Peru Economic Outlook. March 2023

Economic activity is expected to grow 1,9% in 2023, six tenth of a percentage point less than our early-December forecast. This revision considers the social upheaval at the beginning of the year and higher political uncertainty, more than offsetting a milder global activity slowdown. A rebound of 3,0% is expected in 2024.

Key points

• Key points:
• Global activity is expected to slow down in 2023 (to 2,8%) amid still high inflation and monetary tightening. However, we believe it should be milder than previously forecasted (2,3%). This outlook improvement, labour markets strength, and core inflation persistence are coherent with interest rates at higher levels for a longer period.
• On the fiscal side, we forecast a deficit around 2,3% of GDP for 2023 and 2,0% from then on, consistent with gross public debt remaining in 2023 and 2024 between 34% and 35% of GDP, but with a slight upward trend after that.
• The domestic currency will tend to depreciate in the coming months amid increased global risk and a reduction of the interest rate differential between soles and dollars, curbing the appetite for domestic assets, together with the proximity of elections. We forecast the foreign exchange will end this year between 3,90 and 4,00 soles per USD.
• Inflation has so far resisted to decline, but we believe it will begin to move downward in March (due to the high year-on-year comparison base and easing commodities prices) and end the year at around 3,5%. Bias is upwards due to deteriorating weather forecasts.
• In this context, the monetary policy rate will likely remain at 7,75% in the coming months. Later on, in 4Q23, when the Fed is on pause and domestic inflation is closer to the target range, the Central Bank will find room to begin the monetary policy stance normalisation, perhaps timidly for a start in order to avoid eventual depreciation pressures on the domestic currency (elections would be close according to our baseline scenario assumption).

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