Creditorcorp | Daniel Velantia | “Beyond the rebound in 2024, long-term growth depends on the reactivation of confidence” | MEF | economy

Creditorcorp |  Daniel Velantia |  “Beyond the rebound in 2024, long-term growth depends on the reactivation of confidence” |  MEF |  economy

Meera: MEF: What is known so far about possible changes in the said ministry

– The second half of 2023 did not start as expected and the reasons continued to happen in the first two months. Why can't we change course?

I believe it was a combination of many things, but in particular it was a significant forecast error regarding the impact of El Niño Costero on the Peruvian economy. Suddenly, because of history, it seems to me that there is a concentration on analyzing what El Nino's impact will represent in the summer. As we realized, the impact was really significant in the second quarter and even stronger in the third quarter.

– So, in percentage terms, what is the impact?

A box of inflation reports that came out last week tries to isolate shocks to the Peruvian economy, including climate issues, and ends up at 1.5 impact points. I dare say it's a bit more, closer to 2 points. This is very consistent with an analysis we did in 2017, which showed that when there is a strong El Niño — which eventually happened in 2023 — the impact is 2 points on growth. Of course, El Niño costero was significant. Let's remember that the performance of agriculture is the worst in 25 years, and the performance of fisheries in 31 is the main factor behind the economy's inability to respond in the second half.

Could lower business confidence in 2023 also account for this factor?

It feeds back. What happens is that in this situation, which started this year with uncertainty due to social protests, when El Niño comes, confidence is again reduced. As you point out, the recovery was expected in the second semester and it seems that it did not come. Low confidence has an additional effect on the economy. It is a combination of all factors. All the planets are misplaced for Perus.

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– So what size will it be again in 2024?

Peru is definitely going to bounce back because 2023 was so bad. Our estimate is 2%, which seems like a very reasonable number to me at this point. In terms of total investment, we estimate that it will rise by 0.8% in 2024: private investment will not grow and public investment will grow by 4%. Mining investment by Quellaveco fell more than 20% in the first half of 2023. This is a one-time effect that will statistically return the following year. Despite the announcement of new investments, mining investment is not likely to decline but rather remain positive. Another thing is that even if agriculture and fishing go badly due to El Nino, the falls will not be 60%. The statistical basis is different. An El Nino event may affect, but the statistical basis is very favorable as the impact was very strong in 2023. Let's hope FEN is not stronger than initially expected.

– Beyond regeneration, further structural development is of concern.

We are concerned that the potential growth of the economy is slowing down. Beyond recovery and 2% growth in 2024, the reality is that long-term growth at 3% depends on reviving confidence and private investment.

– Looking at the situation of confidence, do you see the renewal of the Cabinet of Ministers as positive?

I feel that the government has made efforts in its announcements to restore confidence and that is good news. It has secured 2.5 points of GDP to counter El Niño. It is on the right track. Also, the announcement of new projects is good news. Now, it is very difficult to make long-term decisions in the uncertainty of what will happen next. Beyond 2024, I believe there should be more political stability from the standpoint that Congress and the administration will stop pushing counter-reforms. I will not start by saying that it is the cabinet but rather the collective work of all the officers. I think there are no reforms yet.

“Cabinet changes? We've done a lot in recent years and not much has happened there. I think this cabinet is definitely more technical than Castillo's. Beyond what ministers can do, it depends on working together. It's a combination of things, I wouldn't say it's just a cabinet.”

– And about reforms? MEF has selected reactivation programs that are most responsive to the situation.

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Let's start by not continuing to approve reforms that threaten long-term growth. Indeed, the impact of pension fund withdrawal on structural growth is already evident. It seems obvious: if you withdraw savings, national saving falls and, as a result, there is less investment. Spot. This is a basic equation. Unless foreign flows enter significantly, but this is not the case. And then, about specific reforms, I always talk about something fundamental in Peru, which is the labor market.

– Financial issue is another point that is questioned by MEF due to the decisions taken to achieve the target. Has financial credibility been damaged?

I would also refer to risk assessment companies. There is a contradiction. Some people say that one time effect is understandable. Another said it's not good, but it's forgivable if it happens once. Let me tell you that in a year like 2023, this kind of thing won't make that much noise. But this should definitely be a one time practice. In general, I still think that taking extraordinary measures in extraordinary years is indeed valid. This is an environment where we want to be fiscally responsible and avoid increasing public debt. It makes some noise, yes; But that raises more concerns about its use in the future.

– What is important to rating agencies when rating Peru?

The real concern is economic and political development. Beyond the financial crisis, stagnation means less economic growth in the future. I think the rating agencies are assessing whether we'll get a steady rebound in activity in 2024 or we'll fall back a little bit in 2025, and that puts the financial accounts very structurally at risk. Without growth there is nothing.

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– Today there is already a tax revenue problem. Does regeneration guarantee true recovery?

In fact, with economic growth comes recession. However, it should be recognized that many taxes are tied to the performance of the economy in 2023. You still have a load during the first part. The good news is that the price of copper is not expected to fall in this troubled situation. This will greatly benefit the tax revenue. The consensus is that copper prices will not fall further at this time and that it is a very attractive metal in the medium to long term. The metallic theme will play an important role. So, there will be a rebound but it will not be significant or necessary. All that has been promised for El Nino are still public spending pressures.


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