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Moody's: Peru's economy is rebalancing toward stronger, domestic demand-led growth

09:09 | New York (U.S.), Aug. 30.

Peru's economy is recovering strongly in 2018, shifting away from external-led growth to a more sustainable domestic-demand growth cycle, Moody's Investors Service affirmed in its latest report.

High frequency and confidence indicators are posting stronger-than-expected results in recent months. Investment —both public and private— is once again driving overall activity.

In the first half of the year, Peruvian economy expanded 4.29% relative to the same period last year.

"We believe that this is partly due to base effects given that the brunt of the shocks were felt in the first half of last year, but even if the economy cools in the second half of this year, the overall expansion for 2018 should be in line with potential at 4%," Moody's expressed.

Although this year's recovery and expansion will match that of 2016, this expansion is different and more sustainable, the credit rating agency indicated.

The mining investment cycle that came to a close in 2015 led to a significant increase in mineral output that pushed headline growth to 4% in 2016, but domestic demand was expanding by an anemic 1.1%.

According to Moody's, depressed domestic demand in 2016-17 weighed on the sustainability of short- and medium-term growth given that for the first time in over a decade the poverty rate increased in 2017 (from 20.7% to 21.7%), and sluggish formal employment growth held back real wages.

This highlights the strong relationship between investment, formal employment, and consumption that has dominated in the Peruvian economy since the early 2000s and the importance of private investment as a key support of sustainable medium-term growth in the country.

"The economy is likely to maintain its current 4% rate of growth through 2019 given favorable private investment dynamics," Moody's forecasted.

Anchoring these trends are a variety of large investment projects in various sectors including mining, infrastructure, telecom, real estate, and energy.

According to Central Reserve Bank estimates, total committed new investments are likely to exceed US$18 billion (8% of GDP) in 2018-19 suggesting a broad-based recovery in investment that will benefit overall activity and accelerate formal employment creation.

(END) NDP/DTK/MVB

Published: 8/30/2018
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