Recent trends and macroeconomic forecasts 2012-2013 INFLATION REPORT: Central Reserve Bank of Peru 441-445 Antonio Miro Quesada. Lima 1 Telephone: 613-2000 - Fax: 613-2525 Mail: [email protected]Exchange rate Interest rate Credit and liquidity International environment Public finance Economic activity (Output gap) Inflation Inflation expectations Supply shocks Demand shocks Financial shocks Monetary policy: Reference interest rate and quantitative easing instruments
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Recent trends and macroeconomic forecasts 2012-2013
InflatIon RepoRt:
Central Reserve Bank of Peru441-445 Antonio Miro Quesada. Lima 1Telephone: 613-2000 - Fax: 613-2525
Reference interest rate and quantitativeeasing instruments
INFLATION REPORTRecent trends and macroeconomic forecasts
CENTRAL RESERVE BANK OF PERU
This Inflation Report was drawn up using data on gross domestic product, balance of payments, and operations of the non-financial public sector as of December 2011, and data on monetary accounts, inflation, financial markets, and foreign exchange rate as of February 2012.
• In order to consolidate this goal, the Bank’s monetary policy is based on aninflationtargetingscheme,withaninflationtargetof2.0percent,plusorminusonepercentagepoint(between1.0percentand3.0percent).TheCentralBank’sinflation target is aimed at anchoring inflation expectations at a similar levelto the inflation rate in developed countries and reflects the BCRP’s permanentcommitmentwithmonetarystability.
• Thenatureofmonetarypolicyispreventiveandthereforeisaimedatanticipatinginflationary or deflationary pressures, taking into account that inflation may beinfluencedbyfactorsbeyondthecontroloftheCentralBank,suchassupplyshocksor thepricesof importedproducts,whichmay result in transitorydeviationsofinflation from the target. The Central Bank considers the annual increase in theconsumerpriceindexrecordedineachmonthandnotonlyatyear’send.
• Each month, and according to a previously announced schedule, the Board oftheBCRPapprovesareferenceratefortheinterbanklendingmarket.Thisinterestrate,whichisthemonetaryoperationaltarget,affectstherateofinflationthroughseveralchannelsindifferenttimeframesand,therefore,isdeterminedonthebasisofmacroeconomicforecastsandsimulations.
• Additionally,theCentralBankimplementspreventivemeasurestopreservefinancialstabilityandmonetarypolicytransmissionmechanisms.Throughinterventionsintheforeignexchangemarket,theCentralBankreducesexcessivevolatilityintheexchangerateandaccumulatesinternationalreserves,thusdevelopingstrengthstofacenegativeeventsinaneconomywithstillahighleveloffinancialdollarization.The Central Bank also uses other monetary policy tools that affect the volumeof liquidityandcredit inamoredirectmanner,suchasreserverequirements indomesticcurrencyandinforeigncurrency.
• The forecasts on which monetary policy decisions are based are disseminatedthroughtheInflationReporttoshowtheconsistencyofthedecisionsadoptedwiththeaimthateconomicagents’expectationstaketheseforecastsintoaccount.TheCentralBankalsodisseminatesthestudiesanalyzingtheriskfactorsthatmaycausedeviationsintheforecastsoftheeconomicvariablesconsidered.
i. UncertaintyinfinancialmarketsassociatedwiththedebtcrisisintheEurozonehasdeclinedsinceDecemberduetotheagreementreachedregardingasecondbailoutprogramforGreeceandduetotheliquiditysupplypolicyadoptedbytheEuropeanCentralBank.Thisdeclineinuncertaintyhasalsobeenfavoredbythebetter-than-expecteddataofeconomicactivityindevelopedcountries(especiallyintheUnitedStates).
Although the probability of a new global recession has decreased significantly,therearestillrisksassociatedwiththeproblemsintheEurozoneandwiththeriseinthepriceofoilregisteredrecently.Inthisscenario,therateofglobalgrowthin2012isstillforecastat3.3percent.Eventhoughgrowthindevelopedcountrieshasbeenrevisedontheupside,thisincreaseisoffsetbytheslightlylowergrowthforecastintheemergingeconomies.
ii. During 2011, the Peruvian economy grew at a rate of 6.9 percent, showing agrowth rate similar to the average one observed in the last eight years. Afterregisteringarateof8.8percent in2010,thepaceofgrowthmoderatedduring2011 towards levels closer to the rate of the potential output, in line with thedeclineregisteredinthegrowthrateofdomesticdemand.
A growth rate of 5.7 percent is estimated in the central forecast scenario for2012(5.5percentinourpreviousReport)consideringthehighertermsoftradeanticipatedandtheimprovementforeseeninconsumerandbusinessexpectationsrelativetoourlastReport.In2013GDPisforecasttogrow6.3percent.
iii. In contrast with the deficit registered in 2010 (0.3 percent), in 2011 the nonfinancialpublicsector(NFPS)recordedaneconomicsurplusof1.9percentofGDP.This balancewas associated, on theonehand,with the increase in the currentrevenuesofthegeneralgovernmentand,ontheotherhand,withtheslowdownin thepaceofgrowthof expenditure.Afiscal surplusof1.1percentofGDP isforecastfor2012.Thisprojectedsurplus,whichissimilartotheoneconsideredinourDecemberReportandintheMultiannualMacroeconomicPlan(1.0percentofGDP),impliesapositivefiscalimpulseofabout0.7percentagepointsofGDP.
iv. The current account deficit in 2012 has been revised downwards and is nowprojectedat1.5percentofGDP(2.2percentinourDecemberReport).Thisrevision
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Inf la t ion Report . March 2012
ismainlyduetotheimprovementobservedintermsoftradeasaresultoftheriseincommodityprices,althoughthiswouldbeoffsetbyanincreasedfactorincomeassociatedwithhigher exportprices. In2013 thedeficit in the current accountwouldincreaseto1.8percentofGDP,alowerfigurethantheoneestimatedinourDecemberReport(2.1percentofGDP).
v. Showing transitorily levelsabove the inflation target, inflation in2011 recordedarateof4.74percent.Thisresultwasinfluencedbybothexternalanddomesticshocks that affected the prices of food products and fuels. Climate anomaliesaddedontotheriseintheinternationalpricesofcommoditiesobservedsincethelastmonthsof 2010, affecting the supply of someperishable farmingproductsespeciallyinthesecondsemesterof2011.The12-monthchangeintheconsumerprice index declined from 4.74 percent in December 2011 to 4.17 percent inFebruary2012, reflecting thebeginningof the reversal of the shocks thatwereobservedinthepreviousyear.
Inflation excluding food and fuels –an indicator used internationally to excludesupplyshocks–showedarateof2.4percentin2011anddeclinedto2.2percentatFebruaryofthisyear.
As stated in our lnflation Report of December, the rate of inflation is expectedto gradually converge to the target range since Q3-2012 if the cost pressuresgenerated by significant increases in commodity prices subside and if inflationexpectationsremainwithinthetargetrange.Moreover,theupwardrevisionintheprojectionoffuelpricesisconsideredintheinflationforecast.
vi. Between December and March the Board of the Central Bank maintained thereferenceinterestrateat4.25percent,thesameratelevelmaintainedsinceMay2011.Thislevelofthereferenceratereflectsamonetarypolicypositionconsistentwithpersistinguncertaintyininternationalfinancialmarketsandwiththereversalofthesupplyshocksthatincreasedtherateofinflationduring2011.
In contrastwithourpreviousReportwhich considered adownwardbias in thebalance of risks in terms of inflation, a neutral balance of risks is considered inthisreportforinflation.Thischangetakesintoaccounttherecentevolutionoftheworldeconomy,the increaseduncertaintyabouttheevolutionofoilprices,andthebetterprospectsofthePeruvianeconomy.
vii. Thedownwardrisksintheinflationforecastarebothexternalanddomestic.Theexternal risks are associated with the possibility that an international financialcrisismayunfold,whilethedomesticrisksareassociatedwithacontextofslowerdemandgrowthduetothepostponementofsomeinvestmentprojects.
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CENTRAL RESERVE BANK OF PERU
a. Uncertainty about the evolution of the world economy
Thebaselinescenarioconsidersalowergrowthrateintheworldeconomythisyear(3.3percentvs.3.7percentin2011)andarateof3.8percentin2013afterarecoveryintheeconomy.Theriskofaglobalrecessionhasdecreasedinrecentmonthsduetothe lesspessimisticviewthat internationalmarketshaveadoptedingeneralvis-à-vistheEurozonefinancialandfiscalproblems.However, should such an adverse scenario develop, this situation wouldcontribute to weaken external demand and affect the domestic economythroughthefinancialandtradechannels.
Thisscenariodescribesadropinglobaleconomicactivitycoupledbyadeclinein the termsof trade.Additionally, a rise inglobal uncertainty could createpanicamonginvestorsinternationallyandunfoldasuddenreversalofexternalcapitalswitharealdepreciationandanincreaseinthecountryriskindicator.
Iftheserisksmaterialized,theCentralBankwoulduseitsavailableinternationalreservesandthevariousmechanismsithastoinjectliquidityinbothdomesticandforeigncurrencytooffsettheimpactofsuchshocksondomesticfinancialconditions. The monetary policy stance in the forecast horizon would beexpansionarytopreventdeflationaryrisks.
b. Evolution of domestic demand.
In a scenario of higher uncertainty, there is the risk that domestic agents’expectationsmaydeteriorate,especiallyinthecaseofinvestment,whichcouldgeneratea lowerdynamisminaggregatedemandandleadtheeconomytogrowbelowitspotentialgrowthrategeneratingdownwardpressuresoncoreinflation.Inthisscenario,theCentralBankwouldeaseitsmonetarypositioninorderthatinflationfallswithintheinflationtargetrange.
On the other hand, there are two risks on the upside for inflation associatedmainlywithhigherforeigncapitalinflowsandhighercommodityprices.
In this scenario, the Central Bank would adjust its monetary policy includingmacroprudentialpolicy instruments,suchastheratesofreserverequirements, ifapaceofcreditexpansionthatcouldaffectmonetaryandfinancialstabilityisperceived.
d. Imported inflation or adverse climate conditions
Thereistheriskthatglobalinflationarypressureswillbemorepersistentthancurrently estimated in the baseline scenario. Uncertainty about how policymakerswillcopewithfinancialproblems,especiallyintheEurozone,ishavingastrongimpactonthelevelofglobaleconomicactivity.Amoredeterminedandcredibleeconomicpolicyinmostdevelopedcountriescouldgenerateaconfidenceshock,whichcouldleadtohigherglobaldemand.Iftheshocksarepersistent,theymayaffecttheevolutionofdomesticinflationthroughhigherimportedcosts,whichcouldgenerateinflationarypressures.
1. GlobaleconomicactivityhashadapositiveevolutionsinceourlastInflationReportwas published. Aggregate indicators of activity, such as the global purchasingmanagers’index(PMI)recordeditshighestlevelinayear,whilethemanufacturingindexandtheservicesindexremainedentheexpansionarea(over50)forthreeandtwelveconsecutivemonths,respectively.
Graph 1JP MORGAN GLObAL PMI MANUFACTURING AND SERVICES
(February2007-February2012)
Source:Bloomberg.
Feb.0730
35
40
45
50
55
60
65
Feb.08 Feb.09 Feb.10
56.5
51.1
Feb.11 Aug.11 Feb.12Aug.07 Aug.08 Aug.09 Aug.10
Services Manufacturing
Graph 2
*PMIindex.Source:Bloomberg.
DEVELOPED COUNTRIES: February 2007 - February 2012Manufacturing index*
DEVELOPED COUNTRIES: February 2007 - February 2012Services index*
USA USAUnitedKingdom UnitedKingdom JapanEurozone Eurozone
50.5
Otherindicatorsofactivityinthemajordevelopedcountries–UnitedStates(USA),Germany,andJapan–show,ingeneralterms,abetterevolutionthanpreviouslyanticipated. Consumer confidence has improved due to expectations that lowinterestrateswillbeobservedforquiteawhile,aswellasduetotheadditionalstimulusimplementedinsomeeconomies.Inlinewiththis,globalgrowthwouldhaveregisteredarecovery inQ1-2012afterhavingexperiencedaslowdowninQ4-2011.
2. As inourprevious InflationReport, theworldeconomy is forecast togrow3.3percentin2012and3.8percentin2013.Theslightlyhighergrowthrateestimatedin developed countries –due to the evolution of activity in the United StatesandGermany,as reflected in recent indicatorsofactivity–wouldbeoffsetbyalowerdynamisminemergingcountrieswhich, inmanycases,continuetoshowinflationarypressures.Moreover,theestimatedaverageGDPofourmaintradingpartnershasbeenrevisedontheupsidefrom2.7to2.9percentfor2012andfrom3.1to3.2percentfor2013.
Graph 3QUARTERLY SEASONALLY ADJUSTED WORLD GDP GROWTH: 2008 -2011
Investment grew 20.6 percent in Q4-2011, although a significant part of thisincrease is explainedby the accumulationof inventories. In contrastwithotherquarters,residentialinvestmentwasmoredynamiceventhoughitwascoupledbydropsinthepricesofhousesinthemonthofJanuary.Non-residentialinvestment,ontheotherhand,declinedinQ4.
Graph 6USA: REAL PERSONAL CONSUMPTION (12 month % change)
AND CONSUMER CONFIDENCE (Index of Univ. Michigan)
Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Jan.12
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
100
90
80
70
60
50
40
30
20
10
Confidence (right axis)
Consumption (left axis)
Table 2USA: SEASONALLY ADJUSTED GDP GROWTH (1Q.09-4Q.11)
Thesebetterindicatorsofactivity,employment,andconfidencewereobservedinacontextoflowerinflationarypressures.TotalCPIinflationclosed2011recordingarateofbelow3percentandcoreinflationshowedarateof2.3percent,whileinflationexpectations remainedstableat3percent. In its lastcommuniqué, theFederalReserve(FED)confirmedthatitwouldprobablymaintainlowinterestratesatleastuntilend2014.
Monetarystimuluswillcontinuetobemaintained inacontextofa reductionofthe fiscal deficit during the next years. It should be pointed out that the fiscalconsolidation measures for the next 10 years are still in the process of beingdiscussed.Lackofpoliticalagreementinthisarea,whichcouldleadtoadisorderlyadjustmentoffiscalaccounts,isariskfactorforgrowth.
Inthiscontext,theforecastongrowthinUSAin2012hasbeenrevisedupwards,from1.8percent(InflationReportofDecember2011)to2.3percent,inlinewiththe execution in Q4-2011, with the gradual improvement of the labor marketand of activity and confidence indicators, with the Federal Reserve’s continuedmonetarystimulus,andwithloweruncertaintyintheEurozonecountries.
4. GrowthprospectsintheEurozonehavebeenaffectedbythesovereigndebtcrisis.The worsening of financial conditions, the fiscal adjustments implemented, andthedeteriorationofconfidenceexplainthisunfavorableevolutionofactivityinthisregion.MostinvestorsestimatethatthecontractionregisteredinQ4-2011wouldextendatleastuntilthefirstsemesterofthisyear.
However,significantdifferencesareobservedbycountries.Themostimportanteconomies, Germany and France, had a better-than-expected performance inQ4-2011: economic activity in France grew 0.9 percent, whereas Germanyshowedaslightcontractionthatwaslowerthananticipated(0.7percentversus1.2percent).
In Germany, the growth of investment –especially investment in construction–hasbeenadeterminingfactorintheGDPresultinQ4-2011,whiletherecoveryof investors’ confidence and the maintenance of conditions in the labor markethaveplayedaroleinrecentmonths.However,GermanexportsinQ4-2011andmanufacturingexportordersinthefirsttwomonthsofthisyearwouldbeindicatingthatrisksforgrowthremainintheregion’smajoreconomy.
Ontheotherhand,theeconomieswithdebtproblemshaverecordedsignificantcontractions thatarehigher thanexpected in themarket (Portugal’scontractionof5percentstandsoutinthissense).Recentindicatorsshowthatthesedifferenttrendshavecontinuedsofarthisyear.
