Economic Perspectives on Peru and the Region

Julio VelardePresident

Central Bank of Peru

December 6, 2018

4,4

6,6 6,77,3

7,7

5,66,0

1,5

3,22,6

5,4

3,93,3 3,2

3,8

5,3

3,7

-1,0

3,9

5,0

60s 70s 80s 90s 2001-18

Emerging Asia LatAm World Peru

* Emerging Asia for 60s and 70s only considers Emerging East Asia & Pacific.

Source: World Bank (for 60s and 70s), WEO (80s, 90s and 2001-18) and BCRP–Inflation Report (Peru).

2

Since the 90s, Peru’s growth rate was higher than the regional and world average.

Average GDP growth by decades

241

199

196

158

148

143

0

50

100

150

200

250

300

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8*

Latin America and the Caribbean: real GDP index(2000=100)

Peru

Colombia

Chile

Latam

Argentina

Mexico

*Forecast.

Source: WEO and BCRP–Inflation Report (Peru).

Since 2008, Peru GDP growth rate has been leading the region.

Country

Average

annual growth

2001-2018

Mexico 2,0

Argentina 2,2

Chile 3,8

Colombia 3,9

Peru 5,0

LatAm 2,6

3

In 2018 and 2019, Peru’s growth will be among the highest in the region.

*Forecast.

1/ Excludes Peru

Source: IMF (WEO, Oct. 2018) and BCRP–Inflation Report (Peru).

4

-0,6

1,3 1,2 2,2

2016

2017

20

18

*

20

19

*

LatAm

Average annual growth

2001-2018: 2.6%

4,0

2,5

4,0 4,0

2016

2017

2018*

2019*

Peru

Average annual growth

2001-2018: 5.0%

2,2

1,8

2,9 3,1

2016

2017

2018*

2019*

Pacific Alliance Countries 1

Average annual growth

2001-2018: 2,8%

Investment in Latin American countries is expected to maintain its average value.

* Forecast

Source: IMF (WEO, October 2018) and BCRP–Inflation Report (Peru).

5

0

5

10

15

20

25

30

35

Emergingmarket anddevelopingeconomies

Argentina Mexico Chile Peru Colombia Latin Americaand the

Caribbean

Brazil

Gross Fixed Capital Formation(% GDP)

Average 2000-2017 2018*

191,5

15,1

8,5 8,16,8 6,4

5,5 4,8 4,7 4,7 4,33,2 2,7 2,6

10 000 000

20,2

6,5

4,1 3,0 4,24,9 4,5

3,0 0,1 3,1 3,0 2,4 2,0

Venezuela Argentina Uruguay DominicanRepublic

Costa Rica Brazil LatAm Bolivia Colombia Ecuador Mexico Chile Panama Peru

Average inflation, 2000-2018 Estimated inflation, 2019

* End of period inflation.

Source: WEO and BCRP–Inflation Report (Peru).

Latin America: 2000-2018 average annual inflation* and

estimated 2019 inflation

6

Peru’s annual inflation is among the lowest in the region and will converge

towards the target center in 2019.

Source: Goldman Sachs and BCRP (Peru).

Monetary conditions: inflation gap, neutral interest rate and policy rate

Next year, Latam-5 central banks may begin with the withdrawal of the monetary

stimulus

-1

0

1

2

3

4

5

6

7

-1

0

1

2

3

4

5

6

7

Brazil Chile Colombia Mexico Peru

Inflation gap (actual minus target)

Neutral real rate range

Current real ex-ante policy rate

7

A group of Latin American countries has promoted government debt reduction

in the last 20 years. The other group should reduce its debt in order to achieve

fiscal consolidation.

* Forecast

Source: IMF (WEO, October 2018) and BCRP–Inflation Report (Peru).

