Peru's current account deficit peaked in 2015 at 4.8% of GDP driven mostly by high demand for capital imports, particularly during the peak investment phase of mining projects, and a significant decline in export prices, Moody's Investors Service affirmed.
Since then, the imbalance narrowed significantly to 2.7% in 2016 and 1.3% in 2017 as a result of the large increase in the
volume of minerals exported following the
mining investment cycle that culminated in 2015, and a recovery in prices.
According to the credit rating agency,
non-mining exports have also risen in tandem despite less supportive increases in prices.
"Domestic demand weakness was also responsible for the moderation in import growth, but as the economy recovers, we expect import demand to strengthen such that growth in imports will outpace that of
exports through 2020," Moody's expressed.
Additionally, increased profit repatriation will also widen the investment income deficit as
domestic demand and export dynamism supports increased dividend payments. This will bring the current account
deficit more in line with its structural, albeit sustainable, level of around 2% of GDP.
As has been the case for the past two decades (with the exception of 2014-15), the current account will continue to be more than financed by
foreign direct investment (FDI), supporting the country's healthy external finances and strong international reserve position.
Moreover, a hefty portion of profits is reinvested in the economy, supporting future FDI reinvestment flows.
As with other emerging markets, Peru imports capital —particularly into its extractive industries— which drives the country's negative net international investment position (IIP).
Although the net IIP deficit stood at 36.5% of GDP in 2017, it remains in line with 'A' category peers. Considering that the
stock of FDI in Peru is 46% of GDP, excluding FDI from the overall figure suggests that the economy is not particularly exposed to external leverage.
Finally,
Peru's international reserves are among the highest in Latin America relative to GDP, at 29.5% as of the end of 2017, outperforming peers such as Mexico, Chile, Colombia, and Uruguay (Baa2 stable) at 14.3%, 13.7%, 14.5%, and 26.3%, respectively.
"As measured by our external vulnerability indicator (EVI, a measure of reserve coverage relative to external debt amortizations), Peru's reserves cover 2018 external debt payments more than 4.0 times," it concluded.
Based on information provided by Moody's.
(END) NDP/DTK/MVB