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Monetary Policy and macroeconomic Stability Julio Velarde Governor Central Reserve Bank of Peru February 2019 Contents Sound Macroeconomic Fundamentals Economic Activity Performance Monetary Policy Stance 2 Peruvian economy has been one of

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Monetary Policy and macroeconomic Stability

Julio Velarde Governor Central Reserve Bank of Peru February 2019

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Sound Macroeconomic Fundamentals Economic Activity Performance Monetary Policy Stance

Contents

2

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223 158 195 241 100 120 140 160 180 200 220 240 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Emerging markets (excl. China)

* Forecast Source: IMF – World Economic Outlook (October 2018) and BCRP (Peru)

Real GDP

(Index 2000=100)

Peru

LatAm World

Peruvian economy has been one of the top growth performers in the world during the current century.

3 Average annual growth rate 2001-2018 World 3.8 Emerging Markets excluding China 4.6 Latin America and the Caribbean 2.6 Peru 5.0

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5,0 4,4 3,9 3,8 3,6 3,1 2,3 2,2 2,0

  • 1,2

Peru Bolivia Colombia Chile Ecuador Uruguay Brazil Argentina Mexico Venezuela

Latin America*: average annual growth rate 2001-2018

4

*South America and Mexico. Source: IMF-WEO and BCRP (Peru).

Latin America had a 2.6% annual average growth in the last 18 years. Peru’s growth leads the region.

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Source: El Desarrollo de la Economía Peruana en la Era Moderna, Bruno Seminario. Annual Report 2017, BCRP.

50 100 150 200 250

1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018

Peru: real GDP, 1950-2018 Index 1987 = 100

Period Average annual growth 1951-60 5.5 61-70 5.3 71-80 3.7 81-90

  • 1.0

91-2000 3.9 2001-18 5.0

1987-1992 GDP

  • 23%

GDP per capita

  • 31%

19 years of continuous growth (1959-1977) 20 years of continuous growth (1999-2018) 5

20 years of continuous growth: the longest since 1921.

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*South America and Mexico. Source: IMF-WEO and BCRP–Inflation Report (Peru).

6

2 9 9 9 19 20

Argentina Brazil Chile Mexico Latin America* Colombia Peru

Latin America*: length of the most recent period of continuous growth (in years)

In Latin America, Peru and Colombia hold the record of the longest period of continuous growth.

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1/ End-of-period inflation. *South America and Mexico, excluding Venezuela. Source: IMF-WEO and BCRP (Peru).

7

Latin America*: average annual inflation1/, 2001-2018

8,5 6,4 4,8 4,7 4,7 4,3 3,2 2,6

Uruguay Brazil Bolivia Colombia Ecuador Mexico Chile Peru

Latin America’s average annual inflation (2001-2018) was 7.3%, while Peru’s average annual inflation was 2.6%.

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8

Robust growth and low inflation has helped to reduce poverty significantly.

58,7 55,6 49,1 42,4 37,3 33,5 30,8 27,8 25,8 23,9 22,7 21,8 20,7 21,7 1 2 3 4 5 6 7 8 9 10 10 20 30 40 50 60 70 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Poverty rate GDP annual growth rate

GDP growth rate (%) Poverty rate (%)

GDP average annual growth rate (2013-2017) = 3.6% Poverty reduction: 4 p.p. GDP average annual growth rate (2004-2012) = 6.5% Poverty reduction: 33 p.p.

Source: INEI y BCRP.

Poverty has been reduced in more than half in 7 years

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Country Change in percentage points Average annual GDP growth (%) Peru

  • 37

5,4 Chile

  • 32

3,8 Bolivia

  • 32

4,5 Ecuador

  • 30

3,8 Argentina

  • 27

2,9 Paraguay

  • 26

4,2 Colombia

  • 23

4,1 Uruguay

  • 20

3,6 Brazil

  • 20

4,5 Panama

  • 18

6,7 Dominican Republic

  • 13

5,4 Honduras

  • 11

4,0 El Salvador

  • 9

2,1 Mexico

  • 3

2,2

Source: CEPAL, IMF. 9

Peru leads the poverty reduction in Latin America.

Latin America poverty rate reduction (2002-2017)

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10

Public debt has been reduced from 47.1% of GDP in 2001 to 25.7% of GDP in 2018.

NON FINANCIAL PUBLIC SECTOR DEBT (% GDP) Source: BCRP.