8

0

20

40

60

80

100

120

140

160

180

Venezuela Brazil Uruguay LAC Argentina Mexico Costa Rica Bolivia Colombia Ecuador Panama DominicanRepublic

Peru Chile Paraguay

General Government Gross Debt(% GDP)

2018* 2000

The current account deficit is expected to remain at sustainable levels (and among

the lowest in the region), and will continue to be covered mostly by long-term

private sector external financing.

9

-0,5

-2,4-1,7

-2,8

-4,6 -4,4 -4,8

-2,7

-1,1 -1,6 -1,5

7,0

9,3

7,0

10,89,8

7,86,6

4,65,7

5,04,0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* 2019*

CURRENT ACCOUNT AND LONG-TERM PRIVATE SECTOR EXTERNAL FINANCING1/ (% GDP)

Current account

Long-Term Private Sector External Financing % GDP

Current Account

Balance

2017 2018* 2019*

Argentina -4,9 -3,7 -3,2

Chile -1,5 -2,5 -2,7

Colombia -3,3 -2,4 -2,4

Brazil -0,5 -1,3 -1,6

Peru -1,1 -1,6 -1,5

Mexico -1,7 -1,3 -1,3

1/ Includes net foreign investment, portfolio investment, and private sector long-term disbursements.

* Forecast.

Source: BCRP – Inflation Report.

* Forecast

Source: IMF (WEO, October 2018) and BCRP (Peru).

Peru’s international reserves will be around 26 percent of GDP and will represent

4 times the short-term external debt.

65,7 62,3 61,5 61,7

63,6 61,1 61,9

2013 2014 2015 2016 2017 2018* 2019*

Net International Reserves (US$ billons)

10

INTERNATIONAL COVERAGE INDICATORS 2013 2014 2015 2016 2017 2018* 2019*

NIR as a % of:

a. GDP 32,5 30,8 32,1 31,7 29,7 26,9 26,2

b. Short-term external debt 1/ 572 550 460 316 453 397 445

c. Short-term external debt plus current account deficit 315 308 273 249 386 322 356

1/ Includes short-term debt balance plus redemption (1-year) of private and public sector.

* Forecast.

Source: BCRP – Inflation Report.

-14,7

-12,5

-6,6

-1,1

0,3

0,9

5,3

6,4

6,8

6,8

7,4

12,7

14,9

15,2

15,7

19,9

24,2

42,7

71,6

-20 0 20 40 60 80

Turkey

Venezuela

Argentina

South Africa

Chile

Malaysia

Indonesia

Colombia

Egypt

India

Mexico

Brazil

Philippines

Vietnam

China

Peru

Russia

Thailand

Saudi Arabia

External Vulnerability Indicator: 2018(% GDP)

Note: Indicator = [ Official Foreign Exchange Reserves - Short-term External Debt + Current Account Balance] / GDP.

Source: Moody’s and BCRP.

Higher external

soundness

Lower external

soundness

The high NIR, a sustainable current account and a low short-term external debt

guarantee external soundness…

11

-0,2

0,5

2,5

4,0

4,6

5,0

5,2

6,3

6,8

8,9

10,5

10,5

15,4

15,6

42,3

98,3

Ucraine

Thailand

Malaysia

Mexico

Peru

China

Philippines

Colombia

Indonesia

Chile

India

South Africa

Russia

Brazil

Turkey

Argentina

… and allows Peru to soften the impact of external financial shocks.

* Percentage change as of December 4 of 2018 with respect to December 31 of 2017.

Source: Bloomberg and Reuters.

FX depreciation 2018*

(currency unit per US$ - % change)

12

2,12,3

0,9

-0,3

-2,0

-2,5

-3,1-2,8 -2,6

2011 2012 2013 2014 2015 2016 2017 2018* 2019*

NON-FINANCIAL PUBLIC SECTOR SURPLUS/DEFICIT: 2011 - 2019(% GDP)

13

Fiscal deficit will decrease due to higher tax collection and lower tax refunds.

*Forecast.

Source: BCRP– Inflation Report.

