Peru Economic Outlook. Fourth Quarter 2020

Following the impact of the measures adopted to contain COVID-19, economic activity has recovered faster than expected, although the normalization is losing momentum. We expect GDP to contract by 13% in 2020 and to rebound next year by 10%, following the general election and the availability of a vaccine or viable treatment

Key points

• Key points:
• The gradual flexibilisation of isolation measures implemented in March to contain the propagation of the virus has favoured the normalisation of economic activity. Thus, the contraction of GDP went from 40% YoY in April to slightly below 10% YoY in August. This normalisation, however, has lost some steam.
• Looking forward, we expect private sector spending to remain weak. In the case of households, due to the deterioration of the labour market; in the case of firms, as a result of cautious investment. In this context, we estimate GDP will contract 13% in 2020, but rebound 10% next year.
• On the fiscal policy side, the next administration will face the challenge of increasing tax revenues in order to stabilise public debt (as a % of GDP). Assuming both a credible process of fiscal consolidation is implemented, thus favouring capital inflows, and a higher trade surplus, the local currency will appreciate in 2021.
• The Central Bank will maintain a strongly accommodative monetary policy stance, with the reference interest rate remaining at 0,25% until 2022, amid an absence of demand pressures. However, we do not rule out that, if necessary, the monetary stimulus might be expanded with unconventional monetary policy measures.
• The risk balance on the economic activity forecasts is positive for 2020 and neutral for 2021.

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