Julio Velarde Flores, President, Banco Central de Reserva del Perú: Interview

Interview: Julio Velarde Flores

How will the sector perform in 2019?

JULIO VELARDE FLORES: We expect the economy to grow by almost 4% in 2019. Despite the lower than expected results in the first quarter of 2019, mainly linked to supply factors in fishing and mining, we expect private investment to accelerate from the 4.4% growth recorded in 2018. Similarly, consumption will continue to grow at a steady pace – at 3.8% – as job creation remains robust.

In recent years Peru faced considerable challenges, namely the Lava Jato corruption case, which affected the construction industry, and the El Niño phenomenon, which caused significant damage in northern Peru. However, the economy has proved resilient. The resignation of President Pedro Pablo Kuczynski had a negligible effect on the exchange rate and on sovereign interest rates, and GDP expanded by 4% in 2018 despite the political noise. Growth is expected to remain strong throughout 2019, while inflation will likely remain stable, at around 2%, which is the middle of the target range and makes it one of the lowest inflation figures in the region.

Overall growth in the Peruvian banking sector is among the highest in Latin America. Its solid macroeconomic fundamentals and resilience to bouts of capital flow volatility have increased the appeal of Peruvian assets to foreign investors, particularly sovereign bonds in domestic currency. During the first four months of 2019 non-resident positions in domestic currency bonds increased by around $3bn. All in all, we expect the economy to continue posting solid growth and displaying macroeconomic stability.

To what extent do you think global commercial and economic trends will impact the Peruvian central bank’s interest rate policy?

VELARDE: In 2018 the central bank cut the interest rate to 2.75%, below its neutral level. The expansionary monetary stance is consistent with a negative output gap and inflation close to the centre of the central bank’s inflation target range of 1-3%. Uncertainty in global markets calls for a prudent wait-and-see approach. Unpredictability about global growth and the behaviour of capital flows has increased recently, thereby affecting the value of the dollar. Currently, our main concern is how the dollar will be affected by trade tensions between the US and China, and what will be the consequences for domestic demand and the appetite for imported commodities in both economies. After a moment of appeasement following the G20 summit in Buenos Aires in late 2018, tension between the US and China escalated over the subsequent months, and the recent agricultural tariff measures signal that the conflict is by no means over yet.

The economic health of the EU could also affect us, although to a lesser extent than other trade partners. There has been a progressive deceleration in all major economies in the bloc, notably in Italy, where growth has remained stagnant, while a Brexit deal remains uncertain. Right now any change in interest rates will stem from political, not economic or commercial, risks.

What export-orientated sectors will drive growth?

VELARDE: Commodity exporters in Peru are steadily building solid and sophisticated value chains that are favouring other industries and further enhancing raw material transformation and manufacturing. The emergence of packaging, refrigeration and logistics companies in the agriculture sector, as well as metal-mechanical industries growing in tandem with mining activities, are encouraging developments. This is not the first time Peru has been able to reap the benefits from a commodity super-cycle or a high-price period in international markets. The country’s fisheries boom in the 1950s and 1960s led to the creation of several buoyant industries, including fishmeal production and shipyard activities. More crucially, the country still holds significant potential in mining, an industry which will most likely drive growth in the future.