14

Fiscal deficit path will lead to an increase in the gross debt, but up to sustainable

levels.

11,4 9,8 8,8 8,811,1 10,4

8,8 9,0 9,1

10,2

10,110,4 11,1

12,2 13,5 16,1 16,817,8

7,6

3,92,7 3,0

5,46,8

9,5

11,4

13,5

21,619,9 19,2

19,9

23,3 23,824,9

25,726,9

2011 2012 2013 2014 2015 2016 2017 2018* 2019*

NON FINANCIAL PUBLIC SECTOR DEBT: 2011 - 2019(% GDP)

Gross Debt in foreign currency

Gross Debt in local currency

Net Debt

Average maturity of debt (years) 12,1

Share of debt in foreign currency (%) 65

March 2018

*Forecast.

Source: BCRP – Inflation Report.

3

5

7

9

11

13

15

17

en

e.-

16

feb.-

16

ma

r.-1

6

ab

r.-1

6

ma

y.-

16

jun.-

16

jul.-1

6

ag

o.-

16

sep.-

16

oct.-1

6

no

v.-

16

dic

.-1

6

en

e.-

17

feb.-

17

ma

r.-1

7

ab

r.-1

7

ma

y.-

17

jun.-

17

jul.-1

7

ag

o.-

17

sep.-

17

oct.-1

7

no

v.-

17

dic

.-1

7

en

e.-

18

feb.-

18

ma

r.-1

8

ab

r.-1

8

ma

y.-

18

jun.-

18

jul.-1

8

ag

o.-

18

sep.-

18

oct.-1

8

10-Year Sovereign Yields in Local Currency

Peru

Mexico

Colombia

Chile

Brazil

Sovereign yields reflect a positive investor sentiment towards Peru´s financial

position. Peru’s solid macroeconomic indicators provide assurances of a sound

economic performance.

Sovereign Ratings

(local currency)

S&P Moody's Fitch

Chile AA- A1 A+

Peru A- A3 A-

Mexico A- A3 BBB+

Colombia BBB Baa2 BBB

Brazil BB- Ba2 BB-

15Source: Bloomberg and Ministry of Economic and Finance (MEF).

Chile Peru Colombia Mexico Brazil

31-12-17 4,55 5,17 6,48 7,65 10,26

4-12-18 4,41 5,64 6,96 9,12 9,97

Difference (bps) -14 47 48 147 -29

Economic activity has been recovering since the second quarter of 2017.

4,6

3,9

4,8

3,0

2,3

2,62,7

2,3

3,2

5,5

2,3

4,9

Q1

- 2

01

6

Q2

- 2

01

6

Q3

- 2

01

6

Q4

- 2

01

6

Q1

- 2

01

7

Q2

- 2

01

7

Q3

- 2

01

7

Q4

- 2

01

7

Q1

- 2

01

8

Q2

- 2

01

8

Q3

- 2

01

8

Q4

- 2

01

8*

*Forecast.

Source: BCRP – Inflation Report.

GDP growth(YoY% change)

16

31,4

6,1

0,3

-13,8-17,4

-5,7

5,5

1,6

5,58,4

-1,6

21,0

Q1

- 2

01

6

Q2

- 2

01

6

Q3

- 2

01

6

Q4

- 2

01

6

Q1

- 2

01

7

Q2

- 2

01

7

Q3

- 2

01

7

Q4 -

2017

Q1

- 2

01

8

Q2

- 2

01

8

Q3

- 2

01

8

Q4

- 2

01

8*

Public Investment(YoY% change)

Public investment has increased in line with progress of the works on the Pan

American Games and the El Niño Reconstruction program.

17

*Forecast.

Source: BCRP – Inflation Report.

After 14 consecutive months of decrease, private investment has recovered since

the second half of 2017.

Private Investment(YoY% change)

*Forecast

Source: BCRP – Inflation Report.

