IMF Executive Board Concludes 2018 Article IV Consultation with Peru

On July 9, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Peru.

Peru has been one of the top performers in Latin America since the turn of the century. Robust growth has helped close the income gap with the largest regional economies and reduce poverty significantly, while inflation has remained low. Sound macroeconomic and structural reforms have played an indispensable role in this. 

After a difficult 2017, the economy is recovering. Extreme weather caused by El Niño and spillovers from the Odebrecht investigation led to subpar growth in 2017, and the poverty ratio increased. While high commodity prices are currently supporting investment and broader economic activity, domestic headwinds have continued. The Odebrecht case led to the resignation of President Kuczynski. The authorities have also been facing the challenge of rebuilding infrastructure damaged by El Niño. In the face of this, the new Cabinet has moved quickly to implement various measures and receive special legislative powers from Congress to speed up the reconstruction and implement needed reforms. Recent indicators suggest a pickup in economic activity. 

Against this backdrop, growth in 2018 is expected to increase to 3.7 percent, supported by countercyclical fiscal and monetary stimulus. In 2019–20, the recovery of private domestic demand is expected to push growth above 4 percent, even as gradual fiscal consolidation takes place. In the medium term, growth is projected to converge to its potential of 4 percent.

Headline inflation is expected to gradually increase to the center of the central bank target range of 1–3 percent by end-2018.

Executive Board Assessment[2]

Executive Directors commended the authorities for implementing sound macroeconomic policies and key structural reforms over the past two decades, which have helped keep inflation low, raise incomes and reduce poverty. While medium‑term risks are tilted to the downside, high copper prices and reduced political uncertainty create a window of opportunity for addressing remaining challenges and increasing potential growth. 

Directors agreed that the fiscal policy stance should remain countercyclical in 2018. Given the negative output gap, Directors supported the authorities’ objective to expand public investment to meet the significant reconstruction needs after the flooding and landslides, while also stressing the importance of increasing implementation capacity of subnational governments. 

Directors welcomed the commitment to medium‑term fiscal consolidation, under the fiscal responsibility framework. They supported the focus on revenue mobilization through strengthening tax policy and administration, and streamlining current expenditures to help free up space for much needed public investment. 

Directors considered that the accommodative monetary policy stance remains appropriate and that monetary policy should remain data dependent. While the central bank has improved the communication of its policy guidance, it could consider further enhancements in this area. Directors underscored that exchange rate flexibility is an important shock absorber, and foreign exchange interventions should continue to be two‑sided and limited to addressing disorderly market conditions. 

Directors observed that the financial sector remains sound and resilient to severe macroeconomic shocks, as shown by the stress tests, thanks to a robust supervisory framework, although high concentration, off‑balance sheet positions, and common exposures call for continued monitoring of risks and for increasing capital surcharges for systemically‑important banks. Directors welcomed the reduction in financial dollarization, but stressed the importance of taking steps to reduce it further.

Directors recommended further improvement of the macroprudential framework, including by giving enhanced mandates for macroprudential policy to the central bank and the financial supervisor. 

Directors underscored the need for continued structural reforms to tackle the long‑standing challenge of high informality and low productivity. Directors called for further efforts to strengthen governance, improve education, increase labor market flexibility, and enhance financial deepening and inclusion. They highlighted the importance of reforming the pension system to enhance social protection and reduce inequities.

Peru : Financial System Stability Assessment

Peru’s financial system has developed and become more resilient since the previous FSAP in 2011, but some challenges remain. Peru’s main vulnerabilities are external, especially related to growth in trading partners (due to reliance on commodity exports), and exchange rate depreciation (due to significant dollarization), which were confirmed by the Growth-at-Risk (GaR) analysis. Peru is also vulnerable to domestic headwinds, related to uncertainty and spillovers from the ongoing Lava Jato investigation. The banking sector remains highly concentrated, with the four largest banks accounting for 83 percent of total private banking sector assets. These top four banks are all classified as domestic-systemically important banks (D-SIBs) and hence are subject to elevated supervision. The mission’s stress-test analysis showed that the banking system is largely resilient to adverse shocks, largely because of banks’ initial strong capital buffers and profitability. In the adverse scenario, all large banks experience credit losses, but initial high capital and profitability help them remain above the minimum regulatory capital adequacy ratio (CAR) threshold of 10 percent, while, for a few small banks, the CARs fall below the regulatory threshold.
The overall banking system’s profits decline substantially in the adverse scenario, with some banks facing losses, but the aggregate capital shortfall for these banks is modest. The interconnectedness/contagion analysis showed that the joint probability of distress across all banks has fallen since the post-global financial crisis peak level it reached in 2010. However, shocks that affect credit exposures, which are strongly correlated among large banks, have the potential to become systemic events, since the banking system is concentrated.

Peru Selected Indicators Table
Social Indicators       
Life expectancy at birth (years)74.274.474.774.9
Infant mortality (per thousand live births)13.512.912.411.9
Adult literacy rate93.893.794.294.2
Poverty rate (total) 1/23.922.721.820.721.7
Unemployment rate5.
Production and prices       
Real GDP5.
Real domestic demand7.
Real domestic demand (contribution to GDP)
Consumption (contribution to GDP)
Investment (contribution to GDP)3.0-0.9-0.7-1.0-
Net Exports (contribution to GDP)-
Output gap (percent of potential GDP)1.7-0.2-0.9-0.6-1.1-1.1-0.8
Consumer prices (end of period)
Consumer prices (period average)
External sector       
Terms of trade (deterioration -)-5.2-5.4-6.4-
Real effective exchange rate (depreciation -)-0.2-1.60.8-2.41.4n.a.n.a.
Money and credit 2/ 3/       
Broad money15.39.511.
Net credit to the private sector18.313.
Public sector       
NFPS revenue27.727.724.923.223.023.423.9
NFPS primary expenditure25.726.925.924.624.925.425.2
NFPS primary balance2.00.8-1.0-1.4-1.9-2.0-1.3
NFPS overall balance0.9-0.3-2.0-2.5-3.1-3.3-2.7
NFPS structural primary balance 4/0.7-0.3-0.5-1.1-1.5-1.7-1.1
External sector       
External current account balance-4.6-4.4-4.8-2.7-1.3-1.7-1.8
Gross reserves       
 In billions of U.S. dollars65.762.461.561.763.763.764.2
 Percent of short-term external debt 5/536534523450312478454
 Percent of foreign currency deposits at banks274258224230225220222
Total external debt 6/29.934.
Gross non-financial public sector debt 7/19.920.623.924.425.326.627.6
Savings and investment       
Gross domestic investment25.824.924.122.621.421.922.6
 Public sector (incl. repayment certificates)
 Private sector (incl. inventories)20.119.319.117.816.917.117.6
National savings21.220.519.319.920.220.220.8
 Public sector7.
 Private sector14.214.515.617.
Memorandum items       
Nominal GDP (S/. billions)548.2576.5612.7659.7701.8749.0796.9
GDP per capita (in US$)6,6556,5866,1686,2086,7627,1987,533

Sources: National authorities; UNDP Human Development Indicators; and Fund staff estimates/projections.

1/ Defined as the percentage of households with total spending below the cost of a basic consumption basket.

2/ Corresponds to depository corporations

3/ Foreign currency stocks are valued at end-of-period exchange rates.

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/ Short-term debt is defined on a residual maturity basis and includes amortization of medium and long-term debt.

6/ Includes local currency debt held by non-residents and excludes global bonds held by residents.

7/ Includes repayment certificates.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:
IMF Communications Department

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