Frustrated by Weak GDP Prints, Peru Considers Redoing Its Index
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Peru’s “disappointing” 2019 economic growth figure didn’t accurately reflect strong numbers posted in several key areas, central bank President Julio Velarde said.
That’s prompting talks in the government to potentially overhaul the way gross domestic product, or GDP, is measured since the index has remained unchanged for at least 10 years, Velarde said.
“It’s a debate that we’re having, not necessarily this year but probably next year, to start adjusting,” Velarde, 67, said in an interview Monday at his office in Lima. “It’s a bit out of date.”
To back his argument he pointed out that inflation printed at just 1.9% in 2019 while income tax collection for individuals rose 10.8%, formal job growth was at 3.8% and value-added tax collection rose 6.8%. Peru’s economy probably grew 2.3% last year, according to preliminary central bank forecasts.
“The figures don’t seem to gel with the economic growth indicator,” he said.
The national statistics agency’s press office said it couldn’t immediately comment on changes to the index while the Finance Ministry declined to comment.
Velarde has led the bank since 2006, making him one of the longest serving central bankers in emerging markets. Under his watch, the $222 billion economy has ridden the commodities boom and bust, quantitative easing and tapering by the Federal Reserve, and some of Peru’s worst political turmoil in decades. Yet stable macroeconomic policy helped the economy post some of the fastest average growth rates and lowest inflation in Latin America. Slowing growth led the bank to cut rates to a nine-year low in November.
Read More: Peru Keeps Key Rate On Hold With Economy Primed for Rebound
The government is also looking to stimulate growth. It’s pushing public investment and infrastructure as a major growth driver, which is already showing signs of improvement in January.
For 2020, the government sees 4% growth while the central bank is forecasting 3.8% and private economists expect 3.1%, according to the median estimate compiled by Bloomberg. The International Monetary Fund stands at 3.6%.
Peru’s 2.25% benchmark interest rate is “very expansive” with a real interest rate basically at zero, Velarde said. After public investment fell last year, it may grow about 6% this year.
Decisions about future changes to the rate will depend on new data, he said. The central bank isn’t observing inflation pressures and still sees a risk that domestic demand growth will be weaker than expected. Inflation expectations are anchored.
“We’re seeing a certain recovery,” he said. “With an expansionary fiscal and monetary policy, I don’t see 3.8% growth as particularly optimistic.”
Low public debt and a stable currency have made Peru popular with foreign investors, who hold roughly half the government’s sol-denominated bonds.
The sol was little changed in trading Tuesday while Peru’s spread over U.S. Treasuries, the narrowest in Latin America, fell 5 basis points to 1.21 percentage points.
Read More: With Investor Demand Surging, Peru Says No Plans to Sell Bonds
The central bank’s policy of intervening in the market to curb excessive sol volatility deters traders from making major bets on or against the currency. The sol’s low volatility is incorporated into trading algorithms, Velarde said.
The sol may be a little weaker than its fundamentals would suggest because of factors such as investor concern about the economic impact of the coronavirus, he said.
“We have a trade surplus and a current account balance that’s financed more than twice over by long-term capital inflows. One would expect the currency trend to appreciate,” he said.
The monetary authority relaxed limits for local banks’ trading of currency forwards last month amid an absence of pressure on the sol. Velarde said the central bank considered removing the limits altogether but decided it was better just to loosen them.
“There are a lot of things that could be relaxed because there isn’t any pressure” on the currency, he said.
Velarde’s term expires in July next year, and it will be up to the country’s next president to pick a successor, or ask him to stay. Velarde didn’t rule out serving a fourth term.
“The advantage when you reach a certain age is that you can wait to see what comes. I don’t have any urgency to do anything. I can go to the private sector, I can do nothing or I can stay at the bank, and the three options are equally attractive.’’
(Updates headline, adds markets.)
To contact the reporters on this story: John Quigley in Lima at jquigley8@bloomberg.net;Daniel Cancel in Lima at dcancel@bloomberg.net
To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Robert Jameson
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