14 consecutive quarters of decline

18

12,210,6

4,9

-2,6

-10

-5

0

5

10

15

20

I.12 II III

IV

I.13 II III

IV

I.14 II III

IV

I.15 II III

IV

I.16 II III

IV

I.17 II III

IV

I.18 II III

IV*

Private sector confidence remains high.

6466

69 70 69 69 7069

6568

30

35

40

45

50

55

60

65

70

75

80

J.1

7 F M A M J J A S O N D

J.1

8 F M A M J J A S O N

Business expectations on the economic situation for the three and twelve

months ahead

Economy in the 3M ahead Economy in the 12M ahead

Optimistic area

Pessimistic area

Source: Apoyo, BCRP.

19

61

6264

65

59

61

63

61 62

40

45

50

55

60

65

70

J.1

7 F M A M J J A S O N D

J.1

8 F M A M J J A S O

Business expectations on the familiar economy situation for the twelve months

ahead(INDICCA, Lima Metropolitana)

Optimistic area

Pessimistic area

Expected investment 2019-2021: over US$ 28 billion.

SECTORS

(US$ millions)

2019-2021: MAIN INVESTMENT PROJECTS

(US$ millions)

Mining

(14 690)

• Quellaveco (3 450)

• Pampa del Pongo (1 800)

• Mina Justa (1 230)

• Zafranal (895)

• Michiquillay (700)

Infrastructure

(6 026)

• Lima Metro Line 2 (1 450)

• Expansion of Lima’s Jorge Chavez International Airport (1 000)

• Port terminals – Arequipa, Salaverry, Chancay, Paita, Ica y Loreto

(1 118)

• Highways (955)

Hydrocarbons

(2 213)

• Block 39 exploration (730)

• Block Z-2B exploration and drilling (400)

Electricity

(1 592)

• Santa Teresa II Hydroelectric expansion (450)

• Majes I and Majes II Hydroelectric (350).

Industrial

(806)

• Mitsubishi Phosphate Processing Plant (430)

Other sectors

(2 732)

• Intercorp Shopping Center (EX-San Martin quarter) Lima (650)

Private consumption has been driven by better labor market conditions.

2,4

2,93,0

1,4

2,1 2,1 2,2 2,1 2,1

2,82,6 2,6

3,8

2,7

3,7

5,7

4,34,1

4,3

4,7 4,7

J.1

7 F M A M J J A S O N D

J.1

8 F M A M J J A S

Private Formal Employment(YoY % change)

Source: SUNAT

4,43,94,24,0

3,4

4,2

3,44,0

4,5

3,23,3

2,4

4,44,4

8,69,18,9

7,3

6,5

10,7

7,6

J.1

7 F M A M J J A S O N D

J.1

8 F M A M J J A S

Jan-Set. 2018

Total 4,2

Agricultural exports 17,1

Agriculture and livestock 17,4

Mining 3,5

21

Total Income of Private Formal Employment(YoY % nominal change)

1,6 1,7

0,5 0,4

1,7 1,7 1,7 1,72,3

3,6

4,9 5,15,7

6,0

7,48,0 8,0

7,46,9

7,6 7,36,8

J.17 F M A M J J A S O N D J.18 F M A M J J A S O

Financial Sector indicators show clear signs of greater dynamism.

Source: BCRP

Credit to the Private Sector (YoY % change)

5,44,7

4,2 4,34,8 4,8 4,8 4,6

5,26,2

6,9 7,37,8

8,7

10,010,810,6

10,110,9

11,510,910,8

J.17 F M A M J J A S O N D J.18 F M A M J J A S O

Consumption(YoY % change)

1,8 1,71,1 1,3

1,8 2,0 1,9 1,7

2,8

5,6

7,67,1 7,3

7,78,3 8,5 8,4

7,9 8,2 8,4 8,1

6,8

J.17 F M A M J J A S O N D J.18 F M A M J J A S O

Mortgages(YoY % change)

22

Electricity and cement consumption has accelerated

Source: BCRP.