Graph 9EUROZONE: QUARTERLY GROWTH
(Seasonallyadjustedannualizedquarterlyrates)
Source:Bloomberg.Eurozone Germany France Italy Spain
5. ThegrowthofGDPinJapanwasnegativein2011(-0.9percent)duemainlytothenaturaldisastersthataffectedthecountry inMarch(earthquake)and inOctober(floods in Thailand interrupted the logistics supply chain, affecting exports intheentireAsianregion).OnlyinQ3wasapositivegrowthrateobservedintheeconomy (7 percent in annual terms) due to the fiscal and monetary stimulusimplemented.ActivitycontractedagaininQ4-2011(2.3percent)duetoEurope’sfinancialproblemsandtothenaturaldisastersthatThailandcontinuedtosuffer.
Japan is expected to resume its growth path in 2012 as soon as the problems inEurope start being resolved and the effects of natural disasters are overcome. Forthesereasons,thegrowthforecastforJapanin2012and2013remainsat1.9percent.
In2012Chinawouldcontinueshowinghighgrowth rates (8.2percent)due tothedynamismofpublicandprivateinvestment,butwouldslowdowncomparedto2011(9.2percent)duetothelowerdynamismoftheexternalsector–athirdofChina’stradeiscarriedoutwithEurope–andduetothemeasuresadoptedbythe authorities in order to prevent the formation of price bubbles in the assetsmarkets.China implementedaseriesofmeasures in2011duetothe likelihoodofanoverheatingintherealestatesector,thegrowthofbankcredit,andrisinginflation. Among others, these measures included restrictions on purchases ofa secondor thirdhouse,highermortgage installments, limitsonbank loansbybankingentity,andincreasinginterestratesandtheratesofreserverequirements.
Morerecently, theChineseauthoritieshaverevisedtheirestimatedgrowthratefor2012from8.0to7.5percentintheirXIIFive-YearPlan(2012-2017).Thisrateisnotanobjective,butthisisasignthatistellingthemarketthatthedynamismoftheChineseeconomymustgraduallydecline.Inthelastdecade,forexample,Chinagrewatanaveragerateof9.4percent(8.7percentin2000-2005and10.2percent in 2006-2010), while the rate announced by the government was 8.0percent.
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Inf la t ion Report . March 2012
Graph 10CHINA: QUARTERLY GDP GROWTH AND REFERENCE RATE
7. InLatin America,monthly indicatorsof activity and industrialproduction showsome slowdownofgrowthduring the first twomonthsof the year. The regionis expected to grow 3.7 percent in 2012, showing a lower rate than the onerecordedlastyear(4.3percent).
Theseresultsreflectthecontinuationofthetrendthatstartedin2011whenthepace of economic growth slowed down over the year. Growth, which was ledbydomesticdemand,wasoffsetbytheincreasinglylowerexternalstimulusandgrowthoftheindustrialsector.Ofthecountrieswithinflationtargeting,ChileandColombia registered the highest growth rates in comparison with the previous
TABLE 3 CHINA’S ECONOMIC INDICATORS: 2010 - 2012
2010 2011 2012 December March June September December February
Inflationarypressures(duebothtosupplyandtodemandfactors)havealsobeenobserved in the region. Because of this, many Latin American countries havedecidedtoraiseinterestratesduringthefirstsemesterof2011andmakeapausein thewithdrawalofmonetarystimulusas fromthesecondsemester.However,thedifferentdegreesofslowdownoftheseeconomieshavedetermineddifferentpolicyreactions.Thus,whileBrazilhascutitspolicyrateby225bpssinceAugust,theCentralBankofColombiahasraiseditby50bpssofarthisyear.
Graph 11LATIN AMERICA: GDP GROWTH FORECAST*
*ConsensusEconomicsandBCRP(Peru).
2012
3.3
4.4
3.4 3.4 3.6 3.5 3.74.4 4.1 4.1 4.2 4.2 4.2
1.4
4.34.9
4.54.1
4.9 4.7
5.76.32013
Brazil Mexico Argentina Paraguay Bolivia Uruguay Venezuela Chile Ecuador Colombia Peru
dif ferences as in the cases of Hungary and Turkey, which are estimated tohavegrown1.6and8.1percent,respectively.In2012and2013thisregionwouldgrowatlowerratesduemainlytotheevolutionoftheEurozone,thisef fectbeingpartiallyof fsetbythehighpricesofcommoditiessuchasoilandgas.
Financial markets
8. Financial markets were strongly influenced by uncertainty about Greece andother Eurozone countries with debt problems. At the time of writing thisreport,marketvolatilityhasdeclined.TheVIXindexhasdroppedfromlevelsof23atend2011to18inearlyMarch.Inadditiontolowerriskaversionafterthe arrangement reached with Greece, this result would be reflecting betterprospectsforglobalgrowth,andparticularlyforsomeofthemajordevelopedeconomies,suchasUSAandGermany.The indicatorsof thesovereigndebt,money, foreignexchange,andglobalstockexchangemarketshavereflectedthislowerriskaversion.
9. Financialconditionsinsovereign debt marketshaveimprovedsignificantly,andespecially in the case of Italian markets which were being affected by fears ofcontagion. The fiscal adjustment measures and structural reforms announced,andthenewfiscalagreementandthemonetarypolicymeasuresadoptedbytheEuropean Central Bank (ECB) have positively influenced the evolution of thesemarkets,althoughwithoutreachingyettheconditionsobservedpriortothedebtcrisis.
Table 4SOvEREIGN SPREADS OF DEvELOPED COUNTRIES
End of period Change in bps Dec.08 Dec.09 Dec.10 Dec.11 Mar.12* Dec.11 Dec.10 Dec.09 Dec.08 (5) (4) (3) (2) (1) (1)/(2) (1)/(3) (1)/(4) (1)/(5)
Financialconditionsinthecountrieswithbailoutprograms(Greece,Portugal,andIreland)shownosignofrecoveryandcontinuereflectingaweakposition.Thereis stilluncertaintyabout long termfinancial soundness inGreece,Portugal, andIreland.
InGreece,thedebtrestructuringandotheradditionalfiscaladjustmentmeasureshavenotbeenabletoreversefearsofinsolvency.InPortugalandIreland,despitethepositiveresultsobtainedintheevaluationoftheprogramscarriedoutwiththeIMF/EU/ECB(thefiscalgoalsarebeingmet),therearestillfearsthatPortugalwillneedaPrivateSectorInvolvement(PSI)programsimilartotheoneimplementedwithGreeceandthattheresultinIreland’snextreferendumonanewfiscaltreatywillprevent, inthefuture, Ireland’saccesstotheEuropeanStabilityMechanism(ESM), the European bailout fund. The signature of a new fiscal treaty is arequirementtoreceiveresourcesfromtheEuropeanfund.Thefiscaltreatyimpliesastructuralfiscaldeficit limitof0.5percentofGDPforeachcountry,whichwillimplyapenaltyofupto0.1percentofGDPifthelimitisnotmet,andagradualreductionofthedebtratioto60percentofGDP.ThistreatywasapprovedbythemainEuropeanleadersinFebruaryandratifiedinthesummitinMarch.
FinancialconditionsinSpainimprovedsignificantlyuntil lateFebruary.However,sinceMarch,marketconditionsworsenedwhenthefiscaldeficitgoalforthisyearwasmodified from itsoriginal levelof4.4percent to5.3percentofGDP (afterhaving a level of 8.5 percent in 2011) following the negotiation between thegovernmentandtheEuropeanleaders.
Graph 13DEVELOPED COUNTRIES DEFICIT AND DEbT: 2011*
10.Lower risk aversion has also favored the evolution of Latin Americancountries’debtmarkets. Reversing the trendobserved inQ4-2011, creditspreads in the regionshowadownward trendsince January. ThegreatestcorrectionsintheEMBIGandCDSspreadshavebeenobservedinBrazilandChile,respectively.
1/ End of period data. Source: Eurostat, IMF, Moody’s and others.
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CENTRAL RESERVE BANK OF PERU
11.Conditionsinmoney markets haveimprovedsubstantially,particularlyinEuropeanmarkets.AsreportedinourDecemberReport,conditionsintheU.S.moneymarketcontinued reflecting the low interest rates in USA and the limited exposure ofAmericanbankstotheEuropeandebtcrisis.
Graph 14SPREAD bETWEEN THE 3-MONTH US$-LIbOR RATE AND O/N OF SWAP MARkET (OIS) (%)
On the other hand, conditions in European markets have improved significantly.Europeaninterbankrateshavebeendecliningduetothetwo3-yearliquidityinjectionoperationsmadebytheECB(€489billioninDecember2011and€530billioninFebruary2012)andtheeasingofcreditrequirementsforthecollateralsusedbybanks.
ThisincreasedexpansionofliquiditybytheECBhasimpliedthatitsbalancehasreached record levels (€3 trillion) and that, in GDP terms (32 percent), it hasexceededthatofthemajorcentralbanks(FED:19percent,BankofEngland:21percent,BankofJapan:30percent).Withthis,thebalanceofECBloanstobanks
Table 6SOvEREIGN SPREADS OF EMERGING MARkETS
End of period data Difference of March against to: Dec.07 Dec.08 Dec.09 Dec.10 Dec.11 Mar.12 Dec.11 Dec.10 Dec.09 Dec.08
(throughitsmainrefinancingoperations)hasreachedarecordlevelof€1.2trillionand registered an average maturity of 976 days. The banks that have favoredthemosthavebeen theSpanishand Italianbanks.Moreover, thisexpansionofliquidityhas, for the timebeing, returnedto theECBas remuneratedovernight(O/N)deposits.AfterthesecondinjectionofliquiditybytheECB,banks’overnightdepositsattheEuropeanCentralBankreachedarecordlevelof€ 821billion.
Banks in countries without bailout programs have started to get credit in themarket.Forexample,themarketofUSfundshasincreasedagainitsshareinFrenchbankssinceJanuaryofthisyear.
12. Year-to-date,themainstockmarketshaveregisteredgainsand,insomecases,havebeenabletoreversethelossesobservedin2011.Indevelopedcountries,thepositiveresultsof Japan’s StockExchange (inpartdue to thedepreciationof theyen) andGermany’sStockExchange(inpartduetothebetterfinancialconditionsassociatedwiththeevolutionofthedebtcrisis)standout,whileintheemergingcountriesthestockmarketswithbetterresultsintheLatinAmericanregionincludetheboursesofColombia,Brazil,andPeru,aswellastheboursesofRussiaandTurkeyinEurope.Theriseinthepricesofcommodities(metalsandcrude)andlowerriskaversionwouldaccountforthisbetterevolutioninthestockmarketsofemergingeconomies.
Graph 17STOCk MARkETS
(Endofperíod;%Chg.Mar.12respecttoDec.11)
-5% 0% 5% 10% 15% 20% 25% 30%
UNITEDSTATESCANADA
UNITEDKINGDOMNORWAY
AUSTRALIANEWZEALAND
JAPANHONGKONG
TAIWANKOREA
EUROZONEGERMANY
FRANCEIRELAND
PORTUGALSPAIN
GREECE
CZECHREP.HUNGARY
POLANDROMANIA
RUSSIATURKEY
UKRAINE
CHINAINDIA
INDONESIAPHILIPPINESSINGAPOREMALAYSIATHAILAND
ISRAEL
BRAZILCHILE
COLOMBIAMEXICO
ARGENTINAPERU
Source:Bloomberg.
13.The US dollar has started to reverse slightly the appreciation observed during2011duebasically to the reductionof riskaversionand to low interest rates inUSA. According to the currency basket elaborated by the FED (considering thecurrenciesofUSA’smain tradingpartners), thedollarhasdepreciatedaround2percentsofarthisyear.
Moreover, the dollar’s depreciatory trend against the currencies of the maindevelopedcountrieshasbeen limitedbasicallyby themonetaryeasingmeasuresadoptedbythemajorcentralbanks.Thus,forexample,thedepreciationofthedollaragainst the pound and the euro (about 1 percent) was limited by the measuresimplementedbytheECBandtheBoE.Tocounterbalancetheeffectsofthesovereigndebt crisis in the Eurozone, the former has been increasing liquidity significantly(since end 2011) and the latter has increased its asset purchase program by£50billion(from£275billionto£325billion).
14.With the exception of the Argentine peso, year-to-date the currencies of LatinAmerican countries have appreciated against the dollar due to the higher netinflowofcapitals, lowerriskaversion,andtheriseinthepricesofcommodities.TheappreciationoftheColombianpeso(8.1percent)andtheMexicanpeso(6.8percent)areworthpointingout.TheevolutionoftheColombianpesoisexplainedbytheriseinthepriceofoil,bythedecisionoftheCentralBankofColombiatoraiseitspolicyrate(50bps.sofarthisyear),andbysignificantinvestmentflows.Ontheotherhand,theMexicancurrencyhasappreciatedmainlyduetothebetterprospectsoftheU.S.economy.
In this context, the central banks in the region have taken measures to offsetappreciatorypressures.Colombiahasactivatedagain theprogramofdailyspotpurchasesofUS$20million,extendingituntilAugustofthisyear.InBrazil,theCentral Bank has repeatedly intervened in the foreign exchange market and in
26
CENTRAL RESERVE BANK OF PERU
the spot andderivativesmarket to counterbalance theappreciationof the localcurrencyandthegovernmenthasadoptedothermeasurestooffsetcapitalinflowstothecountry,suchasincludingforeignloansandbondsaspartoftheoperationssubjecttoataxonfinancialoperations.
15.Sofarin2012,mostcentralbankshavemaintainedtheirinterestratesunchangedinacontextofuncertaintyabouttheevolutionofEurope’sfinancialcrisis.Ofthe32countrieswedoafollow-upon,14didnotmodifytheir interestratesand8lowered their rates (Brazil standsout in the lattergroupwith a rate cutof 125bps.).Incontrast,sofarthisyearColombiahasraiseditsrateby50bps.duetothedynamismofitseconomicactivitysinceQ4-2011andtotheacceleratedgrowthofcredit.
Table 8MONETARY POLICY INTEREST RATE
Accumulated change (bps.) Sep.08 Dec.08 Dec.09 Dec.10 Dec.11 Mar.12 Dec.11 Dec.10 Dec.09 Sep.08 Countries that have kept rates in the first quarter of 2012 Australia 7.00 4.25 3.75 4.75 4.25 4.25 0 -50 50 -275 BCE 4.25 2.50 1.00 1.00 1.00 1.00 0 0 0 -325 Canada 3.00 1.50 0.25 1.00 1.00 1.00 0 0 75 -200 South Korea 5.25 3.00 2.00 2.50 3.25 3.25 0 75 125 -200 United States 2.00 0.25 0.25 0.25 0.25 0.25 0 0 0 -175 Hungary 8.50 10.00 6.25 5.75 7.00 7.00 0 125 75 -150 India 9.00 6.50 4.75 6.25 8.50 8.50 0 225 375 -50 Iceland 15.50 18.00 10.00 4.50 4.75 4.75 0 25 -525 -1,075 Japan 0.50 0.10 0.10 0.10 0.10 0.10 0 0 0 -40 Malaysia 3.50 3.25 2.00 2.75 3.00 3.00 0 25 100 -50 Mexico 8.25 8.25 4.50 4.50 4.50 4.50 0 0 0 -375 New Zealand 7.50 5.00 2.50 3.00 2.50 2.50 0 -50 0 -500 Pakistan 13.00 15.00 12.50 14.00 12.00 12.00 0 -200 -50 -100 Peru 6.50 6.50 1.25 3.00 4.25 4.25 0 125 300 -225 Poland 6.00 5.00 3.50 3.50 4.50 4.50 0 100 100 -150 United Kingdom 5.00 2.00 0.50 0.50 0.50 0.50 0 0 0 -450 SouthAfrica 12.00 11.50 7.00 5.50 5.50 5.50 0 0 -150 -650 Switzerland 2.75 0.50 0.25 0.25 0.25 0.25 0 0 0 -250 Taiwan 3.50 2.00 1.25 1.63 1.88 1.88 0 25 63 -163 Turkey 16.75 15.00 6.50 6.50 5.75 5.75 0 -75 -75 -1,100 Countries that have increased rates in the first quarter of 2012 Colombia 10.00 9.50 3.50 3.00 4.75 5.25 50 225 175 -475 Countries that have reduced rates in the first quarter of 2012 Brazil 13.75 13.75 8.75 10.75 11.00 9.75 -125 -100 100 -400 Chile 8.25 8.25 0.50 3.25 5.25 5.00 -25 175 450 -325 Philippines 6.00 5.50 4.00 4.00 4.50 4.00 -50 0 0 -200 Indonesia 9.25 9.25 6.50 6.50 6.00 5.75 -25 -75 -75 -350 Israel 4.25 2.50 1.25 2.00 2.75 2.50 -25 50 125 -175 Norway 5.75 3.00 1.75 2.00 1.75 1.50 -25 -50 -25 -425 Serbia 15.75 17.75 9.50 11.50 9.75 9.50 -25 -200 0 -625 Sweden 4.75 2.00 0.25 1.25 1.75 1.50 -25 25 125 -325 Thailand 3.75 2.75 1.25 2.00 3.50 3.00 -50 100 175 -75 Countries that have not met in the first quarter of 2012 China 7.20 5.31 5.31 5.81 6.56 6.56 0 75 125 -64 Uruguay 7.25 7.75 6.25 6.50 8.75 8.75 0 225 250 150
Source: Reuters and Bloomberg.
