Cracks In Growth Story Beginning To Show

BMI View: Peru's economy posted the slowest expansion since 2009 in Q113 due in part to a weak performance by the external sector and moderating fixed investment, bolstering our long-held view for a notable moderation in real GDP growth in the next few years. Indeed, with a slowdown in China to continue hitting Peru's economy through the trade and investment channels in the coming years, we maintain our below-consensus real GDP growth forecasts of 5.4% and 5.0% for 2013 and 2014, respectively.

Macro Strategy

Peruvian real GDP growth came in at 4.8% year-on-year (y-o-y) in Q113, marking the economy's slo west expansion since Q409, and underpinning our long-held view that economic activity in the country is set to slow this year ( see 'Growth To Slow In H213', March 6 ) . Indeed, with exports to China comprising over 15.0% of total exports last year and the mining sector and related industries heavily dependent on foreign investment, Peru is highly exposed to an economic rebalancing in China, which our Asia Country Risk team believes will see growth slow to an average of 6.4 % between 2013 and 2017, as compared to 9.2% during the previous five years . As such, we remain below consensus on Peruvian growth in the next few years, forecasting a 5.4% expansion in real terms in 2013 and just 5.0% in 2014.

External Sector Begins To Weigh On Growth
Peru - Components Of Real GDP By Expenditure (LHS) & Growth (RHS), % chg y-o-y

Expenditure Breakdown

Private Consumption: Holding Up Better Than Most... Despite our forecast for a notable slowdown in headline growth in the next few years, we expect that private consumption will remain a relative bright spot for the economy. Indeed, we forecast private consumption to contribute 3.8 percentage points (pp) to real GDP growth in 2013 and 3.4pp in 2014, implying real growth of 5.8% and 5.1% respectively. This marks a moderation from 2012 levels on the back of our view for modest currency weakness this year and broad economic weakness. However, given our forecast for a 25 basis points policy rate cut to 4.00% by end-2013 and our expectation that monetary policy will remain accommodative in 2014 as well, we anticipate that the consumer sector will remain relatively well supported.

Government Consumption: Social Spending Will Remain Supportive... After contributing 1.0pp to headline growth in 2012, we forecast government consumption to add 0.7pp and 0.4pp to real GDP growth in 2013 and 2014, respectively. This implies a slowdown from 10.6% real growth last year to 7.2% this year and 4.0% in 2013. While strong government consumption was driven in part by a backlog of projects and investments held up by the 2011 general election, we expect this to ease somewhat in the next 12 months. Nevertheless, with Peruvian President Ollanta Humala continuing to emphasise his commitment to spending on social development programmes, we do not anticipate a significant downturn in government consumption in the next few years.

Fixed Investment: Growth To Remain Off Its Highs... Following robust growth in recent years, we believe fixed investment is set for a period of more moderate expansion in the short to medium term. We forecast gross fixed capital formation to contribute 2.1pp to headline growth in 2013 and 1.9pp in 2014, implying real growth of 7.0% and 6.5%, respectively. This marks a sizeable slowdown from 14.9% growth in real terms last year.

A Strong Correlation
Peru - Real GDP and Fixed Investment Growth, % chg y-o-y

Indeed, with the majority of funding for a government-led stimulus programme focused on public works having been allocated, and hold-ups in the infrastructure concessions process implying that the private sector is unlikely to fill the void in this industry in H213, we see little to suggest an uptick in fixed investment growth this year ( see 'Flagship Projects Delayed, But Growth Continues To Accelerate', January 16). These factors, combined with weaker metals demand and prices on the back of a slowdown in Chinese economic activity, further underpin this view. However, we note modest upside risks to this view stemming from President Humala's recent announcement that the government will prioritise investment after growth slowed in Q113. Should the policies spur public and private fixed investment in the next 12 months, gross fixed capital formation could outperform our expectations this year.

Net Exports: Mining Exports To Remain A Drag... Peruvian exports were hit hard in Q113 on the back of a significant leg down for metals prices (mining exports comprised 56.8% of total exports in 2012), leading to the country's first trade deficit since Q408 ( see 'Regional Export Update: Weak Q1 Suggests Downside Risks'). As such, we have revised down our export growth forecast for this year from 2.0% to zero, as although we believe favourable base effects will bolster export growth in the next few months, our Commodities team remains below consensus on gold and copper prices in the next few years. As such, we forecast net exports to remain a drag on growth this year, subtracting 1.2pp from headline growth.

Price An Important Factor
Peru - Real Import And Export Price Growth & Trade Balance

Risks To Outlook

The primary risk to our growth outlook for Peru in the next few years remains to the downside, should fixed investment growth remain more sluggish than we currently expect and metals prices continue to head lower, weighing on the external sector. Moreover, a more significant sell-off in the Peruvian sol than we expect in the coming months could dampen private consumption as well, dragging down headline real GDP growth.

That said, following President Humala's announcement in late May that the government plans to spur investment into the economy and develop the industrial sector, we note that these measures could pose upside risks to our 5.4% growth forecast this year. While specific details on the measures have not been released, should they succeed in boosting public and private investment in the coming months we could see gross fixed capital formation growth exceed our expectations this year, bolstering headline growth in turn.

2008 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f
Notes: e BMI estimates. f BMI forecasts. 1 Unemployment rate in Lima. Sources: 2 BCRP; 3 BCRP/BMI calculation; 4 World Bank/UN/BMI; 5 INEI.
Nominal GDP, PENbn 2 371.1 368.1 434.7 486.5 526.3 560.6 606.8 657.1 710.9 771.8
Nominal GDP, US$bn 3 126.9 122.2 153.9 176.7 199.6 214.0 232.5 252.2 273.4 297.4
Real GDP growth, % change y-o-y 3 9.8 0.9 8.8 6.9 6.3 5.4 5.0 5.1 5.2 5.4
GDP per capita, US$ 3 4,459 4,250 5,293 6,010 6,712 7,115 7,643 8,201 8,792 9,462
Population, mn 4 28.5 28.8 29.1 29.4 e 29.7 e 30.1 30.4 30.8 31.1 31.4
Unemployment, % of labour force, eop 1,2 7.8 7.9 7.2 7.9 5.6 6.0 6.3 6.1 6.1 5.9
This article is tagged to:
Sector: Country Risk
Geography: Peru

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