Peru: Staff Concluding Statement of the 2018 Article IV Mission

 
May 23, 2018
 
 
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
 
I. Context and Recent Developments
 
1. Peru has been one of the top performers in Latin America since the turn of the century, but growth has slowed more recently. Robust growth helped reduce poverty significantly, inflation has remained low, the fiscal position has strengthened, dollarization has declined markedly, and financial deepening has continued. More recently, the worst floods and landslides in recent history and fallout from the Lava Jato corruption scandal contributed to a slowdown in GDP growth to 2.5 percent in 2017.

2. After the resignation of President Kuczynski, the new cabinet has moved quickly to implement measures and request special legislative powers from Congress. Fiscal measures include excise tax hikes, improving tax administration, and streamlining current expenditures.

Law 30737 provides more clarity on civil damages in corruption cases and sets out rules for asset transfers by construction companies under investigation or those convicted. Special powers were requested in six areas: (i) tax policy and administration; (ii) competitiveness; (iii) post-El Niño reconstruction and closing infrastructure gaps (already granted); (iv) anti-corruption measures; (v) protection of vulnerable groups (and preventative measures), and (vi) modernization of the state.

II. Outlook and Risks
 
3. Growth is expected to rebound to 3.7 percent in 2018, with inflation converging to the center of the BCRP’s target band. GDP growth of 3.2 percent in the first quarter and high frequency indicators for April point to a rebound in economic activity this year. A key driver is public investment rising, while private investment is also projected to grow after four weak years. The latter will be supported by easy monetary conditions, and a more favorable credit and investment climate that typically follows commodity price improvements. With food price inflation normalizing throughout the year, headline inflation is expected to gradually increase toward the center of the central bank target range.

4. Growth is projected to accelerate to over four percent in 2019, gradually approaching potential thereafter.  Given higher commodity prices and the government’s reform agenda, staff has increased its estimate of medium-term potential growth to 4 percent from 3¾ percent.

Strong domestic demand, especially higher private investment should be the key driver. After a remarkable adjustment in 2016-17, the current account deficit will widen somewhat given the impact of stronger import demand, narrowing the small gap with its current estimated equilibrium level. Fiscal policy is expected to start a gradual consolidation in 2019, with the fiscal deficit converging to 1 percent of GDP by 2021, as stipulated by the fiscal rule.

5. Risks are broadly balanced. On the domestic front, key downside risks include further delays to public investment projects and PPPs given capacity constraints and the ongoing corruption investigations. On the external front, more protectionist trade policies, a slowdown in China, or a more rapid increase in international interest rates could adversely affect Peru via weaker growth of exports and tighter financing conditions. Higher spillovers from commodity prices, as observed in Peru in the past, present the main source of near-term upside risk. The authorities’ efforts to reduce impediments to investment projects could also bear fruit earlier than expected.

III. Policy Recommendations
 
6. In the short term, countercyclical fiscal and monetary policies remain appropriate while structural reforms are an indispensable complement. Key challenges include strengthening the tax system, improving public investment and PPP management, buttressing macroprudential policies and financial sector oversight, tackling governance vulnerabilities, and enhancing the pension system’s social protection role.

Monetary Policy
 
7. The current monetary stance is appropriate and should remain data dependent. The BCRP has appropriately loosened monetary conditions in response to weaker than expected growth developments and declining inflation outturns and expectations. The real policy rate now stands at just 0.6 percent, significantly below the BCRP’s estimate of the neutral rate (around 1¾ percent), implying substantial monetary stimulus. Under staff’s baseline scenario, this suggests limited scope for additional interest rate cuts given core inflation and inflation expectations near the mid-point of the target range (two percent), and a projected narrowing of the output gap.

