According to the Central Reserve Bank of Peru, Peru maintains solid macroeconomic fundamentals that give it the capacity to respond to economic shocks.
At the recent Investor Day 2023, organized by the Lima Stock Exchange Group (BVL), Adrián Armas, Central Manager of Economic Studies of the Central Reserve Bank of Peru (BCRP), presented the economic perspectives of the Peruvian market and the current situation of the global economy.
Below is a summary of his presentation:
Global economic growth and risks
The International Monetary Fund (IMF) has revised its global growth forecasts for this year, going from a modest 2.8% to a more optimistic 3%. This improvement is primarily due to the moderation of some risks, such as the banking crisis.
The economic indicators of the United States have exceeded some expectations, which influences the outlook for inflation rates and control. However, there is a lagging effect of the measures taken, and it is essential to highlight that the risk of banking crises in the United States has been reduced if The IMF has identified several risks that could affect global economic activity:
– High Inflation: Inflation could remain high or even increase due to events such as an escalation of the war in Ukraine and extreme weather events.
– Turbulence in the Financial System: The tightening policies of central banks could generate turmoil in the financial system.
– China’s Slow Recovery: Despite the IMF’s projection of 5.2% growth in China, more recent data suggests a slower economic recovery.
– Fiscal Debt Overhang: Tensions related to fiscal debt could spread to other economies.
The terms of trade remain favorable at levels above the average of the last two decades. This leads to having a strong trade balance.
Outlook for Peru
In the global context of favorable terms of trade, leading to a surplus trade balance, Peru has faced political challenges in recent years, which has led to the rotation of presidents and authorities. 2021, in particular, experienced the largest short-term capital outflow in decades due to political uncertainties.
However, according to the Central Reserve Bank of Peru, the country maintains solid macroeconomic fundamentals that give it the ability to respond to economic shocks. Stability is one of the best assets of the Peruvian economy, and its currency, the Sol, has proven to be one of the most stable in the region, with limited depreciation.
Peru has international reserves equivalent to 29% of GDP, the highest in the region and comparable with Far Eastern economies.
National Economic Activity
While Peru has maintained solid average economic growth of 4.3% annually over the past two decades, it has recently faced obstacles, such as the anchovy fishing ban, social conflicts, and adverse weather conditions. In the first half of the year, GDP experienced a drop of -0.5%.
Business expectations were affected, and although there was a slight recovery in July, challenges remain in private investment and consumption, according to the Central Reserve Bank of Peru.
Monetary Policy and Inflation Projection
The BCRP has maintained the reference interest rate at 7.75%, with an inflation rate decreasing significantly. Unlike other countries in the region, Peru registers one of the lowest and most stable inflation rates in the current century, around 3%. Inflation decreased to 5.88% in July after reaching a maximum of 8.81% in June 2022, partly due to climatic factors and rising food prices.
The same has yet to happen in neighboring countries where their rates have risen to double digits, such as Brazil and Colombia, which are at 13.25%, Mexico at 11.25%, and Chile at 10.25%. (Data as of August 17, 2023).
The Central Reserve Bank of Peru is working with a scenario of relative political stability. The markets are attributing growth for this year of 1.3%, and for next year, it is projected to be 2.7%, with Peru becoming the country in the region with the highest growth in 2024.
Solid fundamentals, according to the Central Reserve Bank of Peru
Peru stands out for its solid macroeconomic fundamentals: low inflation rates, high international reserves, low financing costs, and orderly public finances. Economic recovery is linked to socio-political stability and a favorable environment for doing business.
The country is projected to be one of the fastest-growing countries in 2024, and inflation is expected to enter the target range as the effects of adverse weather events on food prices dissipate.
Peru is a good choice for foreign direct investment
Peru is an attractive destination for foreign direct investment (FDI) due to its robust economic fundamentals, strategic geographic location, and commitment to fostering a business-friendly environment. With a consistently growing economy, Peru has demonstrated resilience and stability, offering investors a predictable landscape. The country’s strategic positioning as a gateway to the Pacific provides access to key Asian and American markets, enhancing trade opportunities. Additionally, Peru has actively engaged in trade liberalization, signing numerous free trade agreements that facilitate market access and reduce trade barriers. The government’s dedication to economic reforms, such as streamlining bureaucratic processes and improving infrastructure, further enhances the ease of doing business.
Natural resource abundance, including significant mineral and agricultural wealth, presents lucrative investment prospects, particularly in the mining, agriculture, and renewable energy sectors. Peru’s diverse and dynamic economy and skilled workforce make it an ideal investment destination. Moreover, ongoing efforts to promote sustainability and responsible business practices align with global trends, fostering a positive image for environmentally conscious investors. In conclusion, Peru’s stable economic growth, strategic location, commitment to reforms, and abundant natural resources collectively make it an enticing option for foreign direct investment.