28
CENTRAL RESERVE BANK OF PERU
Terms of trade and prices of commodities
16.During 2011 the prices of commodities were favored by the high internationallevelsofliquidity,lowinventorylevels,andsomesupplyconstraints,particularlyin thefirst semesterof theyear. This trendwasoffsetby the liquidationofnoncommercialpositionsgeneratedby thehigher risk aversionassociatedwith theEurozonecrisisandfearsoflowerglobalgrowth.
In2011theterms of trade increased5percentgiventhatthepricesofourexportsproductsrosemorethanthepricesofourimports,particularlyinthefirstsemesteroftheyear.InQ4-2011,therecoveryoftermsoftradeisexplainedbythegreaterdownwardcorrectionobservedinthepricesofimports,especiallyfoodimports.
Thepricesofourexportsrecordedariseof20percentin2011.Theriseinthepriceofgoldstandsoutsincethisrisewasfavoredbyinvestors’increaseddemandforgoldasahedgeasset inacontextofhigh international liquidityandglobal riskaversion.Thepricesofimportsrose14percent,mainlyduetotheriseinthepricesofcrudeandfoodproductssuchasmaizeandsoybeanoil.
Sofarthisyear,termsoftradehavecontinuedtoshowtheupwardtrendinitiatedin November, mainly as a result of the rising price of copper that is driven byfavorabledataofgrowthandmanufacturingactivity inUSAandChina.Becauseaslightpricecorrection isestimated for the restof theyear, termsof tradeareforeseentodeclineby1.4percentonaveragein2012andtoriseby0.4percentin2013.
17. Thehighavailabilityofinternationalliquidityasaresultoflowinterestratesallowedthedemandforcommoditiesasalternativeinvestmentassetstoincreaseinthefirsthalfof2011.However,thedeteriorationoftheinternationalcontextassociatedwithfearsthattheEuropeancrisismightintensifygeneratednetoutflowsofthesemarketsinSeptemberandDecember.AnoutflowofUS$7.7billionofthefundsthatmanageinvestmentsincommoditieswasobservedinDecember,asaresultofwhichtheamountof investments in2011wasUS$15billion(vs.US$67billion in2010),the lowestlevelregisteredsince2002.However,this lowerflowwasnotreflectedindeclinesin the prices of commodities, since the latter found support in supply constraints(metalsandfoodproducts)andingeopoliticaltensions(crude).Theinvestmentfundswith investments in commodities recovered in January2012whenanet inflowofUS$3.7billionwasregistered.Intoday’scontextofhighavailabilityofliquidity,noncommercialpositionsareexpectedtoincreaseinthemarketthisyear.
30
CENTRAL RESERVE BANK OF PERU
Graph 22COMMODITIES INVESTMENT FLOWS
(BillionsofUS$)
1513108530
-3-5-8
-10
Source:BloombergandBarclaysCapital.
Apr.09 Dec.09 Aug.10 Apr.11 Dec.11
Copper
18. In2011thepriceofcopperincreased17percentandrecordedanaveragepriceof US$ 3.43 per pound in December, but showed a downward trend during agreatpartoftheyear.Inthefirsttwomonthsofthisyear,thepriceofcopperhasreversedthistrendrising11percent.
AfterreachingahistoricalnominalaveragerecordofUS$4.48apoundinFebruary2011duetosupplyconstraintsinproducingcountrieslikeChile,Indonesia,China,andPeru,thepriceofcopperregisteredadownwardtrenduntilNovembergivenfearsofaglobalrecessionassociatedwiththeworseningofEurope’sdebtcrisis.In November-December 2011, this price recovered due to supply problems inproducingcountries(temporaryclosureofmineGrasberginIndonesia,productioninterruptionsduetoastrikeinmineCerroVerdeinPeruandtotechnicalfailuresinmineCollahuasiinChile).
So far this year, the price of copper has been favored by better-than-expecteddataofgrowthandmanufacturingactivity inUSAandChinaand therefore it isestimatedthatthispricewillstabilizeintheforecasthorizonatahigherlevelthantheoneconsideredinourpreviousInflationReport.
Like the price of copper, the price of zinc showed a downward trend during
mostof2011,affectedbyfearsoflowerglobaleconomicactivityandbyahigherproduction of refined zinc, as well as by the lower dynamism of consumptionin Japan in a context in which inventories registered their maximum historicallevels. This downward trend was offset by supply constraints in China (due toenvironmentalregulations)andinAustraliaandUSA(duetotechnicalproblems).
The rise in thepriceof zinc in thefirst twomonthsof theyear is explainedbyahigher speculativedemandsupportedby theannountcement that some largemineswillbeclosedinCanadaandIrelandinthenexttwoyears,aswellasbyamorepositiveoutlookforgeneraleconomicactivityinUSA.
Theprice rise in2011 isexplainedby thecontractionofsupplyassociatedwithsocial conflicts in the Middle East and North Africa (especially in Libya, whereoilexportsweredrasticallyreduced),terroristattacksinNigeria,andgeopoliticaltensionsbetweenIranandtheWest.
ThepriceofcrudereacheditspeakinApril(US$110perbarrelonaverage),declininggraduallythereafteruntilitpostedanaveragelevelofUS$86abarrelinSeptemberduetoexpectationsof lowerglobaldemand inOECDcountries,especially in theEUduetotheimpactofthedebtcrisis.Onthesupplyside,therecoveryofLibya’sproductionandexports towards theendofNovembercontributed to reduce thepriceofoil.
Intheforecasthorizonthepriceofoilisexpectedtoshowsimilarlevelstothoseobserved today, but higher than the ones estimated in the Inflation Report ofDecember.TheworseningofthetensionsbetweenIranandtheWestrepresentariskfactorontheupsideinthiscentralscenario.
In contrast with 2008, when the prices of crude reached historical maximumlevels,theglobaleconomyiscurrentlymorevulnerabletoasharppricerisesinceeconomicrecoverycouldbeaffected.
According to the World Agricultural Supply and Demand Estimates of the USDepartment of Agriculture (USDA) of March 2012, the situation in global foodmarketsshowsan improvement (less tightness) in thecaseofwheatgiven thatglobal inventories at the end of the 2011/2012 farming period would increase5percentcomparedwiththepreviouscropyear.Ontheotherhand,theglobalmarket of soybean oil would show tighter conditions this farming period sinceinventorieswoulddeclineby9percent.
Sincethelastmonthsof2011,thepriceofmaizehasbeenfavoredbyexpectationsof a lowerglobal supplydue to fearsof a lowerproduction in SouthAmericanproducingcountries(mainlyArgentina)asaresultoftheloweryieldsthatwouldbecausedbyLaNiñaevent.
However, since maize-sown areas are expected to increase in USA this year,thepricesofmaize in the forecast horizon are estimated to showadownwardcorrectiontosimilarlevelstothoseforeseeninourInflationReportofDecember2011,thatis,todecline8percentrelativetotheaveragepricein2011.
priceofmaize(asubstituteproduct),aswellasbyRussiaandUkraine’srestrictionsontheirexports.However,theinternationalpriceofwheatshowedadownwardtrendduring theyeardue to theUSDA’ssuccessiveupward revisionsofglobalproductionandduetoincreasedcompetitionininternationalmarkets.
36
CENTRAL RESERVE BANK OF PERU
Year-to-date,thepriceofwheathasresumedarisingtrendasaresultofunfavorableclimateconditionsinEuropeanproducingcountriesandexpectationsthatRussiaandUkrainewillestablishrestrictionsontheirexports(onlyUkraineimplementedthem).Thepriceofwheatisthereforeexpectedtoincreaseslightlyrelativetoitscurrent levels and the ones estimated in our last Inflation Report. Nonetheless,onaverageterms,in2012thepriceofwheatwoulddecline8percentcomparedtotheaveragepricein2011,inlinewiththeexpectedglobalinventoriesof210milliontonsestimatedbyUSDAforthe2011/2012cropyear(thisfigureisclosetotherecordlevelobtainedinthe1999/2000cropyear).
The rise observed in this price in 2011 is mainly explained by the increasesregistered in the firstmonthsof the year (due to the effects of LaNiña and totherisesinthepriceofcrude),becausetheaveragepriceofsoybeanoilfollowedadownward trend sinceMay–except inSeptember–that intensified inOctoberwhenthispricefell6percentduetothefavorablesoybeanyieldobtainedinUSA.
It is estimated that the level of prices of soybean oil will be similar to thoseobservedtoday,buthigherthantheonesconsideredinourpreviousReportduetothehigherpricesofoilforeseenandthelowerproductionofsoybeanexpectedbyUSDAforthe2011/2012period.
SOYbEAN OILUSDA: ESTIMATES FOR 2011/2012 CROP YEAR
(MILLION TONS)
IRDec.11IRMar.12
Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Jan.12 Jan.13
ProductionFinalstock(rightaxis)
May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar.
BOX 1GREECE’S SECOND BAILOUT PACkAGE AND DEBT RESTRUCTURING PROGRAM
Atransactiontorestructurethepublicdebtwiththeprivatesector,knownasthePSI(PrivateSectorInvolvement),wasagreedinthesecondhalfofFebruarybetweentheEuropeanUnion(EU),theInternationalMonetaryFund(IMF),andacommitteerepresentingprivateholdersofGreekbondsas part of the conditions that will allow Greece’s access to a package of €130 billion. The approval of this package by the European Union and the IMF should take place prior to the maturity of bonds for €14.5 billion on March 20. The new program is expected to reduce the debt to GDP ratio from 164percent(2011)to120.5percentby2020.
To this end, the Greek government had to meet a series of preconditions, including the following: approvemeasurestofurtherreducethefiscaldeficitby€325million;initiatetheprocessrequiredtoconstitutionallyprioritizetherepaymentofdebt;havethetermsofPSIpassedbyParliament,includingtheretroactiveintroductionofcollectiveactionclauses(CACs)underwhichthebondswillbe restructured, among others.
PSI terms
After thePSI transactionwas approved byParliament, on February 24 theGreek governmentlaunchedtheofferfortherestructuringofeligiblebonds–undertheGreeklaworunderinternationallaw–foratotalof€206billion,whichrepresentsapproximately60percentofthedebtbalancein2011. The main terms of the PSI are:
• Thebondswillbeexchangedwithanominaldiscountof53.5percent.Oftheremaining46.5percentfaceamount,15percentwillbeexchangedbyshort-terminstruments(1-2years)oftheEuropeanFinancialStabilityFacility(EFSF)and31.5percentwillbeexchangedbynewGreek bonds maturing in 30 years.
• Thenewbondshaveastep-upcoupon(withagraceperiodofoneyear):2percentinthefirstthreeyears(2013-2015),3percentbetween2016and2020,3.65percent in2021,and4.3percent from 2022 onwards.
• Some retroactive CACs have been introduced under the Greek law to ensure a highparticipation of the private sector, given that the program requires that at least 90-95 percent of the eligible debt with the private sector is restructured. If it were necessary to activate theCACs,aquorumof50percentofbondholdersandamajorityof two thirdsof the eligible debt holders are required. In the case of international bonds governed by internationallaws,themajorityrequiredtointroduceaCACisaquorumof75percentofbond holders.
• ThereisanadditionalwarrantassociatedwiththeevolutionofGDP.Accordingtothisinstrument,1 percent of the additional coupon will be paid as from 2015 if Greece’s GDP shows a positive growthabovecertainlevel(thislevelhasnotbeenspecifiedyet).
On March 9, after the process of voluntary restructuring of the debt written under the Greek law ended,theresultsindicatedaparticipationof86percent(€152billionofthe€177billioneligiblebonds).Withthisresult,thegovernmentactivatedtheCAC,whichwouldinvolvethefullparticipationof creditors under the Greek law. In addition to this, it was reported that so far bondholders of about €20billion–of the€29billion ineligiblebonds–of thedebtwrittenunder international lawhadalreadydecidedtojointheprocess,asaresultofwhichtotalparticipationwas96percent.Whatstill remains to be seen is the participation of creditors with debt written under international law whowilldecidetojointheprocessbeforetheexpirationdate(March23),aswellaswhethertheparticipationrateenablestheactivationofinternationalCACsornot,andwhetherthegovernmentdecides to exercise them or not.
Official participation
The Greek bonds purchased by the European Central Bank and the central banks in the Eurozone under theSecurityMarketProgram (SMP),whichhaveanestimatedvalueof€45billion,wereswappedbynewGreekbonds(withthesameconditionstheyhadbefore)topreventthattheybeincluded as part of the debt eligible for the PSI. Since these bonds were purchased at a discount on the secondary market, the earnings generated because of this discount would be returned to the Greek government in the way of a discount on theinterestrateontheloansgrantedbyEUgovernmentsaspartoftheirfirstaidpackageof€110billion. It is estimated that this reduction would contribute to reduce the debt-to-GDP ratio by 1.8 percentagepoints towards2020and that itwould reducefinancingrequirementsby€1.8billionduring the rescue program.
Inseasonallyadjustedterms,GDPrecordedanannualgrowthof4.7percent inQ4-2011, after having registered a growth rate of 6.0 percent in the previousquarter.
Graph 34SEASONALLY ADJUSTED GDP AND DOMESTIC DEMAND: 2008 - 2011
(Annualized%change)
14.016.0
7.5
14.2
7.3
13.5
-3.5
-7.6
-3.3
-17.5
-4.4-0.7
6.5
11.6 10.814.7
8.2
14.0 13.3
18.1
6.5
13.8
9.0 8.36.5
4.1 5.2 4.8 6.0 5.1 4.76.6
GDPDomesticdemand
Graph 35GDP: POTENTIAL GROWTH AND ACTUAL GROWTH: 2005-2011
(%changeinthelast4quarters)
12
10
8
6
4
2
0
-2
12
10
8
6
4
2
0
-22010 20112006 2007 2008 2009
PotentialGDP(centralestimate)Observedgrowth
Memo: PotentialGDP is not anobservable variable andhas to be estimated.Becauseof this, thegraph showsuncertaintyaboutitsgrowthrate.Asinthecaseoftheoutputgap(Graph101)andtheinflationforecast(Graph102),eachbandconcentratesaprobabilityofoccurrenceof5%andtotalbandsrepresentaprobabilityofoccurrenceof90%.
27.TherateofgrowthofGDP in2011(6.9percent)wasslightlyhigher thanthe rate projected in our December Report (6.8 percent). The centralforecast scenario for the Peruvian economy in 2012 considers a growthrateof5.7percent,consideringbettertermsoftradeandanimprovementinconsumers’andinvestors’expectationsrelativetotheonesconsideredinourpreviousReport.In2013thePeruvianeconomyisstillprojectedtogrow6.3percent.
28.Aspreviouslymentioned,theeconomy’spotentialgrowthwasslightlyabove6.0 percent at end 2011 and the growth of GDP and domestic demand areforecasttobeclosetotheirpotentialgrowthrateinthenexttwoyears.
41
Inf la t ion Report . March 2012
Projected evolution of expenditure components
29. In2012domestic demand wouldcontinuetoshowamoremoderatepaceofgrowthafterhavingdeclined fromagrowth rateof13.1percent in2010 to a rateof7.2percent in 2011. Domestic demand in 2012 is estimated to record a rate of 5.9percentduemainlytothelowerpaceofgrowththatprivateconsumptionandprivateinvestmentwouldregisterincomparisonwith2011.Thiswouldbeoffsetbyagreaterdynamismofpublicinvestment,whichisestimatedtogrow34.3percent.Withthis,thecontributionofpublicexpendituretogrowthwouldrisefromanegativevalueof-0.7percentagepointstoapositivevalueof2.1percentagepoints.
