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1 Peru: Beset by Countervailing Winds February 2021 Estudios Económicos – Scotiabank (Peru) Guillermo Arbe +51.1.211.6052 (Peru) Scotiabank Peru [email protected] ™ Trademark of The Bank of Nova Scotia Countervailing winds 2 • Strong Q4 recovery trend • Political turbulence • Metal prices • Second COVID-19 wave • Strong macro balances • Elections Macro Growth & Balances 2020 2021 GDP Growth -11.1 8.7 Domestic Demand -9.8 7.8 Private Consumption -8.7 6.8 Private Investment -17.2 15.1 2021 GDP growth, y/y Public Investment -17.7 13.8 • Consensus 9.5% Unemployment (% GDP) 13.8 10.0 • Market range 6%–12% Inflation 2.0 2.6 Reference rate 0.25 0.25 Fiscal Balance (% GDP) -8.9 -5.4 Trade Balance 7,750 12,523 NIR (USD mn) 74,707 77,000 Source: BCRP; Prepared by Scotiabank Peru COVID-19 second wave 3 • Mortality per million: 1,200 (the world average is 280 per million). • Timing of second-wave restrictions much later than in first wave. Status of vaccines • Procurement of 85 mn doses. • 1 mn have arrived, 2 mn in March, 10 mn by June. • Government goal: 15 mn vaccinated by July. • 160,000 health professionals have been vaccinated (0.5% of the population). COVID-19 Hospital Patients 16000 21-Feb 14000 Inoculation Phases 12000 1. Health professionals, domestic security 1.7mn 10000 2. People over 60 or with health issues, 8000 indigenous communities 6.0mn 3. Ages 18 to 59 16.8mn 6000 4000 10-Dec 2000 Jul-20 Apr-20 Oct-20 Jun-20 Nov-20 Aug-20 Sep-20 May-20 Sources: Ministerio de Salud; Prepared by Scotiabank Peru. New measures restrict mobility, not production 4 • 95% of the economy allowed to operate, versus 44% at height of 2020 lockdown. • Our GDP growth forecast of 8.7% y/y for 2021 in line with 6.8 weeks of restrictions. • New support measures represent 2.5% of GDP in resources for households. • Difference between electricity demand and mobility trends: government restrictions have affected mobility, but not production. Support measures: • PEN 600 transfer to over four million families. • One-month postponement on the payment of income, sales, and other taxes. • PEN 2 bn small-business support program (similar to Reactiva), and a PEN 0.2 bn tourism support program. Electricity Demand Growth Google Mobility Trends (% y/y, 7-day rolling average) (% change compared to baseline) 10 5 -2.9 0 0 -20 -5 -10 -40 -15 -60 -20 -80 -25 -100 -30 Jul-20 Oct-20 -35 Apr-20 Jun-20 Jan-21 Mar-20 Feb-20 Nov-20 Dec-20 Aug-20 Sep-20 May-20 retail and recreation grocery and pharmacy parks transit stations Jul-20 Jan-21 Jun-20 Oct-20 Apr-20 Feb-20 Sep-20 Feb-21 Dec-20 workplaces Aug-20 Nov-20 Mar-20 May-20 Baseline: Dayli Average (Jan 3–Feb 6, 2020) To Jan 24 Source: COES Prepared by: Estudios Económicos Scotiabank Perú Source: Google Prepared by Scotiabank Research Department 2020: the recovery was better than expected 5 Q4 especially strong • Domestic demand did not contract. • Surprisingly strong private investment turnaround. • December: positive growth ahead of expectations. • 6 of 12 major sectors rose (fishing, construction, resource processing, government services, telecom, and financial services). GDP Growth GDP Demand Growth 2020 (y/y) Q4 FY 10.0 3.0 3.7 0.5 -3.8 -2.8 GDP -1.7 -11.1 0.0 -6.9 -9.7 Domestic Demand 0.0 -9.8 -11.6 -10.0 -16.3 -17.8 Private Consumption -1.5 -8.7 -20.0 Govt Current Spending 21.7 7.5 -30.0 Private Investment 9.4 -17.2 -32.3 -40.0 1 2 Public Investment 8.6 -17.7 Phases -39.2 3 4 Exports Volume -11.2 -20.0 -50.0 Imports Volume -5.6 -15.6 Jul-20 Jan-20 Jun-20 Oct-20 Apr-20 Feb-20 Sep-20 Dec-20 Aug-20 Nov-20 Mar-20 May-20 Source: BCRP; Prepared by Scotiabank Peru Sources: BCRP; Prepared by Scotiabank Peru. An encouraging improvement in private demand—investment 6 • Technological transformations. • Booming real estate. • Companies adapting to new consumption patterns. • Terms of trade (high metal prices) have traditionally given strong support to macro accounts and business confidence. Private Investment Growth Terms of Trade (y/y, %) (y/y) 20.0 20% 18.0 9.4% 16.0 5.3% 7.1% 2.8% 