Peru’s fundamentals and economic outlookJulio Velarde

Governor

Central Bank of Peru

September 2015

1. Peru’s growth is based on strong fundamentals

2. Recent economic developments and prospects

3. Policy Framework

4. Concluding Remarks

Agenda

2

7.4 7.3

6.5

5.95.5 5.4 5.2

4.5 4.4

3.7 3.63.1 3.1

2.5 2.3 2.3 2.1 2.0 1.91.5

0.6 0.60.1

Average GDP growth: 2005-2014

Average GDP growth is among the highest in emerging economies

Source: IMF, World Economic Outlook

3

After the 2008-2009 financial crisis, Peru was the country with the fastest recovery and highest growth among the main Latin American ITers

90

100

110

120

130

140

150

2007 2008 2009 2010 2011 2012 2013 2014

GDP of selected countries (2007-2014)(Index 2007=100)

Source: IMF and BCRP.

Peru

Colombia

Mexico

Brazil

Chile

Average GDP

Growth

2010-2014

Brazil 2,8

Colombia 4,8

Chile 4,6

Mexico 3,3

Peru 5,8

Average LATAM 3,5

4

5.4

4.1 4.03.6

2.9

2.1

Brazil Mexico Colombia Chile Peru Peru (excludes food andenergy)

Average Inflation: 2005-2014

Average Inflation is the lowest among main Latin American economies

Source: IMF, World Economic Outlook

5

Peruvian Credit rating of sovereign debt is BBB+ since 2013

Source: Standard & Poors

AA AA- A+ A- BBB+ BBB BBB- BB+ B-

Long term sovereign debt in foreign currency

Colombia

Philippines*

Brazil

India

South Africa

Hungary

Indonesia*

Russia

Turkey

Egypt

Investment grade: BBB-

China*

Czech Republic

Qatar

Taiwan* Chile

South Korea* Malaysia*

PolandPeru

Mexico

* Asia - Pacific

6

80

43

3532

29 28 28 27 26

20 19 18 18 17 16 15 15 15 13 12 127

2

Ta

iwan

Th

aila

nd

Chin

a

Mala

ysia

Peru

Phili

ppin

es

Hun

gary

Czech R

ep

ublic

Kore

a

Russia

Pola

nd

Qata

r

United A

rab

Em

irate

s

India

Bra

zil

Mexic

o

Tu

rke

y

Chile

Sou

th A

fric

a

Indo

nesia

Colo

mb

ia

Egypt

Gre

ece

International Reserves: 2014(% GDP)

International reserves are equivalent to 29 percent of GDP

Source: IMF and Bloomberg

7

177.2

90.5

76.965.2 65.0

57.050.1 48.8 47.2 45.9 41.6 41.1 38.0 37.6 37.2 35.7 33.5 31.5

25.0 20.1 17.9 13.9 12.1

Gross public debt: 2014 (% GDP)

Public debt is among the lowest in emerging economies

Source: IMF and BCRP

8

Banking system has a low exposure to external liabilities

7.0

4.0

9.5

5.3

3.9

2.6

3.2

6.6

2.73.2

1.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

Short Term External Liabilities of the Banking Sector(% of GDP)

*Up to June 20159

Dollarization ratio dropped to almost a half since 2005

62

5755

50

46 4645

4341

38

34

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

Dollarization Ratio of Credit to the Private Sector

(%)

* Up to July 2015

10

Credit to GDP almost doubled since 2005

21.920.8

23.9

28.9 29.330.5

31.933.2

36.5

39.340.7

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

Credit to the Private Sector(% of GDP)

* Up to June 2015

11

Peru’s Gross fixed investment is among the highest in Emerging Economies

17.3 18.220.3

23.9 23.325.1 24.0

25.8 26.6 25.8

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Gross fixed investment (% of GDP)

Private investment Public Investment

% GDP 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Private 14,3 15,0 16,8 19,4 17,6 19,2 19,2 20,4 20,8 20,3

Public 3,1 3,2 3,5 4,5 5,7 5,9 4,8 5,4 5,8 5,5

22.2

17.0

21.9

25.0

20.0

Chile Brazil Mexico Colombia Latin America

Total investment(% of GDP)

Source: IMF.

20.7

31.533.8

25.2

India Indonesia Malaysia Philippines

Total investment(% of GDP)

Source: IMF.