Table 11GDP AND DOMESTIC DEMAND
(Real%change) 2010 2011 2012* 2013* IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12
1. Domestic demand 13.1 7.2 5.6 5.9 6.1 6.5 a. Private consumption 6.0 6.4 5.6 5.8 5.8 5.8 b. Public consumption 10.0 4.8 5.3 5.3 4.9 5.1 c. Private investment 22.1 11.7 7.0 8.2 8.3 8.7 d. Public investment 27.3 -17.8 33.1 34.3 7.3 7.32. Exports 1.3 8.8 6.0 7.5 7.7 7.73. Imports 24.0 9.8 6.5 8.3 6.6 8.34. GDP 8.8 6.9 5.5 5.7 6.3 6.3
Memo Government expenditure 16.3 -4.2 14.7 15.2 5.9 6.0
IR:InflationReport.* Forecast.
Table 12GDP AND DOMESTIC DEMAND(Contributionstothereal%change)
2010 2011 2012* 2013* IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12 1. Domestic demand 13.1 7.5 5.8 6.2 6.4 6.8 a. Private consumption 4.1 4.2 3.7 3.9 3.8 3.8 b. Public consumption 0.9 0.5 0.5 0.5 0.5 0.5 c. Private investment 4.2 2.5 1.6 1.8 1.9 2.0 d. Public investment 1.5 -1.1 1.6 1.6 0.4 0.4 e. Inventory variation 1/ 0.2 1.4 0.2 -0.2 -0.2 -0.12. Exports 0.2 1.6 1.1 1.4 1.4 1.43. Imports 4.5 2.1 1.4 1.8 1.5 1.94. GDP 8.8 6.9 5.5 5.7 6.3 6.3MemoGovernment expenditure 2.4 -0.7 2.1 2.1 0.9 0.9
a. The Consumer Confidence Index has been on the optimistic side for 23consecutivemonths.
Graph 37CONSUMER CONFIDENCE INDEX: 2008 - 2012
Households’economicsituation
Source:IpsosAPOYO.Elaboration:BCRP.
J.08 J.09 J.10 J.11 J.12M M M M MM M M MJ J J JS S S SN N N N
Optimistic
56
45
49
44
46
39
36
42 41
38
44
4343
37
46
41
45
53
45
53
48
5551
50
5355 56
53
6158
56
65
5954
53
5959
64
58
59 5959
5659
56
61
68
Pessimistic
47
51
b. Thevolumeof importsofdurableconsumergoodshasshowna fasterpaceofgrowthinthefirsttwomonthsof2012,recordingarateof30percentinJanuaryandarateof41percentinFebruary.
43
Inf la t ion Report . March 2012
Graph 38VOLUME OF IMPORTS OF DURAbLE GOODS: 2008 - 2012
(12month%change)
0
20
-20
40
-40
60
80
30.3
41.4
J.08 J.09 J.10 J.11 J.12M M M MM M M MJ J J JS S S SN N N N
Graph 39URbAN EMPLOYMENT: 2004 - 2011
(%change)
Source:MTPE.
2004
2.7
2005
4.5
2006
7.2
2007
8.3
2008
8.3
2009
1.3
2010
4.2
2011
5.4Average2004-2011:5.2%
c. Thegrowthofemploymentinurbanareas,infirmswith10andmoreworkers,showedafasterpacein2011,risingfromarateof4.2percentin2010toarateof5.4percentin2011.Thisratewashigherthantheaveragegrowthrateofurbanemploymentintheperiod2004–2011.
31.Private investment grew 11.7 percent in 2011. A moderation of growth wasobserved over the year in this variable, which recorded two-digit rates untilQ2 and lower rates thereafter in a context of international uncertainty that ledenterprises to delay their decisions of investments. It is estimated that privateinvestmentwouldregisteralowergrowthratein2012thanin2011,inlinewiththemoderationofthegrowthofdemandforeseenforthisyear.
Several indicators reflect the evolution of private investment:
a. Businessexpectationsof theeconomic situation in the threemonthsaheadhave gradually improved during the second semester of 2011 and haverecordedtheirhighestlevelin11monthsinFebruary.
44
CENTRAL RESERVE BANK OF PERU
Graph 40EXPECTATIONS AbOUT THE ECONOMY IN THE NEXT 3 MONTHS: 2008 - 2012
J.08 J.09 J.10 J.11 J.12M M M M FM M M MJ J J JS S S SN N N N
Optimistic70 71
67 6974 71
6761
56
44
47
32
38
3335
39
53 51 5363
61
66 69 72 72
71
74
71
75
7171
70
71 70 68 66 65 65
46
49
47
51 535158 56
605758
Pessimistic
b. Economicagents forecast thatGDPwillgrowbetween5.0and5.5percentin2012.Arateofbetween5.6and6.0percentisestimatedfor2013sincegreaterdynamismisexpectedintheeconomyinthisyear.
Table 13SURvEY ON MACROECONOMIC EXPECTATIONS: GDP GROWTH(
(%)
Expectations up to: IR Sep.11 IR Dec.11 IR Mar.12*
* Survey made during the second half of February 2012.
c. Theproductionofelectricitycontinuestoshowahighpaceofgrowth,althoughwithlowerratesthantheonesobservedinthefirstsemesterof2011.
Graph 41ELECTRICITY PRODUCTION: 2008 - 2012
(12month%change)
-4.0
8.0
2.0
14.0
-2.0
10.0
4.0
16.0
0.0
12.0
6.0
8.1
5.67.9
J.08 J.09 J.10 J.11 J.12 F*M M M MM M M MJ J J JS S S SN N N N*Preliminary.
45
Inf la t ion Report . March 2012
Graph 42VOLUME OF IMPORTS OF CAPITAL GOODS: 2008 - 2012
(12month%change)
0
20
-20
40
-40
-60
60
80
100
J.08 J.09 J.10 J.11 J.12M M M MM M M MJ J J JS S S SN N N N F
6.115.9
3.2
Graph 43DOMESTIC CONSUMPTION OF CEMENT: 2008 - 2012
(Annual%change)
-10
-5
0
5
10
15
20
25
30
35
J.08 J.09 J.10 J.11 J.12M M M MM M M MJ J J JS S S SN N N N F
3.84.5
15.5
d. Thevolumeofimportsofcapitalgoodsalsoshowslowergrowthratesthantheonesobservedin2011.
e. Constructionhasshownsignsofarecoveryinthelastmonths,asreflectedinthedomesticconsumptionofcement.
32.The investment projects announced for the period 2012–2013 amount toUS$35.5billion,ahigherfigure than theone reported inDecember (US$33.5billion). Considering the evolution of business expectations and the announcedinvestment, the forecaston thegrowthofprivate investment in2012hasbeenrevisedupwardsfrom7.0to8.2percent.Iftheseinvestmentprojectscrystallized,thegrowthrateofinvestmentintheperiod2012–2013wouldbehigherthan8percent;thatis,higherthantheGDPgrowthrate.
(MillionsofUS$) 2012 2013 2012 - 2013 IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12 Mining 7,360 7,242 7,857 9,002 15,217 16,244Hydrocarbons 2,170 2,232 3,072 2,756 5,242 4,988Electricity 2,714 2,606 2,224 2,289 4,938 4,895Industry 1,040 1,082 640 830 1,680 1,912Infrastructure 1,055 1,211 895 1,049 1,950 2,260Other sectors 2,533 3,045 1,962 2,112 4,495 5,157
TOTAL 16,872 17,418 16,650 18,038 33,522 35,456
Source: Press media and information companies.
47
Inf la t ion Report . March 2012
Table 15ANNOUNCED MAIN INvESTMENT PROJECTS: 2012 - 2013
Sector Company Project name XstrataPerúS.A. LasBambas Minera Yanacocha S.R.L. Minas Conga SociedadMineraCerroVerdeS.A.A. CerroVerde JinzhaoMiningPerúS.A. PampadelPongo China Minmetals Corporation and Jiangxi Copper Company Limited El Galeno AngloAmericanQuellavecoS.A Quellaveco MineraChinalcoPerúS.A. Toromocho XstrataPerúS.A. Antapaccay CompañíaMineraAntaminaS.A. Expansion:Antamina Southern Perú Copper Corp. Peru branch Los Chancas ShougangHierroPerúS.A.A. MarconaMining HudBay Minerals Inc. Constancia CandenteCopperPerúS.A. CañariacoNorte GoldFieldsLaCimaS.A.A. Chucapaca MarcobreS.A.C. MinaJusta Southern Perú Copper Corp. Peru branch Toquepala MitsuiMining&SmeltingCo.Ltda.Perubranch Quechua MineraBarrickMisquichilcaS.A. Expansion:LagunasNorte VolcanCompañíaMineraS.A.A. Expansion:Volcan CompañíaMineraMilpoS.A.A. Magistral Minera Yanacocha S.R.L. Chaquicocha LaArenaS.A. LaArena VolcanCompañíaMineraS.A.A. Rondoni SaviaPerúS.A. LotZ-2B:Perforation,explorationandothers Perenco Peru Limited Exploration Lot 67 and pipeline PetrobrasEnergíaPerúS.A. Lot58andLotX PluspetrolPerúCorp.S.A. ExpansionofPiscoandMalvinasplantsHydrocarbons Cálidda Gas Natural del Perú Expansion of main grid TransportadoraofGasdelPerúS.A.(TgP) Expansionofgasandcapacityoftransportation SK Energy Exploration Lot Z 46 PluspetrolPerúCorp.S.A. ExplorationLots88and56 Contugas Ica pipeline RepsolYPFS.A Lot57-Kinteroni EnergíaAzulS.R.L. HydroelectricplantSantaMaría GeneraciónHuallagaS.A. HydroelectricplantofCerrodeChagila KallpaGeneraciónS.A. HydroelectricplantofCerrodelÁguila FénixPowerPerúS.A. Combinedcyclethermalpowerplant(naturalgas) Norwind Wind energy park Cerro Chocan Electricity EnersurS.A. ExpansionofChilca1 SNPowerPerúS.A. HydroelectricplantCheves KallpaGeneraciónS.A. KallpaIV Egecusco HydroelectricplantsAccoPucará EmpresaAdministradoraChungarS.A.C. HydroelectricplantBeloHorizonte LuzdelSurS.A.A. Gridandinfraestructureexpansion CorporaciónAcerosArequipaS.A. Expansionoflaminationplant(N°2) CementoAndino PlantexpansioninTarma Cementos Portland Cement plant Textiles Camones Expansion of production linesIndustry Cementos Lima Expansion of installed capacity Cementos Otorongo Contruction of cement plant CementosInteroceánicos CementplantArequipa Cementos Pacasmayo Expansion of plant AmericasPotashPeru Phospatesplant TASA Modernizationofplantsandpurchaseofnewships ConsorcioAPMTerminalsCallao ModernizationofNorthPier LíneaAmarillaS.A.C. ParqueRimacexpressway OdebrechtPerúIngenieríayConstrucciónS.A.C. IIRSASouthSection3:Inambari-lñapari ChancayPortS.A. Multipurposepier Infrastructure ConcesionariaVialdelSolS.A.-COVISOL Trujillo-SullanaSolHighway AutopistadelNorteSAC Pativilca–PortofSalaverryRoadNetworkNo.4 TrenLimaLínea1 OperationandMaintenance:Acquisitionofrollingmaterial Terminal Internacional del Sur Expansion of Port of Matarani CoviPeru RoadNº6:Pucusana-CerroAzul-Ica Terminales Portuarios Euroandinos Expansion of Port Paita TelefónicadelPerúS.A. OpticalfiberprojectatLosAndes AméricaMóvilPerúS.A.C. Expansion of infrastructure, capacity and technological innovation Other sectors GrañayMonteroVivienda(GMV) Housingprojects BesalcoS.A. Realstate Cencosud New superpmarkets and malls
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CENTRAL RESERVE BANK OF PERU
33.Public investment declined 17.8 percent in 2011. A greater level ofimplementationwasobserved in the investmentprojectsof regionaland localgovernments, as foreseen in our previous Inflation Report. Public investmentwould show a significant recovery in 2012, returning to more sustainablegrowthratesin2013.Consideringtheevolutionofprivateinvestmentandpublicinvestment,itisestimatedthattheratiooffixedgrossinvestment-to-GDPwouldbeover26percentin2013.
35.Showingafasterpaceofgrowththantheaveragegrowthrateintheperiod2004–2010(3.7percent),theproductionofprimary sectors grew4.4percentin2011.Adifferentiatedconductwasobservedinthedifferentsectors.Fishingrecordedagrowthrateof29.7percent,showinganincreaseinfishcatchforbothhumanandindustrialconsumption.Theproductioninthesubsectorofagriculturealsogrewdespitethecoldweatherconditionsthataffectedtheproductionofsomecrops,especially in the second half of the year, while the production in the livestocksubsectorgrew5.2percentreflectingmainlyahigherconsumptionofbeef.Ontheotherhand,growthinmetallicminingdecreasedforthesecondconsecutiveyearduetoalowerproductionofzinc,silver,andlead.
than-normal periods of cold temperatures and the intensity of rains during themonthsofFebruaryandMarchonsomecrops.Forexample,thelowproductionof mango due to the negative effect of La Niña on the yield of this crop wasaggravatedbyintenserains.Nonetheless,othercropslikericewerefavoredbythegreateravailabilityofwater.Moreover,someexport-orientedcropssuchascoffee,olive,grapes,andcottonwouldshowhighgrowthrates.
According to informationprovidedby Imarpeandsomefishingcompanies, thefishingsectorwould reduce itsquotaofanchovycatch toabout6million tons,afterhavingextractednearly7millionmetrictonsofanchovyin2011.
TheminingandhydrocarbonssectorwouldregisteralowerratethanforeseeninourpreviousReportduetolowerproductioninthecaseofbothmetallicminingand hydrocarbons extraction despite the expansion of Southern and Antamina,theonsetofoperationsatXstrataTintaya’scopperprojectofAntapaccay,andtheproductionofgoldatTantahuatayandLaArena.Thelowervolumesconsideredinthecaseofothermetalsarebasedontheproductionrecordedinthefirstmonthsoftheyearandontheestimatesofthecompaniesinvolved.
Theproductionofthesubsectorofhydrocarbonswasalsoreviseddownwardsdueto the lower extraction of crude projected given the exhaustion of Pluspetrol’slot I-AB in Loreto. This lower extraction of crude would be offset by a higherproductionofnaturalgasinPluspetrol’slots88and56.
36.Non-primary sectors grew7.4percentin2011,showingaslightlylowerratethan the average rate of 7.5 percent registered in 2004–2010. The growthrates of non-primary sectors moderated over the year after the high ratesrecordedin2010,especiallyinthesectorsofnon-primarymanufacturingandconstruction.
Theprospectsforgrowthinthesectorofmanufacturingin2012arebasedonthebettertermsoftradeconsideredtodayandonthetrendregisteredbydomesticdemandinbothconsumptionandinvestment.Thedemandforconsumergoodssuchasfoodproducts,beverages,andtextileswouldbedrivenbybetterconsumerexpectationsandbybetterincomesforthepopulation,whiletheimplementationofworksbylocalandregionalgovernmentswouldbedrivenmainlybyincreasedgovernment spending.Moreover, the announcementsof increased investmentsin housing compounds and malls would bring about a higher production ofconstructionmaterials,suchascement,glass,iron,andsteel.
In this context of higher spending in public and private investment, growth inthe construction sector hasbeen revisedupwardsdue to the signsof recoveryobservedduringthefirstmonthsoftheyear.
Asreflected intheBCRPsurveyonmacroeconomicexpectations, in Januarytheindicatorofutilizationofinstalledcapacityinnon-primarymanufacturingshowedaslightly lower level than in theprevious twomonths,witha rateclose to theaveragerateinthesecondsemesterof2011.