14.0 0.9% 12.0 0% 10.0 8.0 -7.4% 6.0 4.0 -15.1% -20% 2.0 0.0 -2.0 -40% -4.0 -6.0 -8.0 -10.0 -12.0 -60% -57.3% Jul-19 Jul-20 Jan-19 Jan-20 Jun-19 Jun-20 Oct-20 Oct-19 Apr-20 Apr-19 Feb-19 Sep-19 Feb-20 Sep-20 Dec-19 Dec-20 Aug-19 Aug-20 Nov-19 Nov-20 Mar-20 Mar-19 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 May-19 May-20 Source: BCRP; Sunat Prepared by: Research Department- Source: BCR Elaboration: Research Department-Scotiabank Peru Scotiabank Peru Infrastructure investments are slow, but progressing 7 • Ancón Industrial Park: USD 750 mn – tender pending. • Chancay Port – phase 1: USD 1.2 mn – beginning construction. • Lima Metro Line 2: USD 5.3 bn – under construction. • Lima airport: USD 1.2 bn – under construction. • 9 Ports: USD 420 mn – (Salaverry, San Martin, others). • Reconstruction North: PEN 22.7 bn (USD 6.2 bn) – G2G UK. • Hospitals: PEN 1 bn (USD 280 mn) – G2G France. • Projects on agenda for tender in 2021: PEN 4.3 bn (USD 1.2 bn). An encouraging improvement in private demand—consumption 8 • Government measures (5.5% of GDP). • Rebound in employment. • New (virtual) sources of service income. • Sales tax revenue above pre-COVID-19 levels reflects robust sales, but also new activities and the formalization of informal sales through digitalization. Domestic Sales Tax Revenue Private Consumption Growth (y/y, %) (y/y) 7.8 8 8.8 5.4 5.0 3.2 3.3 3.0 2.5 1.8 0.1 0.2 0.0 -0.6 -1.8 -3.8 -1.7 -1.5 -5.0 -7.3 -13.1 -13.1 -10.0 -9.0 -24.8 -15.0 -20.0 -40.3 -41.7 -44.8 -22.1 -25.0 Jul-20 Jan-21 Jan-20 Jun-20 Oct-19 Oct-20 Apr-20 Feb-20 Sep-20 Sep-19 Dec-19 Dec-20 Aug-20 Nov-19 Nov-20 Mar-20 May-20 1Q19 2Q19 3Q19 4Q19 3Q20 4Q20 1Q20 2Q20 Source: BCRP; Sunat Prepared by: Research Department-Scotiabank Source: BCRP; Prepared by: Research Department-Scotiabank Peru Peru Resources available to boost domestic demand 9 In 2020, government transfers and access to savings helped sustain consumption. Resources that will be available in 2021: +5% of GDP. • Household deposits at banks up by PEN 30 bn (15%) between March and December 2020. • lower spending on restricted activities + resources from AFP withdrawals + Reactiva. • Nearly PEN 19 bn in pension withdrawals, government transfers. Peru: Spending in restaurants (in US$ billions) Resources Available for Households 8.8 • AFP withdrawals in 2020: S/ 24.3bn • CTS withdrawals in 2020: S/ 4.5 bn • Household Support funds 2020: S/ 13 bn Total 2020: S/ 41.8 bn 4.5 (5.5% of GDP) • AFP withdrawals 2021: S/ 15.9 bn • ONP Support funds: S/ 0.5 bn • Household Support funds 2021 S/ 2.4 bn Total 2021: S/ 18.8bn 2019 2020E (2.5% of GDP) Source: BCRP, Research Department-Scotiabank Peru Employment is also recovering, albeit still under past levels 10 10 Formal Jobs Growth- Sunat Digital Payroll Employment in Lima (y/y, %) (millions) 6.0 3.9 3.5 3.6 3.6 3.4 5.0 2.8 5.0 4.8 5.0 4.4 4.4 -11.9% 4.1 0.6 3.9 4.0 3.7 3.6 3.7 2.9 3.0 2.5 2.2 -2.7 2.0 -3.4 -4.1 1.0 -5.5 -5.5 -5.3 -6.5 0.0 -7.8 -8.5 Jul-20 jan-20 feb-20 apr-20 Oct-20 Jan-21 Jun-20 aug-20 mar-20 Dec-20 Nov-20 Sep-20 May-20 Jul-20 Oct-19 Oct-20 Apr-20 Jan-20 Jun-20 Feb-20 Mar-20 Sep-19 Dec-19 Aug-20 Nov-20 Dec-20 Nov-19 Sep-20 May-20 Source: INEI Elaboration: Research Department -Scotiabank Perú Source: BCRP; Sunat Prepared by: Research Department-Scotiabank Peru Construction is booming 11 • Cement sales have risen 19%–20% y/y each month from October 2020 to January 2021. • Construction GDP is currently significantly above pre-COVID-19 levels. • Part of construction growth is government spending, but most involves a booming real estate market. Cement sales Lima new home sales ( metric tons) (units) 1,500 1,200,000 1,350 1,200 1,000,000 1,050 900 800,000 750 600 600,000 450 400,000 300 150 200,000 - 0 Jul-19 Jul-20 Oct-19 Apr-20 Oct-20 Jun-19 Jan-20 Jun-20 Mar-20 Feb-20 Dec-19 Nov-19 Aug-19 Sep-19 Aug-20 Sep-20 May-20 Source: Asociación de Empresas Inmobiliarias Jul-19 Jul-20 Jan-19 Jan-20 Jan-21 Mar-19 Mar-20 Nov-19 Nov-20 Sep-19 Sep-20 May-20 May-19 Prepared by Scotiabank Research Department Sources: Asocem Prepared by: Scotiabank Peru.