12

1. Peru’s growth is based on strong fundamentals

2. Recent economic developments and prospects

3. Policy Framework

4. Concluding Remarks

Agenda

13

GDP growth is expected to recover in the next few years

6.3

7.5

8.5

9.1

1.0

8.5

6.56.0 5.8

2.4

2.9

4.0

5.8

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* 2016* 2017**

Peruvian Annual GDP Growth(in percentages)

*Consensus Forecast, August 2015

**Inflation Report, May 2015

14

Signs of recovery: Employment indicators

1.61.8

2.9

4.3

3.3 3.3

3.0

3.6

2.32.4

1.71.9

1.5

2.01.9

0.6

0.3 0.3

-0.2

0.5

0.2

1.21.1

0.90.8

0.20.4

0.60.8

1.2

1.8

Employment(Annual percentage change)

Source: Statistical Institute of Peru (INEI)

15

Signs of recovery: Electricity Production is growing faster than last year

Source: COES

7.4

4.8 4.8

7.57.2

7.47.2

5.4

6.5

7.6

5.15.3

6.0

7.16.9

5.1 5.24.9 4.9

4.6

5.2 5.2

4.8 4.75.0

3.7

5.6 5.55.3

5.6

5.0

7.0

16

Mining sector has started to show higher growth rates

-7.4

-2.3

-4.2

5.3

2.5

8.7

7.0

11.1

2.4

11.2

7.78.4 8.3

9.9

-0.7

-7.9

-2.9

-6.7

-3.9-4.4 -4.8

0.2

-0.9

-7.7

5.8

-1.0

14.7

18.1

8.7

14.1

17

Copper production would increase by 88 percent in the period 2014-2018

1.3 1.3

1.6

1.9

2.2

2.4

2013 2014 2015* 2016* 2017* 2018*

COPPER PRODUCTION(million of tons)

Constancia

(Cusco)

Las Bambas

(Apurímac)

Cerro Verde

(Arequipa)

Toquepala

Expansion

(Tacna)

Toromocho

(Junín)

* Forecast

18

Peru leads the exports of several agricultural and mining products

AGRICULTURAL

PRODUCTS

US$

millions

WORLD

RANKING

Quinoa 196 2

Fresh asparagus 385 2

Canned asparagus 150 2

Organic banana 119 3

Avocados 304 4

Grape 643 5

Paprika 90 5

Coffee 734 7*

Artichoke 93 8

*Organic coffe ranks first.

Source: Comtrade, FAO

MINERAL

PRODUCTS

US$

millions

WORLD

RANKING

Zinc 1 504 2

Copper 8 875 2

Lead 1 131 3

Silver* 3 634 3

Tin 540 4

Molybdenum 360 5

Gold 5 660 6

*Includes refined and concentraded silver.

Source: Comtrade, FAO

19

The current account deficit is financed by long-term private capital inflows

1/ Includes net foreign investment, portfolio investment and private sector's long-term disbursement.

-4.3

-0.5

-2.4-1.9

-2.7

-4.2 -4.0-3.2 -3.1

-2.0

8.3

7.0

9.3

7.2

10.8

9.5

7.2

4.7 4.33.8

2008 2009 2010 2011 2012 2013 2014 2015* 2016* 2017*

CURRENT ACCOUNT AND LONG-TERM EXTERNAL FINANCING OF THE PRIVATE SECTOR: 2005-2017 1/

(% of GDP)

Current Account Long-term financing of the private sector

* Forecast

20

Expansionary fiscal stance would contribute to revert economic cycle

-1.1

-0.3

2.3

2.9

2.4

-1.3

-0.2

2.02.2

0.9

-0.3

-2.2

-2.7 -2.6

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2 014 2015* 2016* 2017*

Fiscal Surplus(% of GDP)

* Forecast

21

Higher public investment in the following years

-0.2

10.2

17.5 17.1

27.9

32.9

14.2

-11.2

19.9

10.7

-2.4 -2.0

8.5

5.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2 014 2015* 2016* 2017*

Public Investment(% chg)

* Forecast

22

1. Peru’s growth is based on strong fundamentals

2. Recent economic developments and prospects

3. Policy Framework

4. Concluding Remarks

Agenda

23

3.25

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Feb

/12

May/1

2

Aug

/12

No

v/1

2

Feb

/13

May/1

3

Aug

/13

No

v/1

3

Feb

/14

May/1

4

Aug

/14

No

v/1

4

Feb

/15

May/1

5

Aug

/15

The Central Bank of Peru lowered its monetary policy interest rate 4 times sinceNovember 2013

Monetary policy interest rate(%)

24

Macro-prudential measures aim at securing sustainable credit growth and contributing to de-dollarization: Domestic Currency Reserve Requirements are now lower than two years ago.