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CENTRAL RESERVE BANK OF PERU
Graph 52RATE OF INSTALLED CAPACITY UTILIZATION OF NON PRIMARY MANUFACTURING
(%)
818079787776757473727170
J10 J11 J12M MM MJ JS SN N
78.0
79.878.8
77.8 77.7
Source:BCRP’sSurveyofMacroeconomicExpectations.
Table 16GROSS DOMESTIC PRODUCT BY ECONOMIC SECTORS
(Real%change) 2010 2011 2012* 2013* IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12
37.Everygrowthforecastmaybeaf fectedbypossibleeventsthatcandiverttheforecastfromitscentralscenario.Inthecurrentcontextofincreaseduncertainty,the materialization of some risks could imply a dif ferent GDP growth ratethan the one originally forecast. In a scenario of risks that have a domesticorigin,bothhouseholdandbusinessexpectationsdeteriorateandgenerateanegative ef fect on the growth of consumption and investment. Likewise, amore critical international environment would imply a lower global growththat would af fect both traditional and non-traditional Peruvian exports andwouldgenerateanegativeimpactonthecountry’seconomicactivity.Theriskscenarios considered in this Report are discussed in the chapter Balance ofRisks.
SUPPLY - DEMAND BALANCE AT THE NATIONAL AND REGIONAL LEvELS, 2012 - 2013
In 2011 the effective power of Sistema Eléctrico Interconectado Nacional (SEIN) amounted to6,444 MW. Given that the maximum demand in 2011 was 4,961 MW, the system’ reserve margin at year end was 30 percent1.
The reserve margin measures excess supply as a percentage of demand: a positive reserve margin implies a surplus of electricity that guarantees an unlimited power supply at the national level under optimal conditions of operation and without any weather, operational, or transmission constraints.
However, the supply that may actually be provided is negatively affected over the year by different factors,suchasasub-optimaloperationofthesystem(e.g.generationortransmissionfailures),hydrologicalconditions(e.g.dryseasonorscarcerainsbetweenMayandNovember),operational
1 (Effectivepower–maximumdemand)/(Maximumdemand).
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Inf la t ion Report . March 2012
conditions (e.g. maintenance programs and constraints in the supply of fuel/transportation ofnaturalgas),aswellasbylimitationsinthecapacityofthetransmissionsystem.AccordingtotheComitédeOperaciónEconómicadelSistema(COES),thereservemarginwouldrangebetween8and 12 percent in 2012 and between 8 and 23 percent in 2013.
These reserve estimates include the energy that will be generated with the onset of operations at two coldreservepowergenerationplants–oneplantinthenortharea2,inTalara(200MW)andtheotherplant in the south area3, in Ilo(564MW)–sinceSeptember2013.Thesedual thermalgenerators–whichoperatebothwithdieselandnaturalgas–areexpectedtoreinforceSEIN’scapacitytosecureacontinuoussupplyofelectricitygiventhat,despitetheirhigher-than-averagefixedandvariablecosts,their startup and synchronization time to provide electricity in case of contingencies is only 30 minutes.
AsregardstheSEINareas,deficitsbetweentheregionalmaximumdemandandlocalgenerationof electricity would be observed in the north and south regions of the system during 2012. Because SEIN has a positive reserve margin nationally due to the surplus registered in the center region4 whichwouldbyfaroffsetanyregionaldeficit,noriskofanelectricityrationingisforeseenif thesystem operates under optimal conditions and if there are no electricity transmission constraints.
These regionaldeficitswouldbe reversedatend2013with theonsetofoperationsat thecoldgeneration reserveplants (CGR), aswell aswith severalwindgenerationprojects in thenorth(110MW)andthehydroelectricpowerplantofMachuPicchuII(100MW)inthesouth.Assumingthat there will be no restrictions for the transmission of electricity in the north and south regions, this additional supply in 2013 could actually be supplied and there would be no risk of rationing. However,thelowerrelativeefficiencyofCGRscomparedtootherpowergenerationtechnologies,such as hydroelectric power plants or combined cycle power plants, will imply an impact on electricity rates.
In order to complement the CGR, it is essential to ensure in the short-term that the SEIN networks are able to transmit the electricity required to and within the north and south areas in a timely and secure manner. However, risks of partial interruptions of supply are observed today mainly in the south region due to the congestion registered by the main transmission grids of this area to import electricity from the center region and to transmit energy in the southern region.
Withoutnewinvestmentsintransmissionprojects,thissituationwouldbecomemoresevereinthefuture given that the demand for electricity in the south will increase in the medium-term with the onsetofoperationsofseveralminingprojectsinthenextfiveyears.
Therefore,itisessentialtoensuretheimplementationofthreetransmissionprojectsinthesouthernregion of SEIN that currently show delays in the operation of the transmission lines involved. These projectsarenecessarytostrengthenthetransmissionofelectricitytoandinsidethisregion.
• Intra – South Transmission Grid: Required to transmit the electricity generated by new generation projects due to start operations between 2013 and 2015 (C.H.Machu PicchuII,C.H.SantaTeresa,andC.T.Quillabamba)andtoreinforcetheflowbetweenCuzcoandArequipa.
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Inf la t ion Report . March 2012
SEIN: PROJECTS OF TRANSMISSION LINES WITH DELAYS(South)
* Date of entry into operation of concession contracts as. Source: COES. Elaboration: BCRP.
Someofthemainreasonsaccountingforthedelaysofnotlessthansixmonthsthattheseprojectsshow in their implementation are uncertainty about the scope and application of the Prior Consultation Law(Chilca-Marcona-Montalvo)andabouttheimplicationsoftheexpansionofprotectedareasof theMachuPicchu-Choquequirao reserve approved by theMinistry for EnvironmentalAffairs(MachuPicchu-Abancay-Cotaruse).
EvenwiththeoperationoftheCRGatend2013,thepostponementofthesetransmissionprojects,together with the limitations observed today in the transportation of gas natural, shows a balance inwhichthereareconsiderablerisksofpartialandtransitoryrationingofelectricityformajorclientsduring 2012 and 2013 due to transmission constraints and/or to SEIN failures.
39.In 2011 the current account deficit in the balance of payments amounted toUS$2.267billion,afigureequivalentto1.3percentofGDP(in2010thedeficitwasequivalentto1.7percentofGDP).Toagreatextent,thisresultreflectsthebetter evolution of exports, which grew 8.5 percent in terms of volume and20.0percent intermsofpricescomparedtothepreviousyear.Onthesideofthefinancialaccount,theflowsofforeigndirectinvestmentanddisbursementsforprojectsmaintainedsimilarlevelstothoseobservedin2010,buttherewasalowerflowoflongtermbankdisbursementsandofnon-residents’purchasesofassets.
40.Acurrentaccountdeficitof1.5percentofGDP is forecast for2012. This lower
deficitthantheoneforeseeninourDecemberreport(2.2percent)reflectsmainlythe improvementobserved in the termsof tradedue to the rise in thepriceofcommodities,whichwouldbeoffsetbyahigherfactorincomeassociatedwiththehigherpricesofexports.In2013thecurrentaccountdeficitwouldbeequivalentto1.8percentofGDP,lowerthantheoneestimatedinourReportofDecember(2.1percentofGDP).
Graph 56CURRENT ACCOUNT OF THE bALANCE OF PAYMENTS: 2004-2013
(%ofGDP)
*Forecast.2004 2005
0.0
1.4 1.4
0.2
-1.7 -1.3 -1.5 -1.8
-4.2
3.1
2006 2007 2008 2009 2010 2011 2012* 2013*
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Inf la t ion Report . March 2012
41.Exportsin2011amountedtoUS$46.268billion,whichrepresentsanincreaseof30.1percentcomparedto2010.Thevolumeofexportsgrew8.5percentduetothegrowthofexportsoffishmeal(19.3percent),coffee(27.8percent),andnon-traditionalproducts (20.1percent), especially agricultural, fishing, andchemicalproducts.
Peru’s exports have increasingly diversified in recent years and Latin AmericancountrieshavebecomethemaindestinationofPeruviannon-traditionalexports.Becauseofthis,thecountry’sshareofexports-to-GDPhasrisenfrom13percentatthebeginningofthe2000sto26.2percentin2011,thehighestlevelregisteredduringallthisperiod.
Table 17BALANCE OF PAYMENTS
(MillionsofUS$) 2010 2011 2012* 2013* IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12 I. CURRENT ACCOUNT BALANCE -2,625 -2,267 -4,258 -2,955 4,418 -3,935 % of GDP -1.7 -1.3 -2.2 -1.5 -2.1 -1.8 1. Trade Balance 6,750 9,302 6,862 9,065 8,152 9,968 a. Exports 35,565 46,268 45,093 48,660 49,548 53,425 b. Imports -28,815 -36,967 -38,231 -39,595 -41,397 -43,456 2. Services -2,345 -2,132 -2,342 -2,409 -2,489 -2,722 3. Investment Income -10,055 -12,636 -12,245 -13,028 -13,774 -14,825 4. Current transfers 3,026 3,200 3,467 3,416 3,694 3,643 Of which: Remittances 2,534 2,697 2,955 2,903 3,181 3,129
II. FINANCIAL ACCOUNT 13,595 6,978 7,058 9,955 7,218 7,935 Of which: 1.PrivateSector(longandshortterm) 13,887 8,467 6,626 8,714 7,261 8,049 2. Public Sector -1,022 -104 412 886 -48 -118
III. BALANCE OF PAYMENTS (=I+II) 10,970 4,711 2,800 7,000 2,800 4,000
In terms of volume, exports would increase 7.3 percent in 2012 (5.6 percent
wasestimated inourpreviousReport),given thathighervolumesofexportsoffishmeal andfishoil andofnon traditionalproducts areexpected in a scenarioofhighergrowthinourtradingpartners.In2013,thevolumesofexportswouldgrow8.9percent,mainlyasaresultoftheonsetofoperationsinsomenewminingprojects,suchasToromocho.
43. Importsin2011were28.3percenthigherthanin2010andamountedtoUS$36.967billion. The average volume of imports grew 12.8 percent, mainly as a result ofhighervolumesofimportsofdurableconsumergoods,industrialinputs,andcapitalgoods(excludingconstructionmaterials).Thisincreaseinthevolumeofimportsisconsistentwithaneconomyinexpansionthatneedstoincreaseitsinvestmentlevelsandacquireorrenewcapital,aswellaswiththepopulation’sbetterlevelsofincomethatreflectinanincreaseddemandfordurableconsumergoods.
44.Therefore, the forecast on the surplus in the trade balance in 2012 has beenrevisedupwardsconsideringthatbettertermsoftradeandhighervolumesthantheonesestimatedinourpreviousReportarenowprojected.Thus,thetradesurplusforecasthasbeenrevisedfromUS$6.9billion(InflationReportofDecember)toUS$9.1billion.
45. In2011 the long termprivatefinancialaccount,whichamounted toUS$9.930billion,was lower byUS$3.421billion than in 2010. This drop in the financialaccount resultedboth fromthedeclineobserved in loans to thefinancialsector(downbyUS$1.544billion)inacontextofinternationaluncertaintyandfromthedecline registered in termsofnon-residentspurchasesofgovernmentbonds inthedomesticmarket(downbyUS$2.504billion).
Thefinancialaccount in2012wouldbehigher thanestimated inourDecemberreport (US$6.6billion)andwouldamount toUS$8.6billion.Thisdifference isexplainedmainlyby theevolutionobserved in thefirstquarter so far this year:significantcapitalinflowsfromportfoliooperationscarriedbyprivatefirms,longtermdisbursementsforthefinancialsector,andnon-residents’acquisitionofbothsovereignbondsandofotherassetsinthesecondarymarket.
BOX 3GROWTH AND DIvERSIFICATION OF NON-TRADITIONAL EXPORTS
(1996 – 2011)
Theeconomicliteraturehighlightstheroleofthegrowthanddiversificationofexportswithaddedvalue as a factor that contributes to sustained economic growth5: contexts of increasing openness andtradediversificationarebasedonfirmsdomiciledinPeruwhichcreatemoreefficientprocesses,carry out innovations, adapt technology, adopt more demanding quality standards, and invest in human and physical capital.
Non-traditionalexports(NTX)maybedefinedasthoseexportproductswhichhaveahigherdegreeoftransformationorincreaseinaddedvalue.Incomparisontotraditionalexports(TX),whicharemainly the result of the exploitation of primary resources, NTX tend to generate a greater impact on GDP,productivity,incomes,andemployment.ThesignificantgrowthanddiversificationofPeru’sNTXobservedinthelastfifteenyearsisworthanalyzinginmoredetail.
Growth of exports with added value
Peru has been showing increasing trade openness in recent years: total exports and imports of goods and services as a percentage of GDP has recorded unprecedented levels with this ratio rising from31.2 in1996 to53.4percent in2011.Exportsaccountsignificantly for thecountry’sincreasing trade openness since they have grown by a real annual rate of 7.1 percent on average duringthisperiod,showingahighergrowthratethanGDPinthesameperiod(4.9percent).
This growth of exports is partially due to the positive performance of NTX. Between 1996 and 2011, NTX recorded an annual average growth of 13.1 percent and the value of NTX, which increased
5 Various studies suggest that trade openness is a positive factor for the growth of productivity and for economic growth(Edwards,1997;FrankelandRomer,1999).Ontheotherhand,theliteraturehighlightstheroleofdiversificationof thesupplyofexportablegoodsasameanstoreducerisksanddecreasethevolatilityoftraditional tradeflows(GhostandOstry,1994;BleaneyandGreenaway,2001).Moreover,severalstudiessuggest that theconcentrationofexportsona limitedgroupofproducts (e.g.primarygoods)canhaveanegativeeffectoneconomicgrowth(SachsandWarner,2000;Al-Marhubi,2000;Hesse,2006;LedermanandMaloney,2007;IllescasandJaramillo,2011.
oversix-foldinthepast15years–fromUS$1.59billionin1996toUS10.13billionin2011–,nowexceedsUS$10billion.IncontrastwithTX,theevolutioninthevalueofNTXismainlyexplainedby thegreater volumesof theseexports,which reflects a growing real penetrationofPeruvianproducts with added value in international markets.
Diversification of exports with added value
ThediversificationofNTX is two-fold: there isadiversificationofNTX in termsofnewmarketsandadiversificationofNTXintermsofnewproducts.Inthelastfifteenyears,thediversificationof Peruvian exports has been marked by the strong growth of the supply of exports through new products.In2011,goodsthatwerenotexportedin1996accountedfor29percent(US$2.98billion)ofthetotalvalueofNTX(asreflectedintariffsub-items).
EXPORTS OF NON-TRADITIONAL PRODUCTS BY COUNTRY OF DESTINATION(MillionsofUS$)
Non-traditional exports: Fundamentals and pending agenda
For a small open economy like Peru, the growth and diversification of exports with addedvalue depends basically on endogenous factors, such as the country’s degree and evolution of competitiveness, at the macro level, and of business competitiveness, at the micro level.
Peru’sexportsbegantogrowatafasterpace inthe1990swhensomefirstgenerationreforms(e.g.unilateraltariffreduction)wereintroducedandthengrewsubstantiallyinthelastdecadewiththeconsolidationof tradeopennessasaStatepolicy (e.g. free tradeagreements). In thisway,at themacro level trade liberalizationwasconsolidatedwithmacroeconomicstability(fiscalandmonetarydiscipline),stableregulationsforinvestment,financialsoundness,andtheimprovementof national competitiveness, all of which contributed to gradually generate a business climate in the country oriented towards a model of growth based on private investment and exports. In addition to this, at the micro-level the country saw improvements in productivity and a gradual modernization of the private export sector towards business models based on quality and differentiation, which have been key to explain the growth of NTX. However, there are still many outstanding challenges inthisareasince,justasin1996,mostcompaniesexportlessthanUS$5million.
While factors of an exogenous nature, such as the evolution of exchange rates may play a role NUMBER OF COMPANIES ACCORDING TO THE vALUE OF THEIR NON TRADITIONAL EXPORTS
in the case of exports of a few products or in the case of exports for a few destinations, recent empirical evidence on Peru’s exports suggests that variations in the real foreign exchange rate havehadnosignificantimpactonthegrowthofPeruvianNTX.Furthermore,thispossibleeffecthasevenbeenreducedduepreciselytothegrowingdiversificationthatPeruvianexportfirmsaredeveloping in terms of countries and of the products they export6.
