Peru Economic Outlook. October 2023

The economy is expected to grow 0,4% in 2023 and 2,3% in 2024. The second quarter downward surprise in economic activity, the deterioration of El Niño weather forecasts, and the sustained weakness of private spending leads us to revise GDP growth downwards by 1,2pp this year and 0,3pp next year.

Key points

• Key points:
• A soft-landing is expected for the global economy, with growth going from 3,5% in 2022 to 2,9% in 2023 and to 3,0% in 2024. In the US, resilient domestic demand turns a recession unlikely. Inflation should keep slowing ahead, allowing the Fed to skip further rate hikes over the next few months. However, it will still continue above the target, with upward risks remaining alive and turning rate cuts unlikely in the short-term.
• On the fiscal side, after reaching 1,7% of GDP in 2022, the deficit is expected to move up to 2,7% in 2023 and to remain at a similar level in 2024. In this context, gross public debt will end next year slightly below a level equivalent to 35% of GDP.
• Depreciation pressures on the domestic currency are expected to continue due to the reduction of the PEN-USD interest rate differential. The downward trend in the current account of the balance of payments deficit will moderate them. As a result, the foreign exchange should end the year between 3,70 and 3,80 soles per dollar and between 3,80 and 3,90 in 2024.
• Although it still remains high (5,0% in September), inflation is declining and we believe it will keep doing so in the coming months, ending 2023 at around 4,1%. Base effects, economic activity weakness, and the tight monetary policy stance point all in that direction. In 2024, after El Niño weather phenomenon is over, inflation will resume its downward trend and end that year at 2,8%.
• We estimate additional cuts in the policy rate to bring it to 6.75% by the end of the year, which will be resumed in 2024 after El Niño and when the Fed begins its own monetary normalization process.

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