47,1 29,9 26,4 26,8 23,8 21,6 19,9 19,2 19,9 23,3 23,8 24,9 25,7 2001 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

NON FINANCIAL PUBLIC SECTOR DEBT (% GDP)

  • Dec. 2010
  • Jul. 2018

Average maturity of the debt (years) 13.4 12.6 Local currency share of the debt (%) 46.1 66*

*December 2018.

24,8 25,7 48,7 53,8 62,7 88,4 Chile Peru Colombia Mexico Argentina Brazil

Public Debt in the region: 2018 *

(% GDP)

*Estimates. IMF (WEO – October 2018) and BCRP.

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3,0 5,0 7,0 9,0 11,0 13,0 15,0 17,0 ene15 feb15 mar15 abr15 may15 jun15 jul15 ago15 sep15

  • ct15

nov15 dic15 ene16 feb16 mar16 abr16 may16 jun16 jul16 ago16 sep16

  • ct16

nov16 dic16 ene17 feb17 mar17 abr17 may17 jun17 jul17 ago17 sep17

  • ct17

nov17 dic17 ene18 feb18 mar18 abr18 may18 jun18 jul18 ago18 sep18

  • ct18

nov18 dic18 ene19 feb19

(%)

10-Year Treasury Bond Yields in Domestic Currency

Peru Colombia Mexico Brazil Chile

11

Sovereign yields reflect a positive investor sentiment towards Peru´s financial position.

Chile Peru Colombia Mexico Brazil (a) 12-31-17 4,55 5,17 6,48 7,65 10,26 (b) 12-31-18 4,24 5,64 6,75 8,64 9,24 (c) 02-18-19 4,13 5,50 6,88 8,32 8,89 Change in bps (c) – (b)

  • 11
  • 14

13

  • 32
  • 35

Source: Bloomberg.

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12

8,6 27,7 31,2 33,1 44,1 48,8 64,0 65,7 62,3 61,5 61,7 63,6 60,1 63,2 2001 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*

*As of 18th February 2019. Source: BCRP.

INTERNATIONAL RESERVES (US$ Billions)

The BCRP has carried out a precautionary accumulation of international reserves aimed to increase its ability to implement counter-cyclical monetary policy.

NIR INDICATORS As a % of: 2018* GDP 28,1 Short-term external debt 1/ 434 Short-term external debt plus current account deficit 353

1/ Includes short-term debt balance plus redemption (1-year) of private and public sector.

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  • 1,6
  • 0,7

0,0 2,1 4,3 4,9 5,8 7,4 8,8 9,3 12,8 16,2 17,2 21,0 39,6 102,1

Ucraine Thailand Mexico Malaysia Peru Philippines China Indonesia Colombia India Chile South Africa Brazil Russia Turkey Argentina

Low external vulnerability softens the impact of external financial shocks.

* Percentage change as of December 31 of 2018 with respect to December 31 of 2017. Source: Bloomberg and Reuters.

FX depreciation 2018* (currency unit per US$ - % change)

13

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Since 2001 credit dollarization has dropped by more than half.

78,0 59,8 50,6 45,2 28,4 29,3 28,2 2001 2007 2010 2013 2016 2017 2018

DOLLARIZATION RATIO (%)

Source: BCRP.

14 Credit / GDP 2001 24 2010 30 2017 41 2018 42

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Sound Macroeconomic Fundamentals Economic Activity Performance Monetary Policy Stance

Contents

15

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1/ Excluding inventories *Forecast. Inflation Report December 2018. Source: BCRP.

2,5 2,2 1,0 1,6 3,9 4,1 4,1 2,4 3,3 4,0 2,5 4,0 4,0 4,0

2014 2015 2016 2017 2018* 2019* 2020*

DOMESTIC DEMAND1/ (YoY real % change)

Domestic demand GDP

16

Economy was affected transitionally by supply shocks during 2017. Since 2018, GDP growth has continued converging to its potential.

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17

Real and Potential GDP, 2008 – 2019

(% change)

* The annual output gap is computed as the average of the quarterly estimates. Source: BCRP

GDP will grow more than its potential in the next years due to the gradual closing of the output gap. Higher investment explains the increase in the potential growth.