However, given their still high potential of growth –only 22percent ofPeruvianexports are non-traditionalproducts–,thependingagendatofosterthisgrowthiswideandrequirestheimplementationofpendingreforms(e.g.propertyrights,judicialsystem,qualityofeducation,infrastructure,technology,competitioninthefinancialsystem,flexiblelaborlaws,eliminationofbureaucraticbarriers),aswellasthe generation and consolidation of opportunities to strengthen production linkages.
6 Potencial y Limitantes de las Exportaciones No Tradicionales, Nota de Estudios No. 15, BCRP, 2008.
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CENTRAL RESERVE BANK OF PERU
IV. Public finances
47.Year2011wascharacterizedbyagrowthofgovernmentrevenuesconsistentwith the good performance of economic activity and the high prices of ourcommodities. Some limits on public spending were established in the firstmonthsoftheyeartorecoverafiscalspacedeemednecessaryinascenarioofhighuncertainty in internationalmarketsassociatedwiththeevolutionoftheexternal financial crisis, especially in Europe. Some measures were adoptedtowards the end of the year to reverse the negative growth rates of publicexpenditure,especiallyinvestment,whichhadbeenregistereduntilQ3.Thesemeasures and the risk that the unspent resources would not be reallocatedto thebudgets of dif ferentgovernmentministries led to a stronggrowthofspendinginDecember.
As a result of this, in 2011 the non financial public sector (NFPS) recorded aneconomic surplus of 1.9 percent of GDP, which contrasts with the deficitregistered in 2010 (0.3 percent). This balance resulted, on the one hand, fromtheincreaseofthecurrentrevenuesofthegeneralgovernment(upbyareal13.6percent)and,ontheotherhand,fromtheslowdowninthegrowthofspending,whichgrewbyareal1.9percent(versus11.8percentin2010).
Graph 63ECONOMIC bALANCE OF THE NON FINANCIAL PUbLIC SECTOR: 2004-2013
(%ofGDP)
*Forecast.
2004
-1.1
2005
-0.3
2006
2.3
2007
2.9
2008
2.4
2009
-1.3
2010
-0.3
2011
1.9
2012*
1.1
2013*
1.4
48.Afiscalsurplusof1.1 percent of GDP isforecastfor2012.Thisbalanceisconsistentwithamoderategrowthofcurrentrevenuesandwithagrowthofnonfinancialexpenditure thatwould be reflecting that both local and regional governmentsareovercomingthebudget implementationproblemsthey faced in2011giventhatnewauthoritiestookofficeinprovinceandregionalmunicipalities.TheresultestimatedforthisyearisslightlyhigherthantheoneconsideredinourDecember
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Inf la t ion Report . March 2012
The forecast scenario estimates a balance of 1.4 percent of GDP in theNFPSin2013,takingintoaccountvariationsinrevenuesandexpendituresthat aremore consistentwith a long term trend. It isworthpointingout,however,thatthescenarioonwhichthisforecastisbasedmaybeaf fectedbytheevolutionofthepricesofourcommoditiesandbythedemandforourexports.Ifanyofthelatterdeclined,thiswouldimplydeteriorationintheresultsforeseen.
Evolution of fiscal revenues
49. In 2011 the current revenues of the general government amounted to 21.0percent of GDP, which means that these revenues grew by a real 14 percent.Within tax revenues–whichgrew13percent–, income taxshowed thehighest
Table 22NON FINANCIAL PUBLIC SECTOR
(%ofGDP)
2010 2011 2012* 2013* IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12 1. General government current revenues 1/ 20.0 21.0 21.0 21.2 21.0 21.2 Real % change 18.6 13.6 4.6 5.5 6.6 6.3
2. General government non financial expenditure 19.2 18.1 18.9 18.9 18.4 18.7 Real % change 11.8 1.9 10.7 9.6 3.6 5.4 Of which: a. Current 13.1 13.0 12.8 12.9 12.4 12.7 Real % change 8.4 7.2 2.6 3.6 3.1 4.5 b. Gross capital formation 5.5 4.7 5.7 5.6 5.6 5.7 Real % change 20.8 -7.7 33.6 25.1 4.8 7.1
1/ The central government includes the ministries, national universities, public agencies and regional governments. The general government has a wider coverage that includes the central government, social security, regulators and supervisors, government charity organizations and local governments.
IR:InflationReport.* Forecast.
Report (1.0 percent of GDP) due to the higher growth expected in the currentrevenuesofthegeneralgovernmentasaresultofthehigherpricesforeseenforourexportsofminerals.
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Table 23 THIRD CATEGORY INCOME TAX 1/ (Millionsofnuevossoles) 2010 2011 Real % change
TOTAL REvENUES 14,652 19,321 27.6
Mining 4,831 6,290 26.0Other Services 2/ 4,526 5,716 22.2Manufacturing 1,891 2,505 28.2Commerce 1,926 2,492 25.2Hydrocarbons 864 1,474 65.1Construction 507 706 34.7Fishing 80 87 5.2Agricultureandlivestock 26 50 86.1 1/ Non including income tax regularization, non residential rents.2/Includesrealestateactivities,ofbusinessandrent,telecommunications,financialintermediation,health,socialservices,tourismand
hospitality, generation of electricity and water, and others.Source: Sunat.
50.Moreover, in2011theVATgrew10percent inrealterms.Thisgrowth,whichwas the result of a 9 percent growth in the domestic VAT and a 12 percentgrowthintheexternalVAT,wasregisteredalthoughtheVATratewasreducedfrom19 to18percentsinceMarch1,2011.Non-tax revenuesalsoshowedaremarkablegrowth(16percent),particularlyinthecaseofoil,gas,andminingroyaltieswhichgrewbyareal44percentduetotheeffectofthehighpricesofcrudeandminerals.
7 The lawmodifying theLawonMiningRoyalties (LawN°29788), the lawestablishing theSpecialTaxonMining(LawN°29789)andthelawestablishingthelegalframeworkfortheSpecialLevyonMining(LawN°29790)werepublishedonSeptember28,2011.
byareal10percent,asaresultofwhichtheratioofthistaxgrewfrom8.2to8.3percentinGDPtermsin2011eventhoughtherateofthistaxwasloweredfrom19to18percentthisyear.ThepositiveperformanceofthePeruvianeconomyandthemeasuresadoptedtoexpandthetaxbase,amongwhichtheextensionofthetaxwithholdingsystemtootherproductsstandsout,havecounterbalancedtheimpactof the reductionof this tax rate. Themeasures aimedat expanding the taxbasewillreflectinthefollowingyears,allowingtheVATtoincreaseinGDPtermsby0.2percentagepointsin2012and2013incomparisonwiththelevelrecordedin2011.
8 The monthly payments that companies make as payments on account of the income tax are determined on the basis of a ratio applied to the net income in the month. The ratio, in this case, is obtained by dividing the taxforfiscalyear2010bythecompany’stotalnetincomeinthesameperiod.
Graph 65INCOME TAX AND EXPORT PRICE INDEX: 2004-2013
53. In 2011 revenues from tariffs on imports fell from 0.4 to 0.3 percent of GDP(26percentinrealterms),reflectingthereductionsoftariffratesimplementedinDecember2010andApril2011,whichreducedtheeffectivetariffsbyupto1.3percent.Thetradeagreementssignedwithothercountries,whichimpliednilorverylowtariffratesforsomeproductshavealsoaffectedtheevolutionoftheserevenues,althoughtoalowerextent.Theseeffectshavebeenpartiallyoffsetbythegrowthofimportsduringtheyear.Therevenuesfromimportdutiesareexpectedto remain at similar levels in the next years since no further tariff reduction isforeseen.
Graph 67IMPORT DUTIES AND EFFECTIVE RATE: 2004-2013
2004
Importduties Effectiverate1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
9.08.07.06.05.04.03.02.01.00.0
%GDP %
2005 2006
0.9
2007
0.7
2008
0.5
2009 2010
0.4
2011
0.3
Effectiverate
2012*
0.3
2013*
0.3
1.2
0.4
*Forecast.
54.The revenue from theexcise tax,whichwas equivalent to1.0percentofGDPin2011,waslowerby0.1percentagepointsthantherecordedin2010.Inrealterms, this represents adeclineof 2percent as a result of thedrop registeredin revenue fromtheexcise taxon fuels (10percent)due to the tworeductionsestablishedontherateofthistaxinJanuaryandJuneoflastyear.Thiseffectwaspartiallyoffsetbyahighercollectionoftheexcisetaxonothergoods–particularlybeers, liqueurs, soft drinks, and cigarettes–, which rose 7 percent. In 2012 theexcisetaxisexpectedtodeclineinGDPtermsgiventhatthereductionoftherateoftheexcisetaxonfuelsinJune2011impliesanegativevariationintherevenuesfromthistaxinthefirstsemesterof2012.
Table 25GENERAL GOvERNMENT NON FINANCIAL EXPENDITURE
(Real%change) 2010 2011 1Q. 2Q. 3Q. 4Q. Year 1Q. 2Q. 3Q. 4Q. Year I. CURRENT EXPENDITURE 21.5 9.2 3.0 3.3 8.4 3.4 7.9 8.1 8.6 7.2 National government 26.0 9.6 1.6 2.1 8.5 6.9 9.6 11.3 3.6 7.7 Regional governments 6.0 3.7 2.7 0.8 3.2 -0.2 2.2 1.3 21.4 6.9 Local governments 24.2 16.1 11.5 14.6 16.1 -11.8 6.9 2.4 17.8 5.3 II. CAPITAL EXPENDITURE 25.6 49.0 21.3 5.0 20.2 -22.3 -15.9 -21.5 5.5 -9.6 National government 31.2 85.8 25.6 19.1 35.7 7.3 3.6 -6.5 -11.1 -3.5 Regional governments 50.9 45.1 26.9 -5.4 17.6 -10.4 -26.4 -28.2 13.3 -9.5 Local governments 11.7 17.0 15.6 -2.1 8.1 -59.7 -38.7 -30.5 19.5 -16.4 III. TOTAL EXPENDITURE 22.3 19.3 8.2 3.9 11.8 -2.0 0.3 -1.2 7.4 1.9 National government 26.7 22.1 5.5 6.1 13.5 6.9 8.1 7.8 -0.4 5.2 Regional governments 12.9 13.7 9.6 -1.7 7.4 -2.3 -6.7 -8.5 18.2 1.6 Local governments 17.9 16.6 13.9 3.3 11.3 -34.7 -17.7 -17.3 18.9 -7.3
Table 26GENERAL GOvERNMENT NON FINANCIAL EXPENDITURE
(Contributiontothereal%change) 2010 2011 1Q. 2Q. 3Q. 4Q. Year 1Q. 2Q. 3Q. 4Q. Year I. CURRENT EXPENDITURE 17.1 6.9 2.2 2.1 5.9 2.7 5.4 5.6 5.4 4.9 National government 13.9 4.8 0.8 0.9 4.1 3.8 4.5 5.2 1.5 3.6 Regional governments 1.0 0.6 0.4 0.1 0.4 0.0 0.3 0.2 2.4 0.9 Local governments 2.2 1.5 1.0 1.1 1.4 -1.1 0.6 0.2 1.4 0.5 II. CAPITAL EXPENDITURE 5.2 12.5 6.0 1.9 5.9 -4.7 -5.1 -6.8 2.1 -3.0 National government 2.6 8.5 2.5 2.6 3.9 0.7 0.6 -0.7 -1.8 -0.5 Regional governments 1.6 2.2 1.6 -0.4 1.0 -0.4 -1.5 -1.9 1.0 -0.6 Local governments 1.1 1.8 2.0 -0.3 1.0 -5.0 -4.1 -4.1 2.8 -2.0 III. TOTAL EXPENDITURE 22.3 19.3 8.2 3.9 11.8 -2.0 0.3 -1.2 7.4 1.9 National government 16.5 13.3 3.2 3.5 8.0 4.4 5.0 4.4 -0.2 3.1 Regional governments 2.6 2.7 1.9 -0.3 1.5 -0.4 -1.3 -1.7 3.4 0.3 Local governments 3.2 3.3 3.0 0.7 2.4 -6.0 -3.5 -3.9 4.3 -1.5
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Inf la t ion Report . March 2012
Themeasuresadoptedbythegovernmentinthefirsthalfof2011toensurethatthefiscal ruleestablished in the FinancialBalanceActwouldbemet–a surplusof 2 percent of GDP in the first semester–, together with the difficulties facedby the new authorities of the regional and local governments in the executionof their budgets –particularly in terms of investments– led to negative growthratesinexpenditureinmostoftheyear.Twoemergencydecrees9wereenactedinSeptemberandinOctobertostimulategovernmentspendingandreversethedecliningtrendofexpenditure.
Thesemeasures,associatedinturnwiththeriskthatthebudgetsofthedifferentgovernment sectors would not be allocated the resources assigned to them,contributedalsotothefactthatexpenditureinthegeneralgovernmentregisteredhigh ratesofgrowth inDecember (localgovernments increased their spendingbyareal39percent, regionalgovernments increaseditby29percent,andthenationalgovernmentby12percent).Thesesignificantvariationstranslatedintoagrowthof7percentinthenonfinancialexpenditureofthegeneralgovernmentin Q4-2011, thus allowing the reversal of the negative trend that expenditureshoweduntilthen.Finally,nonfinancialexpenditureatend2011was2percent.Bycomponents, currentexpendituregrew7percent,whilecapitalexpendituredeclined10percentduetoaweakexecutionofinvestmentprojects.
56.A realgrowthof10percent isestimated innonfinancialpublicexpenditure in
Graph 69GENERAL GOvERNMENT NON FINANCIAL EXPENDITURE: 2004-2013
(Real%change)
*Forecast.
2004
4.7
2005
10.2
2006
7.0
2007
10.8
2008
11.1
2009
10.7
2010
11.8
2011
1.9
2012*
9.6
2013*
5.4
78
CENTRAL RESERVE BANK OF PERU
measuressuchasmovingforwardtheprocessesofselectionofprojectsfor2012andestablishing the continuityof investments,whichmeans that the resourcesforinvestmentprojectsthathavenotbeenaccruedbyDecember31,2011,maybeincludedinthe2012budget.In2013nonfinancialexpenditurewouldgrow5percent,inlinewithalongtermgrowthtrend.ItshouldbepointedoutthattheforecastsonpublicexpenditureconsideredinthisbaselinescenarioareconsistentwiththefiscalrulesonthedeficitandgrowthofexpenditurecontainedintheFiscalResponsibilityandTransparencyAct.
Graph 70NON FINANCIAL CURRENT EXPENDITURE OF THE GENERAL GOVERNMENT: 2004-
2013(Real%change)
*Forecast.2004
4.3
2005
9.7
2006
3.5
2007
9.2
2008
5.6
2009
3.2
2010
8.4
2011
7.2
2012*
3.6
2013*
4.5
Graph 71GENERAL GOVERNMENT CAPITAL EXPENDITURE: 2004-2013
(Real%change)
* Forecast.2004
7.0
2005
12.9
2006
24.8
2007
17.7
2008
32.7
2009
34.1
2010
20.2
2011
-9.6
2012*
25.0
2013*
7.3
Structural economic balance and fiscal impulse
57.Thestructural economic balance is thebalancethatwouldbeobtained ifGDPwereatitstrendlevelandifthepricesofmineralandhydrocarbonsexportswereattheir longtermvalues.Thisbalanceiscalculatedisolatingtheeffectsthatthebusiness cycle and the higher prices of mining and hydrocarbon exports haveon the revenuesof thegeneralgovernment.This indicatorwasnegativeby0.5percentofGDPin2011.Itisestimatedthatin2012thisbalancewoulddeteriorateandshowadeficitof1.2percentofGDP,resumingadownwardtrendthereafterin2013.
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58.Thechangeinthestructuralbalancedeterminesthefiscalimpulse.Thisindicatorallowsus to isolate theef fectof fiscalpolicyondomesticdemandexcludingthe ef fects of the economic cycle. In 2011 the fiscal policy has played acontractiveroleduetotheslowdownregisteredinthepaceofgrowthofpublicexpenditure. The opposite situation, that is, an expansionary fiscal positionwouldbeobservedin2012giventhegrowthofpublicspendingprojectedforthisyear.
