PPP) fell from 49.9 percent in 2004 to 26.1 percent in 2013. This is equivalent to 5.6 million people escaping poverty during that period. Extreme poverty (US$3.20 a day, 2011 PPP) declined from 28.4 percent to 11.4 percent in the same period.
Between 2014 and 2017, GDP growth slowed, 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. Over the past four years, GDP grew an average rate of 3.1 percent. 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 1.3 percent in 2017. Net international reserves remained stable, at 29 percent of GDP in March 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 3.2 percent of GDP in 2017. The higher deficit stems from a decline in revenues resulting from falling commodity prices and the economic slowdown, and an increase in recurrent expenditures in recent years, especially for goods and services and wages. Notwithstanding, at 24.7 (9.4) percent of GDP, Peru’s gross (net) public debt remains one of the lowest in the region.
For 2018, GDP growth is expected to accelerate based on stronger private investment, especially mining, in response to the partial recovery of commodity prices. Increased public investment is also expected through the implementation of projects to rebuild after El Niño and to prepare for the Pan-American Games Peru will host in 2019, as well as through the acceleration of major infrastructure projects. In this context, the fiscal deficit is expected to peak this year, enabling a process of fiscal consolidation to begin in 2019, which will lead to a relatively rapid convergence toward a level of 1 percent GDP in 2021.
Growth projections are vulnerable to external shocks in the prices of Peru’s export commodities, a further deceleration of China’s growth, capital market volatility and the pace of monetary policy tightening in the United States. The economy is also exposed to natural risks, including recurrent climatic phenomena such as El Niño. Raising long-term growth requires structural and fiscal reforms to unleash productivity, reduce informality and improve efficiency of public services.
Last Updated: Apr 17, 2018