Peru's largest bank raises outlook for GDP and private investment

Banco de Crédito del Perú (BCP), the country's largest bank, remains optimistic about the economy after important advances in the first months of 2024. 

The bank raised its annual GDP projection from 2.5% to 3% and upped its expectation for growth in private investment from 2.1% to 4.5%, according to BCP’s first quarter report. (See Documents box in the top right corner of the screen.) 

Market consensus is for GDP to grow 2.3-2.4% this year, according to the central bank.

However, BCP says there are several factors that explain the rebound: absence of external shocks as in previous years – social protests and weather events, among others – as well as a favorable copper price (forecast at US$3.85/lb), lower inflation and the effect of countercyclical policies of the central bank.

Those factors would have contributed to GDP growth in January and expansion of 2.5% is expected for the first quarter compared to 1Q23.

Commenting on preliminary indicators, BCP highlights that electricity demand grew 4.5% in February compared to the same month in 2023, capital imports grew 7%, and real estate sales 2%.

EXTERNAL SHOCKS  

The El Niño phenomenon, which was seen as a major threat for 2024, is no longer considered to be a risk factor for growth. According to BCP, the probability of a moderate/strong El Niño for the summer – from January to mid-April – was 80% three months ago but the probability of a weak/neutral phenomenon is now 80%. The graph below shows the almost zero probability of a strong El Niño, which involves warmer Pacific Ocean waters, while that of a weak one is likely to decline as the months go by. The chances of the cold-water La Niña phenomenon are expected to rise.  

Source: BCP

With the current scenario, government institutions will no longer allocate time and resources to repairing damage from a possible impact but rather they will focus on preventive infrastructure projects and those in accordance with their planning.

The lower probability of an occurrence will also cause the central bank to continue with its policy of progressively reducing the benchmark rate. This will reduce financing costs for the private sector and, if there are no major shocks, could attract foreign capital. The policy rate is expected to close 2024 at between 4.5% and 5%. Today it is at 6.25%.

BCP does not rule out growth of above 3% this year. “The factors that could lead to a bigger GDP rebound are greater execution of public investment, positive marginal effects from a potential La Niña (lower temperature anomalies), a 'risk-on' environment in financial markets once the Fed begins to cut its policy rate [where Peru becomes attractive due to its macroeconomic solidity], the 'catch-up' of specific sectors (inbound tourism), and authorities that unblock projects,” states the report.

PRIVATE INVESTMENT

Although private investment will not yet rise at levels that underpin a sustained recovery, annual growth of 4.5% is expected; and the mining sector will be a fundamental player. According to the bank, mining investment will grow 5% in 2024, and Chinalco's Toromocho expansion, Hochschild's Inmaculada optimization and Buenaventura's San Gabriel project will lead the way.

Private consumption is expected to grow 3% supported by a progressive reduction in inflation and improvement in economic activity.

Although economic expectations remain pessimistic, they have improved significantly in recent months and are now approaching positive territory.

On the central bank’s scale, expectations for the next three months improved from 38 last November to 47 in February this year. A figure above 50 is considered optimistic. In the case of 12-month expectations, the figure is at 62.