Graph 72CONVENTIONAL AND STRUCTURAL bALANCE
OF THE NON FINANCIAL PUbLIC SECTOR: 2004-2013(%ofGDP)
59.Becauseof the lowerfinancial requirementsof thepublicsectorassociatedwiththefiscalsurplusrecordedin2011,noexternalfinancingwasobtainedviabondissuances.Thefinancing requirements of the public sector for2012and2013wouldbenegativebyUS$534millionandUS$1.09billion,respectively,inlinewiththepositivefiscalresultsthatwouldbeobtainedintheseyears.
80
CENTRAL RESERVE BANK OF PERU
60. In January2012,theMinistryofFinance(MEF)placedbonds inthe internationalmarketforanequivalentofUS$1.1billion,ofwhichUS$500millioncorrespondedtothereopeningofPeru’s2050GlobalBondandUS$600milliontothereopeningofthe2031SovereignBond.The2050GlobalBond,thedebtinstrumentwiththelongestmaturityissuedbyourcountry,concentratedthehighestmarketdemand.Theyieldrateofthisbondwas5.372percent,whiletheyieldrateofthesovereignbondwas6.875percent.
Memo: Balance of gross public debt BillionsofUS$ 36.0 38.3 38.8 39.6 39.0 39.5 %ofGDP 23.4 21.7 20.1 19.9 18.6 18.3Balance of gross public debt 4/ BillionsofUS$ 17.8 14.5 12.4 12.2 8.6 8.8 %ofGDP 11.5 8.2 6.4 6.1 4.1 4.1
IR:InflationReport.* Forecast.1/ The effect of exchanging treasury bonds for longer-maturity bonds, as well as the effect of placements made for the prepayment of both
internal and external operations has been isolated in the case of amortization and disbursements.2/ Includes domestic and external bonds.3/Apositivesignindicatesawithdrawaloroverdraftandanegativesignindicateshigherdeposits.4/DefinedasthedifferencebetweengrosspublicdebtandNFPSdeposits.Source: BCRP, MEF.
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Inf la t ion Report . March 2012
62.Thegross and thenetdebtwill continue todeclinedue to thegrowthof botheconomic activity and public sector deposits. At end 2012 the gross debt isexpected to reach19.9percentofGDP,while in2013 this ratiowouldbe18.3percentofGDP.Thenetdebtwouldalsoreproducethistrend,decliningfrom8.2percentofGDPin2011to4.1percentofGDPin2013.
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Graph 75PUbLIC DEbT bALANCE bY RATE TYPE
(%)
48 45 43 39 37 26 25 15 13 14
52 55 57 61 6374 75
85 87 86
Fixedrate Variablerate
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Graph 74PUbLIC DEbT bALANCE bY CURRENCY
(%)
Nationalcurrency Foreigncurrency
8585 8578 76 63 63 60 55 53
1515 15 22 2437 37 40 45 47
Graph 76PUbLIC DEbT: 2004-2013
(%ofGDP)
* Forecast.
2004
44.3
36.1 37.7
30.1 33.0
24.129.7
17.8
24.1
12.5
27.1
14.2
23.4
11.5
21.7
8.2
19.9
6.1
18.3
4.1
2005 2006 2007 2008 2009 2010 2011
GrossdebtNetdebt
2012* 2013*
82
CENTRAL RESERVE BANK OF PERU
BOX 4METHOD USED TO CALCULATE THE STRUCTURAL BALANCE
The structural balance is a non-observable variable that measures the economic balance that theaccountsof thenonfinancialpublicsector (NFPS)wouldshow ifeconomicactivityand theprices of mineral and hydrocarbon exports were at their trend or potential levels. The following methodological criteria are taken into account to estimate the structural balance:
In turn, the revenues from the mining and hydrocarbons consist of payment on account and regularization of the corporate income tax –third category income tax– paid by these sectorsPCIRMt and RIRMt,respectively)androyalties(RMt).
Theseresourcesareadjustedbythecycleoftheinternationalpricesofmineralsandhydrocarbonsto obtain their structural value. Thus, the “structural” level of these variables can be expressed as:
Where PCIRMte, RIRMt
e and RMte are the “structural” component of payment on account
of tax income, regularization of tax income, and royalties paid by the sectors of mining and hydrocarbons, respectively, PMt is the price index ofmining (and hydrocarbon) exports
10 and xxxxx is the reference or long-term value, which is estimated as a moving average of export
prices in a period of 15 years11.Inthisway,theratioreflectsthegapofexportpricesrelativeto the reference value
Itshouldbenotedthatboththepaymentonaccountandtheregularizationofincometaxareadjustedwithanelasticity(a)estimatedbasedonregressionsoftaxrevenueandinternationalprices.Thevalueof this parameter is currently 2.7 for the mining sector and 2.1 for the hydrocarbons sector. Furthermore, theregularizationofincometaxisadjustedforthepricegapexistinginthepreviousperiodtoreflectthefact that it is a payment that corresponds to the operations carried out at the time.
On the other hand, revenue from mining and gas royalties, which does not include payments for regularizationtotaxpayments,isadjustedconsideringaunitaryelasticity(i.e.g=1).
Where IGGte is the structural component of the revenues of the general government, Yt is real GDP,
and YteisrealpotentialGDP.Inthisexpressiontheratioreflectstheoutputgap,whichmeasures
the business cycle. Thus, if economic activity is above the potential level, structural revenues will be lower than the ones observed, and vice versa.
Parameter bt measures the elasticity of the revenue of the general government relative to GDP. This elasticity changes in each period according to the composition of tax revenues. The elasticity for 2012 is estimated at 1.212.
Where GNFt, RPEEt and IDPtrepresentthenon-financialexpenditureofthegeneralgovernment,theprimary balance of State-owned enterprises, and the service of public debt interests, respectively. Thesevariablesarenotadjustedbytheeconomiccycleorexportprices.
In other words, the structural economic balance is the value of the economic balance after deducting the cyclical components of tax revenues that depend on the business cycle and on international prices.
social contributions, tax returns, non-tax revenues, and capital income. The weight given to the elasticity of eachelementreflectstheresource’sshareintermsofthetotalrevenuesofthegeneralgovernment.
Finally, the fiscal impulse, indicator measuring the expansionary or contractionary fiscal policypositionduringaspecificperiod,isestimatedas:
In other words, if the structural primary balance increases, this would imply that discretionary measuresarebeingimplementedtoconsolidatefiscalaccountsandthatthefiscalpolicypositioniscontractionary(negativefiscalimpulse),whereasifthestructuralprimarybalancedeclines,thefiscalpolicypositionisexpansionary(positivefiscalimpulse).
BOX 5RECENT AMENDMENTS TO THE FUEL PRICE STABILIZATION FUND
The Fuel Price Stabilization Fund13 (FPSF)operatesundera “priceband” schemeset onabi-monthly basis by OSINERGMIN, the entity supervising investments in energy and mining. The ruletodeterminethemagnitudeofadjustmentinthepricebandsspecifiesthattheimpactofsuchadjustmentonconsumerpricesshouldnotbehigherthan5percent,except inthecaseofLPGwhere the limit is 1.5 percent.
OSINERGMIN publishes every week the benchmark price for each type of fuel that is used to determine the compensations paid by the FPSF or the contributions paid to the Fund. This benchmarkpriceisbasedontheconceptofimportparityprice(IPP),exceptinthecaseofLPGwhich uses an ad-hoc parity price. The IPP is calculated by adding all the costs associated with anefficientoperationofimportingfueltothecountrytotheaveragepriceofafuelintherelevantmarket(theU.S.GulfCoast)inaperiodoftendays.InthecaseofLPG,thereferencepriceistheFOBpriceofexportsinPisco(whichisassumedtobeequaltothepriceofLPGinMontBelvieu,USA),plusthecostofmoreefficienttransport,storage,anddispatchoperationstodeliverthisfuelto the port of Callao.
The FPSF plays an important role in macroeconomic terms since it mitigates the volatility of the domestic prices of fuels. On the one hand, it contributes to stabilize the production costs of many industries, thereby reducing the distortions in relative prices that are generated when fuel prices varyandthepricesofendproductsarenotadjustedrapidlybecauseofnominalrigidities.Ontheother hand, since fuels are part of the consumer basket, the Fund mitigates changes in households’ real incomes, smoothing consumption and increasing wellbeing.
13 TheFPSFwascreatedbyEmergencyDecree010-2004inSeptember2004.AccordingtoE.D.060-2011ofDecember 2011, the Fund is effective until December 31, 2012.
RPte= REt
e + IDPt
IFt = -(RPte - RP
e )t-1
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Inf la t ion Report . March 2012
The literature is clear in pointing out a negative relationship between the growth of the international prices of fuels and economic activity14.ThismaybeverifiedinthecaseofthePeruvianeconomywhere it is estimated that a fuel price shock of 10 percent can reduce the economy’s rate of annual growth of by up to 0.3 percentage points.
The government has opted to reduce the coverage of the FPSF to improve the focus of its impact: 95 and 97 octane gasoline and gasohol were withdrawn from the Fund’s coverage in October and all industrial oils and petrol were withdrawn from this coverage in December. LPG has been theonlyproductwhichhashadnopriceadjustmentslastyearbecausetherehavebeennopriceadjustmentsinitspricebands.Thishasraisedtheamountofcompensationsassociatedwiththisproduct.
• Residualpetroleumfuels:Thesefuelsusedinisolatedelectricitygenerationsystemsareagainincluded in the coverage of the Fund.
14 ThewoksofHamilton (2008)Oil and the macroeconomy, New Palgrave Dictionary of Economics and Kilian(2008)The Economic Effects of Energy Price Shocks, Journal of Economic Literature. Vol. 46 offer a comprehensive revision of the existing literature.
FUELS PRICES IN THE THIRD WEEk OF MARCH(S/.pergallon)
• FPSFcoverage:FromAugust,ifthereferencepriceofgasolineandLPGforvehicleanddirectuse is higher than the price band by less than 5 percent, such products will not be covered by theFund.Inadditiontothis,asfromAugusttheFundwillonlycoverdieselforvehicleuseandfor the generation of electricity in isolated systems.
• Socialinclusion:Criteria,amounts,andmechanismswillbeestablishedtodelivercompensationsto vulnerable families that use LPG in containers of up to 10 Kg. This mechanism, which will startoperatingaftertheimplementationofthepricebandadjustmentinAugust,willbefinancedthrough the budget of the Ministry of Energy and Mines.
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Inf la t ion Report . March 2012
V. Monetary policy63.Between December and March the Board of the Central Bank maintained the
reference rate at 4.25 percent. This level of the policy rate, which reflects amonetarystanceconsistentwiththeanticipatedconvergenceofinflationtowardsthetolerancerange in thesecondhalfof thisyear, takes intoaccount the lowerdynamism projected in the world economy, the persistence of uncertainty ininternationalfinancialmarkets,andthereversalofthesupplyshocksthataffectedinflationduring2011.
TheBCRPcommuniquésonthemonetaryprogramhavealsoemphasizedthatfutureadjustmentsinthereferenceinterestratewilldependontheevolutionofinflationand itsdeterminants,which reflectsamoreneutralbalanceof risks for inflationthantheoneconsideredinourInflationReportofDecember2011.Thischangeinthebalanceofriskstakesintoaccounttherecentevolutionoftheglobaleconomy,whichhasshownabetter-than-expectedperformanceeventhoughconsiderablelevels of uncertainty are still observed vis-à-vis the evolution of internationalfinancialmarketsandtheoutlookforglobalgrowthintheyear.
RECENT EvOLUTION OF THE POLICY INTEREST RATE:January – March 2012
January: The Board of the Central Reserve Bank of Peru approved to maintain the monetary policy reference rate at 4.25 percent.
This decision takes into account the lower growth being recorded by some components of expenditure,thecurrentinternationalfinancialrisks,andthefactthattheriseofinflationhasbeenmainlyassociatedwithtemporarysupplyfactors.Futureadjustmentsinthereferenceinterestratewilldependontheevolutionofinflationanditsdeterminants.
88
CENTRAL RESERVE BANK OF PERU
February: The Board of the Central Reserve Bank of Peru approved to maintain the monetary policy reference rate at 4.25 percent.
This decision takes into account the lower growth being recorded by some components of expenditure,thecurrentinternationalfinancialrisks,andthefactthattheriseofinflationhasbeenmainlyassociatedwithtemporarysupplyfactors.Futureadjustmentsinthereferenceinterestratewilldependontheevolutionofinflationanditsdeterminants.
March: The Board of the Central Reserve Bank of Peru approved to maintain the monetary policy reference rate at 4.25 percent.
This decision takes into account the lower growth being recorded by some components of expenditure, the current international financial risks, and the rise of inflation associatedmainlywithtemporarysupplyfactors.Futureadjustmentsinthereferenceinterestratewilldependontheevolutionofinflationanditsdeterminants.
64.TheCentralBankhasalsomaintainedtheratesofreserverequirementsindomesticcurrencyandforeigncurrencyunchangedsincemid-2011.AtthecloseofFebruarytheaveragerateofreserverequirementsinnuevossoleswas14.5percentwhilethis rate indollarswas38.6percent. These rateshavecontributed tomoderatethegrowthofcreditandincreasethefinancialsystem’scapacitytofacepossiblescenarioswithsevereliquidityconstraints.
65.Between December 2011 and February 2012 the short term prime rates indomestic currency remained stable around 5.3 percent, a level consistentwiththemonetarypolicyposition.Thereisagreaterrelationshipbetweenthissegment’sinterestrateandthemonetarypolicyinterestratebecausethereisa
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Inf la t ion Report . March 2012
Graph 7990-DAY CORPORATE PRIME RATE VERSUS INTERbANk OVERNIGHT RATE
IN DOMESTIC CURRENCY: SEPTEMbER 2007 - FEbRUARY 2012
66.Mostoftheotherlendingratesinthefinancialsystemalsoremainedatsimilarlevels,withoutshowingsignificantchanges.Theexceptionsincludedtherateonloanstomicrobusinesses,whichincreasedfrom23.2percentinDecemberto23.7percent inFebruary,andtherateonconsumer loans,which fell from38.5to35.7percentinthesameperiod.Thevariationsinthesetypesofcreditreflecttheevolutionofcreditriskandcompetitionconditionsintherespectivecredit markets. The interest rate on mortgages remained stable around 9.4percent.
Table 28INTEREST RATE BY TYPE OF CREDIT 1/
(%)
Domestic currency
Corporate Large Medium-size Small Microbusinesses Consumption Mortgages enterprises firms businesses
67.Short termdeposit rates indomesticcurrencydeclinedslightly in JanuaryandFebruary.Thus,theinterestrateon30-daydepositsfellfrom3.9to3.7percent,while the interest rates on 31-day to 180-day deposits fell from 4.1 to 4.0percent.
Table 29INTEREST RATES IN NUEvOS SOLES
(%)
Deposits Rate on 31 to Rate on 181 to up to 30 days 180-day term deposits 360-day term deposits Dec.10 2.2 2.9 3.8Mar.11 3.1 3.0 4.0Jun.11 4.3 3.6 4.3Jul.11 4.2 3.9 4.5Aug.11 4.1 4.2 4.6Sep.11 4.1 4.3 4.6Oct.11 4.1 4.3 4.7Nov.11 4.0 4.2 4.7Dec.11 3.9 4.1 4.7Jan.12 3.8 4.0 4.7Feb.12 3.7 4.0 4.7
Difference(bps)(Feb.12-Dec.11) -13.8 -9.8 0.2
68.Thecorporateprimerateinforeigncurrencyrosefrom2.60percentinDecember2011to2.96percent inFebruary, reflectingbanks’ loweravailabilityof liquidityin foreign currency due in part to the BCRP purchases of dollars in the foreignexchange rate market. In the first months of the year the Central Bank boughtforeigncurrencyforatotalofUS$3.68billion.
Graph 8090-DAY CORPORATE PRIME RATE VERSUS INTERbANk OVERNIGHT RATE
IN DOMESTIC CURRENCY: SEPTEMbER 2007 - FEbRUARY 2012
69. In January Peru placed bonds for US$ 1.1 billion in the international market, ofwhichtheequivalentofUS$600millionwasplacedindomesticcurrencyatarateof6.875percentandwithamaturityof19years,whichincreasedtheyieldcurveof sovereign bonds to some extent. Around 80 percent of this placement waspurchasedasGlobalDepositaryNotes(GDN)bynonresidentinvestors.Reflectingtheincreasedriskperceivedinemergingcountries,adownwardmovementwasobservedintheyieldcurvesinceFebruary.
