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Monday, May 29 2017 @ 03:04 PM AST

Moody's sees Peru's economic growth rate improving in 2015



Moody's Investors Service sees Peru's economic growth rate improving in 2015, according to a January 21 Issuer Comment obtained today.

"On 15 January, Peru's (A3 stable) Statistical Institute (INEI) reported that the economy grew 0.3% year over year (yoy) in November, taking the 12 month growth rate to 2.9% from 3.5% the previous month. The slowdown reflects ongoing domestic and seasonal shocks that we expect will be reverted in 2015.1 Despite the sluggish growth, fiscal and monetary easing, along with Peru's still-resilient labor market, will support consumption in 2015, although business confidence may take longer to improve and stimulate private sector investment," Moody's said.

According to INEIís bulletin, the slowdown is primarily due to a 13% yoy contraction in the manufacturing sector and a strong contraction of nearly 70% in fishing output due to a temporary suspension of fishing activities in some areas of the country that affected the production of fishmeal and fish oil. Mining and hydrocarbon output, which has been an important drag on economic performance in 2014, posted its second consecutive annual gain in November, signaling stabilizing mineral production and a possible reversal of the trend by the second quarter of 2015, Moody's said.

All other sectors of the economy, excluding transportation, expanded over 3%, suggesting that consumption remains robust despite an unsettled external environment that is weighing on manufacturing exports. "We believe that lingering domestic shocks are responsible for decreased primary sector activity along with weak external demand for gold and precious metals," Moody's said.

November's weak growth print confirms that the economy has been performing below its potential (see exhibit above), which Moody's estimates to be around 5.5%. However, given the transitory nature of the supply-side shocks, there is spare capacity in the economy, Moody's said.

"Sluggish growth is likely to carry into the first quarter of 2015, when output should expand by about 3% yoy, but we expect the recovery to gather momentum thereafter, underpinned by a reversal of supply-side shocks affecting the mining and manufacturing sectors," said Moody's.

In addition to the fiscal stimulus package that has been proposed by the government, the central bank (BCRP) has continued easing monetary policy. Following measures to increase liquidity in the financial system via reductions in local-currency reserve requirements, on January 15 the BCRP board voted to cut its monetary policy rate by 25 basis points to 3.25%.

Moody's said: "In our view, this action seeks to complement government measures that aim to bolster private investment. Moreover, it remains to be seen if this will be sufficient to jump start business confidence, a factor that remains key to growth prospects in 2015 after the decline in investor confidence experienced last year."

As a result of these trends, Moody's revised its growth estimate for 2014 to 2.5% from 2.8%, and adjusted its 2015 growth projection to 4.4% from 5.1%.

Moody's said: "We anticipate this yearís growth will be driven by the fiscal stimulus package, the recent monetary stimulus, the expected recovery in the mining sector and resilient real wages from a strong labor market. Moreover, we expect the economic shocks that underpinned the 2014 deceleration will be transitory and are unlikely to continue dragging Peruís performance in the coming years."

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