6.6

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

No

v-1

1

Jan

-12

Mar

-12

May

-12

Jul-

12

Sep

-12

No

v-1

2

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

*

Jul-

15

*

Domestic Currency Reserve Requirements(% of total obligations subject to reserve requirements)

Marginal Average

* Preliminar

25

70.0

35.6

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

No

v-1

1

Jan

-12

Mar

-12

May

-12

Jul-

12

Sep

-12

No

v-1

2

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

*

Jul-

15

*

Foreign Currency Reserve Requirements(% of total obligations subect to reserve requirements)

Marginal Average

* Preliminar

Macro-prudential measures aim at securing sustainable credit growth and contributing to de-dollarization: Foreign Currency Reserve Requirements are now higher than last year.

26

As a result, we observe higher credit growth in domestic currency and lower credit growth in foreign currency

ANNUAL GROWTH OF CREDIT TO THE PRIVATE SECTOR %

18.1

25.3

18.2

26.1

6.8

2.20.3

-16.1

8.8

-20

-15

-10

-5

0

5

10

15

20

25

30

Soles US$ Total

27

Exchange Rates and FOREX Intervention

-600

-400

-200

0

200

400

600

2.50

2.65

2.80

2.95

3.10

3.25

01

-en

e-1

2

01

-ma

r-1

2

01

-ma

y-1

2

01

-jul-1

2

01

-se

p-1

2

01

-no

v-1

2

01

-en

e-1

3

01

-ma

r-1

3

01

-ma

y-1

3

01

-jul-1

3

01

-se

p-1

3

01

-no

v-1

3

01

-en

e-1

4

01

-ma

r-1

4

01

-ma

y-1

4

01

-jul-1

4

01

-se

p-1

4

01

-no

v-1

4

01

-en

e-1

5

01

-ma

r-1

5

01

-ma

y-1

5

01

-jul-1

5

FO

RE

X N

et

Pu

rch

as

es

(M

illio

ns

of

US

$)

Ex

ch

an

ge

Ra

te (

So

les

pe

r d

oll

ar)

Exchange Rate and Foreign Exchange Intervention

Net purchases of FX Exchange Rate

FOREX Net purchases

(MillIons OF US$)

2012 13 274

2013 - 2015* -11 146

*Up to August 27th

28

Currencies of main Latin American and Asian Countries have experienced a depreciation of more than 30 percent since Jan-2013

Peru

Chile

Indonesia

Mexico

India

-10

0

10

20

30

40

50

60

02/0

1/2

01

3

02/0

2/2

01

3

02/0

3/2

01

3

02/0

4/2

01

3

02/0

5/2

01

3

02/0

6/2

01

3

02/0

7/2

01

3

02/0

8/2

01

3

02/0

9/2

01

3

02/1

0/2

01

3

02/1

1/2

01

3

02/1

2/2

01

3

02/0

1/2

01

4

02/0

2/2

01

4

02/0

3/2

01

4

02/0

4/2

01

4

02/0

5/2

01

4

02/0

6/2

01

4

02/0

7/2

01

4

02/0

8/2

01

4

02/0

9/2

01

4

02/1

0/2

01

4

02/1

1/2

01

4

02/1

2/2

01

4

02/0

1/2

01

5

02/0

2/2

01

5

02/0

3/2

01

5

02/0

4/2

01

5

02/0

5/2

01

5

02/0

6/2

01

5

02/0

7/2

01

5

02/0

8/2

01

5

02/0

9/2

01

5

Cumulative Depreciation of Nominal Exchange Rate(in percentages)

Peru Chile Indonesia India Singapur Mexico

Singapur

29

Real Equilibrium Exchange Rate

The Equilibrium Real Exchange Rate takes into account the Peruvian relative productivity with respect to its trade partners,

the terms of trade, the net foreign assets, the openness degree and the fiscal position.

30

Annual Inflation Forecast converges to the target range in 2016

31

1. Peru’s growth is based on strong fundamentals

2. Recent economic developments and prospects

3. Policy Framework

4. Concluding Remarks

Agenda

32

Concluding Remarks

• Exogenous factors have been affecting the economic cycle;

however, the Peruvian economy holds strong fundamentals.

• During this period, the Central Bank has had an expansionary

position, providing the required liquidity to the market.

• An active fiscal position is required to offset the lower private

spending.

• It is necessary to deepen structural measures to strengthen the

recovery of potential growth.33

Peru’s fundamentals and economic outlookJulio Velarde

Governor

Central Bank of Peru

September 2015