GDP Potential GDP

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GDP is expected to grow 4% in the next two years, driven by investment and private consumption. GDP

(YoY real % change) 2016 2017 2018 2019* 2020*

Domestic Demand

1.1 1.4 4.3 3.9 4.0

Private consumption

3.3 2.5 3.8 3.8 3.9

Public consumption

0.3 0.5 2.0 2.9 1.8

Private investment

  • 5.4

0.2 4.4 6.5 6.0

Public investment

  • 0.2
  • 2.3

8.4 2.8 3.4

Exports

9.4 7.8 2.5 4.7 4.8

Imports

  • 2.2

4.1 3.4 4.3 5.1

GDP

4.0 2.5 4.0 4.0 4.0

*Forecast. Source: BCRP.

18

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Private investment has recovered since the second half of 2017, after 14 consecutive months of decrease. Higher rates of private investment growth are expected in the next two years.

15,6 7,1

  • 2,2
  • 4,2
  • 5,4

0,2 4,4 6,5 6,0 2012 2013 2014 2015 2016 2017 2018* 2019* 2020*

Private Investment (real % change)

19

real % change 2014 2015 2016 2017 2018* 2019* 2020* Total

  • 2.2
  • 4.2
  • 5.4

0.2 4.4 6.5 6.0 Mining

  • 8.5
  • 11.2
  • 50.8

12.4 22.6 19.2 5.9 Non-mining

  • 0.6
  • 2.5

2.6

  • 1.1

2.1 5.2 6.0

*Forecast. Inflation Report December 2018. Source: BCRP.

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Private sector confidence remains high.

64 70 70 65 68 70 69 30 35 40 45 50 55 60 65 70 75 80 J.17 F M A M J J A S O N D J.18 F M A M J J A S O N D J.19

Business expectations on the economic situation for the three and twelve months ahead

Economy in the 3M ahead Economy in the 12M ahead Optimistic area Pessimistic area

Source: Apoyo Consultoría, BCRP.

20

61 65 59 63 62 66 63 40 45 50 55 60 65 70 J.17 F M A M J J A S O N D J.18 F M A M J J A S O N D J.19

Business expectations on the family economy situation for the twelve months ahead

(INDICCA, Lima metropolitan area)

Optimistic area Pessimistic area

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19,5 11,1

  • 1,1
  • 9,5
  • 0,2
  • 2,3

8,4 2,8 3,4 2012 2013 2014 2015 2016 2017 2018 2019* 2020*

Public investment would account for US$ 23 billions in 2019-2020.

Public Investment (real % change)

21

*Forecast. Inflation Report December 2018. Source: BCRP.

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Private consumption has been driven by favorable labor market conditions and ...

2,4 3,0 1,5 3,0 3,7 2,6 3,6 5,7 4,0 5,0 4,2 3,8 J.17 M M J S N J.18 M M J S N

Private Formal Employment (YoY % change)

Source: SUNAT.

4,5 3,4 4,6 2,7 9,1 6,3 10,5 7,7 7,5 8,3

J.17 M M J S N J.18 M M J S N

Jan-Nov. 2018 Total 4.2 Agriculture and livestock 19.7 Agricultural exports 13.2 Business advisory activities 8.1

22

Wage bill (YoY % nominal change)

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1,6 0,4 2,3 4,9 6,0 7,4 8,0 6,9 7,6 7,4 6,8 5,8 6,1

J.17F M A M J J A S O N DJ.18F M A M J J A S O N D

… financial sector indicators continue showing signs of greater dynamism.

Source: BCRP.

Credit to the Private Sector (YoY real % change)

5,4 4,2 5,2 8,7 10,8 11,5 11,1 10,1

J.17F M A M J J A S O N DJ.18F M A M J J A S O N D

Consumption (YoY real % change)

1,8 1,1 2,0 2,8 7,6 8,5 7,9 8,4 8,1 7,0 6,0 6,6

J.17F M A M J J A S O N DJ.18F M A M J J A S O N D

Mortgages (YoY real % change)

23

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9.224 6.393 504

  • 1.509
  • 2.916

1.953 6.571 7.049 6.331 6.318 2011 2012 2013 2014 2015 2016 2017 2018 2019* 2020*

Since 2017 the trade surplus has been more than US$ 6 billion.

* Forecast. Source: BCRP.

Trade Balance

(Millions of US$)

24

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The current account deficit is financed by long-term private capital inflows, mainly FDI.

*Forecast. 1/ Includes net foreign investments, portfolio investment and private sector’s long-term disbursement. Source: BCRP.