8. Credible and agile monetary policy management has been central to macroeconomic stability in Peru, and the BCRP could consider further enhancements in the following areas:
  • Communications . The inflation targeting regime has brought significant transparency gains. The BCRP could consider enhancements in the communication of its guidance of the conditions for future policy rate moves.
  • Exchange rate flexibility . This remains important and FX interventions should continue to be limited to disorderly market conditions. Allowing further two-way exchange rate flexibility could help stimulate market development and support dedollarization efforts.
Fiscal Policy

9. Staff supports the planned increase in public investment and the focus on boosting execution capacity as an immediate priority. With the economy facing a negative output gap, and significant reconstruction needs associated with last year’s flooding and landslides, expanding public investment—which has a high multiplier—remains appropriate. Important steps to improving the framework for capital expenditure include strengthening long-term planning and credibility of investment budgeting, better prioritization, simplifying project monitoring and evaluation, and increasing execution transparency. Given the key role local governments play for investment, continuing efforts to build subnational capacity remains essential. It will also be important that PPP projects—both ongoing and in the pipeline—continue to move forward.

10. The authorities’ strategy to focus the medium-term consolidation effort on the revenue side and streamlining current expenditure is appropriate. In line with the fiscal rule, the authorities are planning to reduce the deficit to 1 percent of GDP by 2021. The focus on raising revenue is welcome given Peru’s tax revenues appear low compared to other countries, the existing infrastructure gaps, and the need to maintain government expenditure in key social areas. In this regard, the recent increase in excise taxes is welcome. Higher commodity prices should also contribute to fiscal consolidation by significantly boosting revenues. If revenue overperforms, staff would support increasing public investment further. Finally, there is likely scope to cut some waste in current expenditure.

11. Staff supports the authorities focus on a tax reform that simplifies the system, levels the playing field and improves tax administration. The tax system is complex, with numerous special regime exemptions, and widespread and overlapping withholding schemes. Priority should be given to reducing the compliance gaps (especially in the VAT), moving towards a less fragmented income tax regime, making personal income taxes more progressive, rationalizing tax exemptions, and increasing revenues from property taxes.

Financial Sector Policy

12. As noted in Peru’s ongoing Financial Sector Assessment Program, the banking sector remains sound but it is still important to continue monitoring a broad set of vulnerabilities.

Stress tests show that the financial sector can withstand even severe macrofinancial shocks. 

Nevertheless, pockets of vulnerability warrant close attention:
  • Peru’s financial sector is highly concentrated, and dominated by financial conglomerates. Even though the interbank contagion analysis did not find large risks of either direct exposures between large banks or indirect risk coming from fire sales effects, large banks have similar loan portfolios and credit risk is strongly correlated among banks. As a result, shocks that trigger common exposures have the potential to become systemic events, since the banking system is concentrated. To mitigate these risks, capital surcharges for systemic banks should be increased in line with the Basel III framework, which the SBS is currently considering. Furthermore, increasing countercyclical provisioning in smaller banks would strengthen their capacity to withstand potential shocks. 
  • Off-balance sheet exposures should continue to be monitored, although stress tests do not suggest they pose a significant current risk.
   
13. Peru’s broad toolkit has helped facilitate significant dedollarization in recent decades, and further measures could help cement this. To make additional progress, the authorities could increase risk weights on FX loans along the lines suggested by recent Basel III guidelines. Regarding FX reserve requirements, changes should be tied to either the dedollarization process or addressing adverse macrofinancial shocks.

14. Staff welcomes the authorities’ plans to strengthen financial sector oversight, but notes that further efforts in some specific areas remain important. There is still a need to remove legal limitations and enhance the supervisory framework that would strengthen the SBS’s capacity for consolidated supervision of financial conglomerates. The passing of the pending legislation migrating the supervision of the saving and credit cooperatives to the SBS would constitute another important step. Continuing the process of transitioning to risk-based supervision of the insurance sector is also important. In addition, the authorities could improve their macroprudential framework even further, including by giving enhanced mandates for macroprudential policy to the BCRP and the SBS, and by implementing a memorandum of understanding to strengthen coordination.

15. Financial development efforts should focus on expanding financial access and inclusion, and addressing high concentration. While progress has been made, overall financial depth in Peru remains low relative to the region. High concentration could also indicate a lack of banking competition in some segments. The authorities should strengthen the legal and institutional framework to more effectively oversee all aspects of competition, market conduct, and consumer protection.