-6,5

-4,5-5,7

-8,8

-1,9

3,5

1,4

3,5 4,2

6,6

4,1

6,7 6,5

4,3 4,1

8,2 8,2

-0,3

2,2

0,31,6

5,0

J.1

7 F M A M J J A S O N D

J.1

8 F M A M J J A S O

Cement consumption(YoY % Chg.)

23

6,2

-2,0

0,8

-0,4

3,3 3,6

1,22,0 1,6

1,00,1

-0,6-0,4

1,8

3,6

6,2

3,0 3,43,9

2,63,2

5,16,2

J.1

7 F M A M J J A S O N D

J.1

8 F M A M J J A S O N

Electricity(YoY % Chg.)

Consequently, GDP is expected to grow 4% in the next two years, driven by

domestic demand, particularly investment and private consumption.

GDP(YoY % Chg.)

Average

2007-20162017 2018* 2019*

Domestic Demand 6,4 1,4 4,4 4,0

Private consumption 6,1 2,5 3,8 3,6

Public consumption 6,3 0,2 3,4 3,2

Private investment 7,9 0,2 5,5 6,5

Public investment 9,1 -2,3 9,9 2,8

Exports 4,0 7,8 3,5 4,6

Imports 7,2 4,1 5,0 4,7

GDP 5,5 2,5 4,0 4,0

Memo:

Primary GDP 3,6 3,1 2,6 4,2

Non-primary GDP 6,1 2,3 4,3 4,0

*Forecast.

Source: BCRP – Inflation Report.24

25

2,172.16

2,17

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

Ja

n-1

5

Ma

r-1

5

Ma

y-1

5

Jul-15

Se

p-1

5

No

v-1

5

Ja

n-1

6

Ma

r-1

6

Ma

y-1

6

Ju

l-1

6

Se

p-1

6

No

v-1

6

Ja

n-1

7

Ma

r-1

7

May-1

7

Ju

l-1

7

Se

p-1

7

No

v-1

7

Ja

n-1

8

Ma

r-1

8

Ma

y-1

8

Ju

l-1

8

Se

p-1

8

No

v-1

8

Inflation

Food and energy

Excluding food and energy

Maximum

Minimum

Target

range

Source: BCRP.

Inflation(YoY% change)

Average 01-17 Nov.18

Inflation: 2.7% 2.2%

Excluding food and energy 2.1% 2.2%

Food and energy 3.2% 2.2%

Inflation has remained in the target range since June.

Reference

rate (%)

Dec. 2016 4.25

May. 2017 4.00

Jul. 2017 3.75

Sep.2017 3.50

Nov. 2017 3.25

Jan. 2018 3.00

Mar.2018 2.75

3,50

4,25

3,002,75

0,08

0,25

1,59

0,770,31

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17 Jan-18 Jun-18 Nov-18

Since March, the Central Bank has maintained its interest rate at 2.75%.

26

Nominal and Real Reference Rate (%)

Nominal

Real*

*Ex-ante (with the inflation expectation one year ahead)

Source: BCRP.

-1

0

1

2

3

4

5

-1

0

1

2

3

4

5

2015 2016 2017 2018 2019*Proyección

Inflation is expected to converge towards the target center in 2019.

27

Inflation Forecast 2018 – 2019 Inflation Forecast

2017 2018 2019

CPI 1,4 2,2 2,0

1. CPI excluding food and energy 2,1 2,3 2,0

i. Goods 1,2 2,2 1,7

ii. Services 2,7 2,3 2,2

2. Food and energy 0,5 2,2 2,1

i. Food 0,3 2,1 2,1

ii. Energy 1,6 2,4 2,1

Source: BCRP – Inflation Report.

Economic Perspectives on Peru and the Region

Julio VelardePresident

Central Bank of Peru

December 6, 2018