25

  • 1,7
  • 2,8
  • 4,6
  • 4,4
  • 4,8
  • 2,7
  • 1,2
  • 1,5
  • 1,6
  • 1,7

7,0 10,8 9,8 7,8 6,6 4,6 5,7 4,4 4,1 3,8 2011 2012 2013 2014 2015 2016 2017 2018 2019* 2020*

CURRENT ACCOUNT AND LONG-TERM EXTERNAL FINANCING OF THE PRIVATE SECTOR1/ (% GDP)

Current Account Long-term External Financing of the Private Sector

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Peru’s non-Commodity export growth remains as the highest among LATAM-5.

4,1 5,0 8,8 13,0 13,4 Brazil* Colombia* Mexico Peru Chile LATAM-5 Non-Commodity Exports: % change (Jan 2018 – Dec 2018 / Jan 2017 – Dec 2017)

*As of November 2018. Chile: excludes mining exports; Colombia: excludes non-monetary gold, coffee, and oil/coal/ferronickel exports; Brazil: industrial exports (total and semi manufactured goods); Mexico: excludes oil exports. Source: Country official statistics and UN Comtrade (world ranking).

26

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27

3 17 18 16 22 28 27 24 21 19 22 27 29

2001 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Mining exports (US$ billions)

Mining exports reported a new high record in 2018: US$ 29 billion.

Share of the world (2017) 1/ Copper

(2)

Silver

(2)

Zinc

(2)

Lead

(4)

Molybdenum

(4)

Tin

(6)

Gold

(6)

Production 12.1% 18.0% 10.6% 6.4% 9.0% 6.2% 4.9% Reserves 10.2% 17.5% 12.2% 6.8% 12.9% 2.2% 4.3%

1/ Mining production. Source:

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28

Mining and agricultural non-commodity exports have risen throughout the last years.

Agricultural non-commodity exports (US$ Billions)

0,4 1,5 1,9 1,8 2,2 2,8 3,1 3,4 4,2 4,4 4,7 5,1 5,9 2001 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Comtrade Share of the world (2017) Asparagus

(2)

Blueberries

(2)

Avocados

(3)

Mangoes

(4)

Paprika

(4)

Grapes

(6)

Tangerines

(6)

Export (US$ millions) 30.1% 15.8% 10.0% 8.6% 4.3% 8.0% 4.0%

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Economic growth in 2019 and 2020 will be led by the non-extractive industries (construction) and the recovery of mining production.

*Forecast. Inflation Report December 2018. Source: BCRP.

GDP BY INDUSTRY (YoY real % change) 2016 2017 2018 2019* 2020* Extractive industries 10.0 3.1 3.3 3.9 3.3 Agriculture and livestock 2.7 2.6 7.5 4.0 4.0 Fishing

  • 10.1

4.7 39.7

  • 6.7

5.4 Mining 21.2 4.5

  • 1.5

5.3 3.0 Oil & Carbons

  • 5.1
  • 2.4

0.0 4.4

  • 0.5

Manufacturing

  • 0.6

1.9 13.2 0.0 5.5 Non-extractive industries 2.5 2.3 4.2 4.0 4.2 Manufacturing

  • 1.6
  • 0.9

3.7 3.8 3.8 Electricity and water 7.3 1.1 4.4 4.0 4.0 Construction

  • 3.2

2.1 5.4 6.9 7.5 Commerce 1.8 1.0 2.6 3.4 3.5 Services 4.0 3.3 4.4 3.9 4.0 GDP 4.0 2.5 4.0 4.0 4.0

29

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1,3 1,4 1,4 1,7 2,4 2,4 2,4 2,5 2,6 2,7 3,0 3,3 2012 2013 2014 2015 2016 2017 2018 2019* 2020* 2021* 2022* 2023*

30

With this investment profile, copper production will expand up to 3.3 millions of MT in 2023.

*Forecast Source: BCRP.

Copper production, 2012-2023 Millions of MT

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In 2018 and 2019, Peru’s growth will be among the highest in the region.

2018 2019

  • 2,3

1,2 1,3 2,1 2,1 2,6 4,0 4,0 4,2 4,3 Venezuela Argentina Ecuador Brazil Mexico Uruguay Colombia Chile Peru Paraguay Bolivia

  • 16,1
  • 12,6
  • 1,1

1,0 1,8 1,9 2,4 3,0 3,4 4,0 4,0 4,1 Venezuela Argentina Ecuador Mexico Uruguay Brazil Colombia Chile Peru Paraguay Bolivia 31

Source: Latin America Consensus Forecast (Jan 2018) and BCRP (Peru).