16. Regarding financial inclusion, reforming the e-wallet Billetera Móvil (BiM) and approaches to fintech used elsewhere should be considered. The uptake of BiM is below expectations. It could benefit from interoperability with bank accounts, digitization of government payments, and expanded access criteria for the mobile money platform. Fintech institutions, while currently limited in scale, could provide new solutions for financial inclusion. Drawing lessons from regulatory approaches emerging elsewhere, such as the adoption of regulatory sandboxes (e.g., see Singapore and the U.K.), would be instrumental to develop the fintech sector by appropriately supporting innovation while managing risks.

Structural Reforms

17. A multi-pronged approach is needed to boost potential growth. Despite some convergence, labor productivity is one-fifth of the U.S. Staff and the authorities agree on many of the priority areas to boost productivity and reduce misallocation of resources, including: education, infrastructure, institutions, and labor market reform. Removing barriers which limit growth of productive firms and labor formalization is also important, including distortions created by tax incentives, burdensome regulation, and limited access to credit.
 
18. The Lava Jato scandal has had a major impact on the economy and the authorities rightly view governance as a priority. Law 30737 should reduce uncertainty in the construction sector, while requiring conflict of interest statements from public officials (as envisioned in the special legislative powers) would be a welcome step to help reduce corruption. In addition, apart from broadly improving fiscal governance, staff recommends: improving timely exchange of information and financial intelligence among anti-corruption agencies; strengthening the asset declaration system (i.e., verification, beneficial ownership information and public access); enhancing risk-based AML/CFT supervision and the reporting system for suspicious transactions; creating a beneficial ownership registry; and ensuring customer due diligence for politically exposed persons. Staff stands ready to further support the authorities in their efforts.

19. While poverty and inequality declined markedly during the commodity boom, they increased in 2017 and a recalibration of policies may be warranted. Increasing tax revenues will help protect needed infrastructure and social spending. Increasing progressiveness of the personal income tax system will also enhance redistribution. Given highly concentrated transfers and a lack of absorptive capacity at the subnational level, it would be worthwhile re-thinking revenue sharing formulas to reduce horizontal inequities. Specifically, in addition to natural resource production, they could better reflect spending needs, for example population size and poverty levels.

20. The pension system could be reformed to enhance social protection and reduce inequities, but tradeoffs necessitate public consultation and careful communication. Given low pension coverage, the non-contributory pillar (Pension 65) will remain important, and should be broadened.

In the public system, shortening the minimum 20-year contribution period would allow more low-income workers to receive a pension. In both these areas, fiscal costs should be carefully assessed. Several reforms could help increase replacement ratios in the private system.

Specifically, high pension management fees should be lowered and excessive flexibility to withdraw lump-sum amounts removed. Increasing contributions could also be considered, but might adversely impact labor formality. Given these reforms will still lead to replacement rates well below OECD levels, it will be crucial to communicate realistic expectations to the public.

Over the longer term, a larger institutional reform should also be pursued to better integrate the private and public pillars, considering tradeoffs between pension adequacy, coverage and fiscal sustainability.

We would like to take this opportunity to thank the Peruvian authorities and private sector representatives for their hospitality and open and constructive dialogue.

Table 1. Peru: Selected Economic Indicators 
                        
Prel.
Proj.






