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Economy
expands faster than expected
According to
data published by the Central Bank on 29 August, gross domestic product
(GDP) expanded 10.9% in the second quarter over the same period last
year. The reading exceeded the 9.7% growth observed in the first quarter
(previously reported: +9.3% year-on-year) and was also above last month’s
Consensus Forecast of 10.3%. In fact, the second quarter reading was the
fastest pace observed since the second quarter of 1995. The domestic side
of the economy continued to be the main engine of economic growth.
Consumption accelerated slightly from 8.2% annual growth in the first
quarter to 8.6%. Simultaneously, investment expanded at the fastest pace
observed since the second quarter of 1995 and increased 35.8% over the
same quarter last year (Q1: +22.9% year-on-year). Meanwhile, in the
external sector, exports of goods and services decelerated slightly (Q1:
+13.0% yoy; Q2: +11.5% yoy), whereas imports picked up the pace notably
(Q1: +20.0% yoy; Q2: +26.8% yoy). As a result, the net contribution from
the external sector to overall growth diminished from -1.7 percentage
points in the first quarter to -3.1 in the second. At the sector level,
the acceleration over the first quarter was mainly the result of faster
growth in agriculture, non-primary industries and services.
Government
expects economic growth to exceed last year’s record pace
On 19
August, international credit agency Moody’s Investors Service raised the
country’s long-term foreign currency debt rating from Ba2 to Ba1, placing
Peru one level below investment grade and in line with Brazil and
Colombia. Moody’s cited a steady strengthening in the balance sheets of
both the government and local banks as well as a downward trend in
dollarisation as the main reasons for its decision. That said, the agency
highlighted that the country continues to face significant socio-economic
challenges. Earlier this year, international credit agencies Standard &
Poor’s and Fitch Ratings granted Peru investment grade. The improved debt
rating is likely to buttress economic growth in the medium to long term.
Meanwhile, this year, economic growth will exceed last year’s record
expansion according to the government. The Ministry of Economy estimates
that the economy grew 9.7% in July and 10.1% in August, which suggests
that economic activity remains buoyant in the third quarter. Domestic
demand is likely to remain the key driver of economic growth. In
particular, investment will maintain the dynamic growth observed in recent
years, supported by strong private and public investment. On the other
hand, private consumption, the other engine of growth, may moderate in the
wake of sluggish consumer confidence. In recent months, consumer
confidence has deteriorated as increasing inflation is eroding consumers’
purchasing power, which is primarily affecting lower income groups.
According to APOYO Consultoría, the consumer confidence index (INDICCA,
Índice de Confianza del Consumidor de APOYO) dropped 4 points in
August to 41 points. As a result, confidence fell further below the
50-point threshold that separates optimism from pessimism for the seventh
consecutive month. According to the 2009 fiscal budget proposal sent to
Congress on 30 August, the Ministry of Economy expects GDP to expand 9.0%
this year and 7.0% in 2009. Last year, the economy grew 8.9%. Consensus
Forecast participants have raised
their
economic growth projection by 0.2 percentage points to 8.3%. In 2009,
panellists expect the economy to grow at a slower 6.7% pace, which is up
0.1 percentage points form last month’s forecast.
Inflation
increases to ten-year high
In August,
consumer prices increased 0.59% over the previous month. The reading was
slightly above the 0.56% price rise observed in July but was virtually in
line with market expectations of a 0.60% increase. As in the previous
month, the August reading was mostly influenced by higher prices for
housing, food and beverages as well as for transportation and
communication. In particular, transportation prices are rising as the
government started to reduce fuel subsidies in the last few months. As a
result of the price rise seen in August, annual headline inflation jumped
from 5.8% in July to 6.3%, which is the highest rate observed since
September 1998. Annual core inflation, which excludes volatile energy and
food items, reached 5.1% in August, up from July’s 4.8% rate. At the
current level, annual headline inflation more than triples the Central
Bank’s 2.0% target for this year, and even widely exceeds the ±1%
tolerance margin around the target rate. Recently, monetary officials
stated that they expect inflation to moderate to 5.5% by the end of the
year (previous forecast: +4.0%) but do not see inflation falling back into
the target range until the second half of 2009. The government is even
less optimistic than the Central Bank. According to the budget proposal
sent to Congress on 30 August, government officials expect inflation to
reach 5.8% by the end of this year and 3.5% next year. Both the Central
Bank and the government have claimed that, so far, international food
prices have been the main driver behind inflation. However, the increase
in core inflation observed during the last seventeen months indicates that
other factors are also influencing price developments. In particular
buoyant domestic demand (Q1: +11.2% year-on-year; Q2: +13.8 yoy), which is
significantly above potential, is exerting strong pressure on consumer
prices as well. In an attempt to prevent higher commodity prices and
strong domestic demand from affecting inflation expectations, the Central
Bank has lifted reserve requirement ratio several times since the
beginning of the year. In addition, the Bank has raised the reference
interest rate by 1.25 percentage points since January and could opt to
raise it by another 25 basis points to 6.50% at the next policy meeting
scheduled on 7 September. Consensus Forecast panellists see inflation
moderating only to 5.6% by the end of this year, which is up 0.4
percentage points from last month’s Consensus.
For next
year, panellists expect inflation to moderate to 3.9%, which is 0.2 percentage
points above last month’s forecast.
Current
account deficit reaches 10-year high
In the second
quarter, the current account balance incurred a deficit of US$ 1.6
billion. The figure contrasted the US$ 368 million surplus observed in
the second quarter of last year and represented a deterioration compared
to the US$ 922 million deficit registered in the previous quarter
(previously reported: US$ 655 million deficit). The external gap,
measured as a percentage of GDP, reached -4.5% in the second quarter (Q1:
-3.1% of GDP), the largest quarterly deficit recorded since the third
quarter of 1998. The increase in the current account deficit was mainly
due to a deterioration in the terms of trade. That said, the current
account deficit was largely financed by important long-term capital
inflows (US$ 2.3 billion or 6.5% of GDP) that were oriented to fund
important investment projects in the private sector. The deterioration in
the current account was mainly due to a decline in the trade surplus,
which diminished from US$ 1.5 billion in the first quarter to US$ 903
million in the second. Exports decelerated notably from 34.7%
year-on-year growth in the first quarter to 25.2%. In contrast, imports
picked up pronouncedly, from 48.8% year-on-year growth in the first
quarter to 67.7%. As a result of the second quarter reading, the moving
annual current account balance turned from a US$ 491 million surplus in
the first quarter to a US$ 1.5 billion deficit in the second. Consensus
Forecast participants anticipate the current account deficit to reach US$
1.9 billion by the end of this year. |
