The lean times in the Peruvian economy

ABSTRACT

The growth rate of “nonprimary gross domestic product (GDP)” (Perú’s urban economy) dropped to 3.6 percent in 2014 and to 2.4 percent in 2015, far below the annual average of 7.3 percent recorded over the previous decade; moreover, an equally low growth rate of 2.8 percent per year is projected in 2016. In the macroeconomic history of Peru, the times of plenty —that is, the more or less prolonged booms—are also times of high prices of the commodities that the country exports; meanwhile, the lean times—that is, the more or less intense recessions in which economic activity slows down—are times of low commodity prices. This article describes the negative external shock undergone by the Peruvian economy and its recessionary and inflationary effects over 2014–15, analyzes the fiscal and monetary policies applied in response to the external shock, and outlines the macroeconomic challenges faced by the new government of Pedro Pablo Kuczynski.

KEYWORDS:

• External shocks
• fiscal policy
• monetary policy

JEL CLASSIFICATIONS:

• E520
• E580
• E620
• F410

Notes

¹Nonprimary GDP accounts for 80 percent of the total and excludes agriculture, fishing, and mining, as well as the processing activities associated with these sectors; the economic activity of urban Peru is measured in this way.

²Overall GDP grew by 3.3 percent in 2015 and is projected to increase by 4 percent in 2016, according to the Reporte de Inflación (BCRP, 2016). These figures reflect the expansion in the mining sector GDP, 15 percent in 2015 and 18 percent in 2016, brought on by the maturation of large-scale investment projects initiated during the period of high metal prices.

³A sufficiently broad expansion in nontraditional exports and tourism, accompanied by import substitution, can also serve to boost the rest of the economy.

⁴This figure does not include the external debt in foreign currency of large local nonfinancial companies, which stood at almost 15 percent of GDP at the end of 2015.

⁵This is the case of apparel exporters, local producers who compete with imported garments largely from China, the tourism industry, agroindustrial exports, and so on.

⁶In the words of Janet Yellen (2015), “My interpretation of the historical evidence is that long-run inflation expectations become anchored at a particular level only after a central bank succeeds in keeping actual inflation near some target level for many years.”

⁷A higher inflation target directly increases inflation. But if monetary policy credibility also increases, thereby restricting the inflationary impact of real exchange-rate shocks, inflation may be reduced indirectly. Appendix 1 gives an example of how this indirect effect predominates in the transition from one equilibrium to another. Albagli et al. (2015) show empirically, using a panel of countries that includes Peru, that this credibility effect—measured by past level of attainment of the inflation target—reduces the inflationary impact of the exchange rate. A similar result is obtained in IMF (2016a), using the dispersion of one-year inflation expectations as an indicator of credibility.

⁸Since the start of the 2000s, bilateral real exchange-rate fluctuations have been closely connected to bilateral nominal exchange-rate fluctuations.

⁹In this analysis, we have not taken into account the role of two supply shocks with opposite signs: the collapse in the oil price and the El Niño phenomenon.

¹⁰On the emerging economies, see Caselli and Roitman (2016); on Peru, see Pérez Forero and Vega (2015).

¹¹Misgivings regarding the desirability of such a low target inflation rate are ongoing; see IMF (2016c).

¹²See BCRP (2016) for an analysis of the impact that the current increase in the exchange rate has had on dollar loan defaults.

¹³The BCRP’s net international position discounts foreign currency belonging to the public sector and the commercial banks from net international reserves.

¹⁴The private pension funds (Administradoras de Fondo de Pensiones, AFPs) increased the proportion of their total portfolio invested abroad from 30 percent to 40 percent over the period 2013–15 with the authorization of the BCRP; at the start of 2013, the total AFP portfolio accounted for 80 percent of the BCRP’s exchange-rate position.

¹⁵The effect of the interest rate on the exchange rate should operate via the channel of capital flows. However, neither gross inflows nor gross outflows of capital respond significantly to the local-external interest rate differential on a panel of twenty-two emerging economies, according to the IMF (2016, ch. 2). Conversely, there is in fact evidence of the impact of the BCRP’s exchange-rate intervention on the price of the dollar; see Adler et al. (2015) and Tashu (2015). In the Peru of today, external factors would seem to be the driving force behind the evolution of the exchange rate, counteracted by the BCRP’s sterilized exchange-rate intervention.

¹⁶Since 2008, the U.S. and European central banks have done the opposite: they have announced that their reference interest rates, close to zero, will remain there for an extended period in order to lower the longer-term interest rates.

¹⁷See BCRP (2015), which contains a daily graph, for one year, of the gap between the interbank interest rate and the reference rate.

¹⁸According to Kliatskova and Mikkelsen (2015), the exchange-rate intervention (sale of dollars) and the increase in the reference exchange rate are stronger in the case of local currency depreciation, in those emerging countries with greater foreign-currency debt in the nonfinancial private sector.

¹⁹According to Cermeño et al. (2015), the reserve ratio—in contrast to the reference interest rate—does not influence the bank lending interest rates in LC fixed by the six biggest banks in Peru. According to Dancourt (2012), the reserve ratio—in contrast to the reference rate—only influences the LC bank credit of small financial institutions.

²⁰For a detailed analysis of this policy process, see Durand (2016).

²¹The gross fixed capital formation of the local and regional governments fell from 3.9 percent of GDP in 2013 to 2.7 percent of GDP in 2015; see BCRP (2016a, p. 83).

²²A third of this decrease in tax revenue is attributed to tax cuts; see BCRP (2016). Of particular note is the cut in income tax payable by companies, scheduled over several years, and the modifications to the general sales tax payment system.

²³Translated by the author.

²⁴For an optimistic view of this inheritance, see IMF (2016c).

Additional information

Notes on contributors

Oscar Dancourt

Oscar Dancourt is a professor in the Department of Economics at Pontificia Universidad Catolica del Peru (PUCP), Lima. A version of this article was presented at the conference Central Banks in Latin America: In Search of Stability and Development, held by Centro de Estudios de Estado y Sociedad (CEDES) and PUCP in Lima, 2016. The author is grateful to Martín Rapetti for his comments and to Gustavo Ganiko and Jefferson Martínez for their superb assistance.