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Saturday, April 13, 2024

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Peru

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GDP: USD242.6bn (World ranking 52)
Population: 34.1mn (World ranking 44)
Form of state: Constitutional Republic
Head of government: Dina Boluarte (President)
Next elections: 2026, Presidential and legislative

Strengths

  • Natural resource rich (minerals: copper, silver, gold, zinc, energy and fishing)
  • Track record of strong macroeconomic policy framework and independence of the central bank
  • Low levels of public debt
  • Strong international reserves and contained external debt
  • Membership of the Pacific Alliance and Andean Community

Weaknesses

  • Vulnerability to climatic shocks
  • Strong dependence on Chinese demand and commodity exports
  • Highly skewed income distribution and high poverty levels
  • Dollarization of the financial system
  • Poor governance indicators

Economic overview

Sturdy Fundamentals, political headwinds

Peru’s macroeconomic fundamentals are among the strongest in Latin America: The export-oriented country has a low public debt-to-GDP ratio, a rules-based fiscal policy, a flexible exchange rate, large foreign reserves and a credible central bank. Despite these strengths, the country faced a challenging year in 2023, when it entered a technical recession with the real GDP contraction estimated at around -0.1%. This economic downturn can be attributed to the ongoing political instability that has plagued the country since the ouster of then-President Pedro Castillo in 2022. While the intense anti-government protests that followed have largely subsided, the political atmosphere remains tense. Economic activity in 2023 was also affected by El Niño, which weighed on fishing, agriculture and related industries.

President Dina Boluarte, Castillo’s successor, is expected to remain in office until the end of her term (in 2026), but her tenure is overshadowed by widespread unpopularity and is sustained by a fragile coalition. This political uncertainty, compounded by the negative impact of Castillo’s presidency on the business environment, continues to impede Peru’s economic stability and growth. Additionally, the country’s exposure to extreme weather events, recently highlighted by disruptive El Niño conditions, has further complicated the economic landscape.

In spite of these hurdles, Peru’s economic outlook shows signs of improvement, with real growth projected to rise to +2% in 2024 and 3.1% in 2025. This expected rebound is driven in part by disinflation, with average inflation forecasted to fall from 6.1% in 2023 to 4.2% in 2024. As a result of this trend it is anticipated that the Banco Central de Reserva del Perú (BCRP) will continue its monetary easing policy that began in September, offering further support to the economy. However, agricultural disruptions caused by El Niño pose a risk to these projections. Increased prices resulting from such disruptions could hinder the disinflation process and potentially prevent the BCRP from implementing the anticipated rate cuts.

Limited risks to the external side, fiscal consolidation may take longer

Although fiscal policy will remain broadly prudent under the current administration, challenges including slow economic growth, extreme weather events and populist influences from Congress are anticipated to hinder fiscal consolidation efforts. Consequently, the fiscal deficit is projected to widen slightly, from an estimated 2.2% of GDP in 2023 to 2.9% of GDP in 2024. Potential relief from rising metal prices, particularly copper (Peru’s primary export), is likely to be offset by increased government spending, as it attempts to support a struggling economy and mitigate the impacts of extreme weather events. As a result, public debt is expected to see a slight increase, reaching 34% of GDP in 2024. Although this is higher than pre-pandemic levels, it is projected to decline in the subsequent years and remains low in comparison to regional standards.

On the external side, Peru’s current account deficit is poised to increase to 2.9% in 2024. This contrasts with a drop to about 1.9% in 2023, a decline attributed in part to the opening of a new copper mine which boosted exports. Although rising metal prices in 2024 may counteract some of the impacts of high oil prices, the deficit is still anticipated to grow due to a deceleration in export growth and widening in primary income and services deficit. The services sector faces challenges, predominantly from the lasting negative effects on tourism due to the 2022/23 protests. This, combined with slower growth in other export areas, contributes to the expected increase in the overall deficit. However, the sustained high demand for Peru’s export metals, especially copper, driven by increased investment in green technologies, is poised to maintain robust foreign direct investment levels through 2024-27. This, along with the Banco Central de Reserva del Perú’s (BCRP) strong international reserve position, is expected to minimize the risk of a balance-ofpayments crisis, ensuring external financial stability.

Political challenges weigh on the business environment

In recent years, Peru’s business environment has navigated through a period of significant challenges. The tenure of ousted President Pedro Castillo led to a marked deterioration, with his hard-left platform frequently clashing with the private sector. The repercussions of this, including the halting of large-scale projects by firms, continue to affect Peru’s economic performance into 2023. Although the new President, Ms Boluarte, adopts a more business-friendly stance, her tenuous grip on power and dependence on a fragile coalition government imply that only modest progress can be anticipated in improving the business environment.

Despite these challenges, Peru’s business environment remains relatively strong, albeit with a decline in its global and regional rankings in recent years. The country’s openness to foreign trade is a significant advantage, but this also introduces vulnerabilities, particularly due to its high dependence on Chinese demand and on commodity exports. This reliance can be problematic as it exposes the economy to external shocks, such as fluctuations in Chinese market demands or changes in commodity prices. Peru also exhibits strengths in areas such as registering property, managing construction permits, facilitating credit access and investor protection. Nevertheless, substantial gaps persist, especially in the ease of starting a business and tax payment processes. The political environment, marked by instability and uncertainty, further constrains progress in these areas. Moreover, concerns regarding the rule of law and control of corruption are significant and underscore the urgent need for concerted efforts to refine the business climate.

 

CEOWORLD magazine - Insights - Peru