Latin America: GDP (YoY % change)

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2,3 0,9

  • 0,3
  • 2,0
  • 2,5
  • 3,1
  • 2,5
  • 2,5
  • 2,1
  • 1,0

2012 2013 2014 2015 2016 2017 2018 2019* 2020* 2021**

OVERALL BALANCE OF THE NON-FINANCIAL PUBLIC SECTOR: 2012 - 2021 (% of GDP)

32

In the next two years, the fiscal deficit is expected to reduce gradually due to the government’s fiscal consolidation process.

*Forecast. **Deficit target derived from the fiscal consolidation process. Source: BCRP.

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Sound Macroeconomic Fundamentals Economic Activity Performance Monetary Policy Stance

Contents

33

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3,50 4,25 3,00 2,75 0,08 0,25 1,59 0,77 0,27

  • 2,0
  • 1,0

0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0 Feb/13 May/13 Aug/13 Nov/13 Feb/14 May/14 Aug/14 Nov/14 Feb/15 May/15 Aug/15 Nov/15 Feb/16 May/16 Aug/16 Nov/16 Feb/17 May/17 Aug/17 Nov/17 Feb/18 May/18 Aug/18 Nov/18 Feb/19

Nominal Real*

Accommodative monetary policy stance

Nominal and Real Reference Rate (%)

* Ex-ante (with expected inflation). Source: BCRP.

34

Nominal reference rate % December 2016 4.25 May 2017 4.00 July 3.75 September 3.50 November 3.25 January 2018 3.00 March 2.75

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35

  • 2,0
  • 1,0

0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0 Mar/15 May/15 Jul/15 Sep/15 Nov/15 Jan/16 Mar/16 May/16 Jul/16 Sep/16 Nov/16 Jan/17 Mar/17 May/17 Jul/17 Sep/17 Nov/17 Jan/18 Mar/18 May/18 Jul/18 Sep/18 Nov/18 Jan/19 Inflation Food and energy Excluding food and energy

Maximum Minimum Target range Source: BCRP.

Inflation

(YoY% change)

Annual rates (end of period) Average 01-18 2018

  • 2019. Jan

Inflation 2.6% 2.2% 2,1% Excluding food and energy 2.1% 2.2% 2.4% Food and energy 3.2% 2.2% 1.8%

Inflation has remained in the target range since June and has been around 2% since November.

Percentage of months less than 3 percent since January 2001 CPI excluding food and energy 84%

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2,48 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 5,0

Apr/07 Jul/07 Oct/07 Jan/08 Apr/08 Jul/08 Oct/08 Jan/09 Apr/09 Jul/09 Oct/09 Jan/10 Apr/10 Jul/10 Oct/10 Jan/11 Apr/11 Jul/11 Oct/11 Jan/12 Apr/12 Jul/12 Oct/12 Jan/13 Apr/13 Jul/13 Oct/13 Jan/14 Apr/14 Jul/14 Oct/14 Jan/15 Apr/15 Jul/15 Oct/15 Jan/16 Apr/16 Jul/16 Oct/16 Jan/17 Apr/17 Jul/17 Oct/17 Jan/18 Apr/18 Jul/18 Oct/18 Jan/19 % Dec.17 2.25 Oct.18 2.44 Nov.18 2.48 Dec.18 2.50 Jan.19 2.48

36

1-Year Ahead Inflation Expectations (%)

Inflation expectations remain in the target range.

Source: BCRP.

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  • 1

1

2 3 4

5

  • 1

1

2 3 4

5

2015 2016 2017 2018 2019 2020

Inflation is expected to remain around the target center.

2016: 3.2 2017: 1.4 2018: 2.2 2019*: 2.0 2020*: 2.0

* Forecast Source: BCRP.

Inflation forecast 2019-2020

(YoY % change)

37

Probability around the central scenario (%)

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705 148 47,1 8,0 4,8 3,8 3,7 3,2 2,6 2,2 1,5 0,3 Venezuela Argentina Uruguay Mexico Paraguay Brasil Colombia Chile Peru Bolivia Ecuador

2018

Latin America: Inflation (YoY % change)

2019

124 884 660 28,7 7,2 4,1 4,1 4,0 3,6 3,6 3,0 2,0 1,4 Venezuela Argentina Uruguay Brasil Paraguay Mexico Bolivia Colombia Chile Peru Ecuador 38

Inflation in Peru will continue to be one of the lowest in the region.

Source: Latin America Consensus Forecast (Jan 2019) and BCRP (Peru).

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Monetary Policy and macroeconomic Stability

Julio Velarde Governor Central Reserve Bank of Peru February 2019