2016
2017
2018
2019
2020
2021
2022
2023
(Annual percentage change; unless otherwise indicated)
Production and prices
Real GDP
4.1
2.5
3.7
4.1
4.2
4.2
4.1
4.0
Real domestic demand
1.1
1.6
4.5
4.7
4.7
4.5
4.5
4.5
Real domestic demand (contribution to GDP)
1.1
1.6
4.4
4.7
4.6
4.5
4.5
4.5
Consumption (contribution to GDP)
2.0
1.7
3.0
2.9
2.9
3.0
3.1
3.1
Investment (contribution to GDP)
-1.0
-0.1
1.4
1.8
1.8
1.5
1.3
1.4
Net Exports (contribution to GDP)
3.0
0.9
-0.7
-0.6
-0.4
-0.3
-0.4
-0.5
Output gap (percent of potential GDP)
-0.6
-1.1
-1.1
-0.8
-0.4
-0.2
0.0
0.0
Consumer prices (end of period)
3.2
1.4
2.2
2.0
2.0
2.0
2.0
2.0
Consumer prices (period average)
3.6
2.8
1.3
2.0
2.0
2.0
2.0
2.0
External sector
Exports
7.6
21.3
13.2
4.0
3.6
3.6
3.9
4.1
Imports
-5.9
10.0
9.9
6.0
5.7
5.6
5.1
5.7
Terms of trade (deterioration -)
-0.7
7.3
6.0
0.4
-0.2
-0.5
0.2
0.4
Real effective exchange rate (depreciation -)
-2.4
1.4
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Money and credit 1/ 2/
Broad money
4.3
7.7
8.5
8.5
7.9
7.6
7.5
7.6
Net credit to the private sector
5.0
5.1
7.2
7.3
6.8
6.6
6.5
6.6
(In percent of GDP; unless otherwise indicated)
Public sector
NFPS revenue
23.2
23.0
23.4
23.9
24.3
24.7
24.7
24.6
NFPS primary expenditure
24.6
24.9
25.4
25.2
24.7
24.2
24.2
24.2
NFPS primary balance
-1.4
-1.9
-2.0
-1.3
-0.4
0.5
0.5
0.5
NFPS overall balance
-2.5
-3.1
-3.3
-2.7
-1.9
-1.0
-1.0
-1.0
NFPS structural primary balance 4/
-1.2
-1.5
-1.7
-1.1
-0.4
0.5
0.5
0.5
External sector
External current account balance
-2.7
-1.3
-1.7
-1.8
-1.9
-2.0
-2.0
-2.0
Gross reserves







In billions of U.S. dollars
61.7
63.7
64.7
65.2
65.2
65.2
65.2
65.2
Percent of short-term external debt 3/
450
312
486
461
514
516
517
523
Percent of foreign currency deposits at banks
230
232
229
231
234
238
242
249








Debt
Total external debt 5/
38.2
35.7
33.1
31.2
30.2
28.9
27.6
26.4
Gross non-financial public sector debt 6/
24.4
25.3
26.8
27.8
27.9
27.4
26.8
26.3
External
10.3
8.7
8.7
8.4
8.7
8.5
8.2
8.0
Domestic
14.0
16.6
18.2
19.4
19.3
18.9
18.6
18.3
Savings and investment
Gross domestic investment
22.6
21.4
21.9
22.6
23.3
23.8
24.1
24.4
Public sector (incl. repayment certificates)
4.8
4.5
4.8
5.0
5.0
5.0
5.0
5.1
Private sector (incl. inventories)
17.8
16.9
17.1
17.6
18.2
18.7
19.0
19.4
National savings
19.9
20.2
20.2
20.7
21.3
21.8
22.1
22.4
Public sector
2.7
2.0
2.2
3.0
3.8
4.7
4.8
4.8
Private sector
17.2
18.1
18.0
17.7
17.5
17.0
17.2
17.6
Memorandum items
Nominal GDP (S/. billions)
659.7
701.8
749.0
796.9
848.1
901.6
958.0
1016.6
GDP per capita (in US$)
6,208
6,762
7,198
7,533
7,823
8,133
8,486
8,864



Sources: National authorities; UNDP Human Development Indicators; and Fund staff estimates/projections.
           
1/ Corresponds to depository corporations.
           
2/ Foreign currency stocks are valued at end-of-period exchange rates.
           
3/ Short-term debt is defined on a residual maturity basis and includes amortization of medium and long-term debt.
           
4/ Adjusted by the economic cycle and commodity prices, and for non-structural commodity revenue. The latter uses as equilibrium commodity prices a moving average estimate that takes 5 years of historical prices and 3 years of forward prices according to IMF World Economic Outlook.
           
5/ Includes local currency debt held by non-residents and excludes global bonds held by residents.
           
6/ Includes repayment certificates.
           
IMF Communications Department

0 comentarios:

Publicar un comentario