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$ 5.5 a day) fell from 52.2% in 2005 to 26.1% in 2013. This is equivalent to 6.4 million people escaping poverty during that period. Extreme poverty (the population living on US$ 3.2 a day) declined from 30.9% to 11.4% in the same period.
Between 2014 and 2018, GDP growth slowed to an annual average rate of 3.2%, mainly owing to lower international commodity prices, including copper, the leading Peruvian export commodity. This led to a temporary reduction of private investment, less fiscal income and a slowdown of 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 management of fiscal, monetary, and exchange policies especially during the boom. 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 previous years matured, which increased exports and offset the deceleration in domestic demand.
In this context, the current account deficit diminished rapidly, from 4.8% of GDP in 2015 to 1.6% in 2018. This external deficit has been financed mainly with long-term capital inflows. Net international reserves remained stable, reaching 31% of GDP by August 2019.
As part of the adjustment, the fiscal deficit has temporarily increased, reaching a peak of 3.0% 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. In 2018, an important rebound of fiscal revenues has allowed to the reduction of the fiscal deficit to 2.3% of GDP.
The process of fiscal consolidation is expected to continue, and the public deficit will reach an estimated 1% of GDP in 2021, in compliance with fiscal regulations. In this context, the gross (net) public debt to June 2019 was 25.8% (10.2%) of GDP. It continues to be one of the lowest in the region.
In the first semester of 2019, inflation (annualized) remained at 2.3%, within the Central Bank’s target range (1%-3%). This figure is compatible with the recent trend and represents the normalization of the inflation rate following a period of volatility during the past two years due to climate factors that affected the food supply.
In the medium term, growth is expected to remain above 3% annually, sustained by strong domestic demand and a gradual increase in exports. These 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 escalation of trade protectionism, a deceleration of China o US 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: Oct 11, 2019