Graph 81SECONDARY MARkET OF SOVEREIGN bONDS 1/
1/Endofmonthyield.
0 5 10 15 20 25 30
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
Yiel
d (%
)
Maturity (Years)
Jan.12
Nov.11Feb.12
Graph 82SOVEREIGN bOND (bTP) HOLDINGS bY NON RESIDENTS
Deposits Rate on 31 to Rate on 181 to up to 30 days 180-day term deposits 360-day term deposits Dec.10 0.9 1.2 1.7Mar.11 1.4 1.1 1.7Jun.11 0.5 1.1 1.7Jul.11 0.6 1.0 1.7Aug.11 0.7 1.0 1.6Sep.11 0.8 1.0 1.6Oct.11 0.6 1.0 1.6Nov.11 0.6 1.0 1.6Dec.11 0.7 1.0 1.6Jan.12 0.9 1.1 1.6Feb.12 1.0 1.1 1.6
Difference(bps)(Feb.12-Dec.11) 36.3 12.7 3.0
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Inf la t ion Report . March 2012
Currency in circulation and credit
72.Showing a recovery compared to January, average currency has been growingat a rate of 17.1 percent in the last 12 months at February, in line with someindicatorsofeconomicactivity.In2012currencywouldgrow17.5percent,whichisconsistentwiththegrowthofGDPandthededollarizationofbanks’ liabilitiesthatisbeingobservedinthisquarter.
73. In2011,credittotheprivatesectorgrew18.9percent.Thispaceofgrowthhasdeclined slightly in thefirstmonthsof 2012, this indicator recording an annualgrowthof18.0percentinFebruary.Bycurrencies,inFebruarycredittotheprivatesectorinnuevossolesrecordedanannualgrowthrateof19.0percent,ahighergrowthratethantheonerecordedbycreditindollars(16.7percent).
Likein2011,credittohouseholdshasbeenshowinggreaterdynamismthancredittoenterprisesso far thisyear.This isparticularlyevident in thecaseofmortgages,whichhavegrownby1.6and1.5percentinJanuaryandFebruary,respectively(andrecordinganannualgrowthof27.2and26.5percent).Thegreaterdynamismofcredittohouseholdsreflectsnotonlyhighconsumerconfidence,butalsotheimprovementregisteredintermsofdisposableincomes,whichhasbeenfavoredbythesustainedgrowth of formal employment and by historically low interest rates. On the otherhand,credittocompaniesgrew0.4and-0.3percentinthefirsttwomonthsoftheyearandaccumulatedanannualgrowth rateof17.2and15.9percent.This lowerpaceofgrowthismainlyexplainedbythelowerdynamismofcreditforforeigntradeactivities,whichgrewby3.5percentinJanuaryand0.7percentinFebruary.
Graph 85CREDIT bY TYPE OF LOANS: JANUARY 2010 - FEbRUARY 2012
74. Inadditiontolowinterestratesinthefinancialsystemandtherecoveryofbusinessconfidence,thisevolutionreflectstheaccessofdomesticfirmstocredit.Accordingtotheaccess-to-creditindicatorelaboratedonthebasisofthesurveyscarriedoutby BCRP, firms’ access to credit has improved and gone from a level of 62 inDecember2011toalevelof67inFebruary2012.
Graph 86STATUS OF ACCESS TO CREDIT OF THE COMPANIES
Itshouldalsobepointedout thatbetween JanuaryandFebruary2012,agroupofPeruviannon-financialcompanies issuedsecurities inthe internationalmarkettofinance someof their investments.MiningcompanyVolcan issuedbonds forUS$600millions–ofwhichUS$35.5millionwereplacedinthelocalmarket–ataninterestrateof5.375percentandwithamaturityof10years,reachingademandofUS$5billion.CamposolbecomethefirstPeruvianagroindustrialcompanytoissue bonds in the international market with an issuance of US$ 125 million in5-yearbondsatarateof9.875percent.Moreover,CementosPacasmayoplacedAmerican Depositary Shares (ADS) for US$ 230 million in the New York StockExchange,increasingitscapitalby17.5percent.
Theaccumulatedflowof credit to theprivate sector in the last12monthsasapercentageofGDPhasremainedat5.0percent,asimilarleveltotheoneobservedatend2010andin2011.Thus,credittoGDPatendFebruaryhasremainedaround30percentofGDP.
Graph 87ANNUAL FLOW OF CREDIT TO THE PRIVATE SECTOR
75. In2011,thedollarizationofcredittotheprivatesectorfellfrom46.3percentatend2010to45.2percent,withcredittohouseholdsshowingthehighestdeclinein termsofdollarizationratio (downfrom26.0percent to25.1percent). In thiscredit group, the segment of mortgage loans was the one that registered thefastestpaceofdedollarization(thedollarizationratiodeclinedfrom51.6percentto48.8percent).Moreover,thedollarizationratioofcorporateloansfellfrom56.3percentto55.6percent.
In February the dollarization ratio of credit continued to fall and recorded 44.2percent, in linewith the trendsobserved in thedollarizationof liquidity,whichdeclinedfrom37.2percentinDecember2011to36.0percentinFebruary2012.Thefasterpaceofdedollarizationobservedin liquidity inthefirstmonthsofthe
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CENTRAL RESERVE BANK OF PERU
yearreflects,inpart,higherconfidenceinthedomesticcurrencyafteruncertaintypartially subsided in international financial markets, as well as a reversal in theincreaseddemandforforeigncurrencyobservedlastyearduetohigheruncertaintygeneratedbytheelections.
Graph 88PERU: LIQUIDITY AND CREDIT DOLLARIZATION RATIO: 1992 - 2012
76.The Central Bank’s operations were mainly oriented at maintaining adequateliquidity levels and the flowof operations in themoneymarket.High levels ofliquidityinthebankingsystem,whichwasreflectedinbanks’increasedpreferenceforacquiringBCRPCertificatesofDeposit(CDBCRP)withmaturitiesofupto1year,contributedtothis.
Table 32SIMPLIFIED BALANCE SHEET OF THE BCRP
(As%ofNetInternationalReserves) Net Assets Dec. 11 Feb.12I. Net International Reserves 100% 100% (US$48,816mills.) (US$53,315mills.)Net Liabilities II. Total public sector deposits 38.0% 37.8% Indomesticcurrency 24.3% 23.7% Inforeigncurrency 13.8% 14.1%
III. Total reserve requirements 27.7% 24.6% Indomesticcurrency 9.7% 9.2% Inforeigncurrency1/ 18.0% 15.4%
1/ Includes banks’ overnight deposits at the Central Bank.
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Inf la t ion Report . March 2012
In this context, between December 2011 and February 2012, the Central Bankwithdrew liquidity for a total of S/. 8.64 billion, mainly through issuances ofBCRPcertificatesofdeposit(S/.5.49billion)andthroughoperationsofovernightdeposits(S/.3.15billion).Inthisperiod,thepublicsectorincreaseditsdepositsattheCentralBankbyS/.3.82billion.
As a result of these operations, the share of BCRP-issued instruments in totalliabilitiesincreased.Asthetableaboveshows,theshareofmonetaryinstrumentsin the international reserves increased from 13.1 percent in December to 18.1percentinFebruary2012.Ontheotherhand,theshareoftotaldepositsforreserverequirementsdeclined from27.7 to24.6percent,mainlydue to thedeclineofdeposits in foreigncurrency since the latter fell from18.0 to15.4percentasaresultofthehigherBCRPinterventionamountintheforeignexchangemarketandthededollarizationofliabilities.(CHECK).
Foreign exchange rate
77.BetweentheendofNovemberandtheendofFebruary,thenuevosolappreciated1.0percentinnominaltermsagainstthedollar(theexchangeratemovedfromS/.2.701perdollartoS/.2.675perdollar).Twotrendscontributedtothis:ontheonehand,thehigherpaceofdedollarizationobservedindeposits,especiallyinthecaseofthedepositsoffirmsassociatedwiththeminingsectorandinthedepositsofsmalldepositorsand,ontheotherhand,lowerglobalriskaversionwhichcontributedtostrengthen most of the currencies of emerging countries after some of the mostsevererisksassociatedwiththedebtcrisisintheEurozonesubsided.
Graph 89INTERVENTION IN THE FOREIGN EXCHANGE MARkET AND EXCHANGE RATE
Ontheotherhand,banks reduced their foreignexchangepositiongeneratinganadditionalsupplyofdollarsofUS$107million.Inthiscontext,theBCRPintervenedintheforeignexchangemarketpurchasingdollarsforatotalofUS$3.82billionwiththeaimofreducingthevolatilityoftheexchangerate.
79. Intheforwardmarket,banks’netpurchasesofdollarsincreasedsignificantlyduringtheperiodduemainlytothematurityofforwardsalescontractsnegotiatedintheperiod when the European crisis deepened in September 2011. Thus, betweenendNovemberandendFebruary,thebalanceofnetforwardpurchasesofforeigncurrencyincreasedbyUS$1.29billion,fromanegativebalanceofUS$163milliontoapositivebalanceofUS$1.12billion.
Graph 91bALANCE OF NET FORWARD PURCHASES AND EXCHANGE RATE(BalanceinmillionsofUS$andexchangerateinsoles/USdollar)
81.BetweenDecember2011andFebruary2012,therealmultilateralexchangeraterosefrom92.4to94.3,whichrepresentedadepreciationof2.0percent inrealterms.Thiswasduetothefactthatthenuevosolappreciatedlessthantheothercurrencies. Thus, while the nuevo sol appreciated 1 percent in this period, theBrazilianrealappreciated8.0percent,theChileanpesoappreciated7.7percent,andtheColombianpesoappreciated8.8percent.
82.Between December 2011 and February 2012, Peru’s international reservesincreased by US$ 4.26 billion and amounted to US$ 53.31 billion on February29, 2012. These high levels of international reserves provide the country withadequatelevelsofinternationalliquiditytofacepossiblescenariosofturbulenceininternationalfinancialmarkets.
BOX 6DEBT AND SYSTEMIC RISk: THE ROLE OF MACROPRUDENTIAL INSTRUMENTS
Because of the international financial crisis, central banks all over the world have becomeincreasingly aware of the importance of implementing measures that can reduce the formation of systemicriskinthefinancialsystem.Oneoftheaspectsthathasgeneratedmoreconcernamongmonetaryauthoritiesistherapidgrowthoffinancial institutions’degreeof leverage,especially ifthis leverage is generated by a rapid growth of short-term liabilities in foreign currency
InPeru,with thepurposeof preventingand limiting the formationof such risks in the financialsystem, the Central Bank maintains a rate of 60 percent of reserve requirements for local banks’ shorttermliabilities(upto2years)withforeignbanks.Thisrateofreserverequirementshasnotonlyenabledbanksinthedomesticfinancialsystemtoaccumulateahigherlevelofliquidityinforeigncurrency,buthasalsogeneratedincentivesforfinancialinstitutionstochangethecompositionoftheir external liabilities from short-term to long-term liabilities
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As the followinggraphshows,after reserve requirementswere raisedsince themid-2010s, theshare of long-term liabilities relative to total external liabilities has increased from 45 percent in July 2010 to 81 percent in February 2012. This higher share of long-term liabilities in terms of banks’ external funding has played an important role in offsetting the impact of European banks’ credit constraints associated with the process of deleveraging generated by increased regulatory requirements in the Eurozone.
EXTERNAL LIAbILITIES OF THE bANkING(BalanceinmillionsofUS$andratioin%)
This constraint in European banks’ supply of credits generated a cut in short term loans for emerging countriesinQ4-2011.InthecaseofPeru,banks’lowerdependenceonshort-termexternalcreditsignificantlyoffsettheimpactofthisshockondomesticfinancialconditions.Theinterestratesonshort term loans in foreign currency have remained stable during this period and, most importantly, the supply of credits has not been affected.
Inthesamewayasarapidgrowthinbanks’leveragethroughshort-termliabilitiesexposesfinancialentitiestoabruptandunforeseencutsincapitalflows,increasingthelikelihoodofagreatersystemicrisk,arapidgrowthoffirmsandhouseholds’deleveragingthroughshorttermloansindollarsalsoincreases the likelihood of cuts in the supply of credit as well as the possibility of unexpected increases in the foreign exchange rate.
In Peru, credit in foreign currency has increased 17.4 percent in the last year, showing a greater paceofgrowththaninpreviousyears–particularlyinthecaseofcorporateloans–favoredbythe low international interest rates and by greater access to financial markets. This growth of credit in dollars highlights the importance of implementing other macro-prudential measures aimed at promoting firms’ and families’ awareness of the risks of borrowing in foreign currency. Given the greater exposure to systemic risk that the nature of loans in dollars generates for businesses and households, such measures may include, for example, limits on loan-to-value ratios or limits on loans based on the income of borrowers and increased provisions for loans in foreign currency.
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CENTRAL RESERVE BANK OF PERU
BOX 7FINANCIAL DOLLARIZATION:
DIFFERENCE BETWEEN NATURAL PERSONS AND LEGAL ENTITIES
Financial dollarization has been declining persistently in Peru since the 1990s and more intensely sincethe2000s,wheninflationtargetingwasadoptedbytheCentralBankofPeru.Monetarystability–lowinflationlevels–makesthedomesticcurrencymoreattractivebothasmeansofpaymentandasastoreofvalue.Thisisreflectedinthereductionoftheratiooffinancialdollarization,whichhasfallen from 78 percent in 2000 to 44 percent in February 2012 in the case of credit and from 65 percent to 36 percent in the case of liquidity in the same period.
In spite of this clear trend, some market segments show a transient reversal of this tendency duringperiodsofhighuncertainty,suchasduringtheinternationalfinancialcrisisin2008and2009and,morerecently,whenthefiscalproblemsintheEurozoneworsened.Itshouldbepointedout,however, that not all economic agents have reacted in the same way vis-à-vis these transitory episodes of greater uncertainty.
Asillustratedinthegraphbellow,legalentitieshaveshowngreatersensitivitytoepisodesofincreaseduncertaintyinfinancialmarketsin2011,asreflectedinthefactthattheirratiosofdollarizationincreasedby6percentagepointsbetweenMarchandJune2011(andfrom50percentinDecember2010to56percentinJune2011).Bytypeofdeposits,termdepositshaveshowngreatervolatilityintheirratioofdollarization, which soared by almost 10 percentage points in the same period. Natural persons, on the other hand, have continued to de-dollarize their deposits, the ratio of dollarization of these deposits having declined from 43 percent at the end of 2010 to 38 percent in December 2011. The deposits of naturalpersonsreflectverylittlesensitivitytotheepisodesofgreateruncertaintydiscussedabove.
More recently, between December 2011 and February 2012, legal entities have reversed in part the increase observed in their ratios of dollarization as they have returned to the level observed in October 2010.
DOLLARIZATION OF DEPOSITS OF NATURAL AND LEGAL PERSONS: 2010-2012(%)
60
55
50
45
40
35
30Jan.10 Jun.10 Nov.10 Apr.11 Sep.11
52.6
43.5
37.4
Feb.12
Naturalpersons Legalpersons Total
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BOX 8MICROPRUDENTIAL AND MACROPRUDENTIAL INSTRUMENTS
The goal of achieving financial stability was initially sought through the implementation ofmicroprudentialpoliciesthatcontributedtocontroleventsoffinancialstressthatwerespecifictodifferentfinancialinstitutions.Theaimwastoprotectconsumersfromtheimpactsoftheseevents.Afterwards, and as a result of events associatedwith financial crises,macroprudential policieshavebeenimplementedwiththeaimofpreventingandcontrollingthesystemicfinancialrisksthatcould affect the level of real economic activity if these risks materialized.
The recent international financial crisis has highlighted how essential it is for central banksand regulatory organizations to adopt macro prudential policies and to go beyond the purely microeconomic approach of traditional prudential regulations. Empirical evidence shows that the individual soundness of banks is not enough to ensure the overall soundness of the financialsystemandtoachievefinancialstabilityasaresultofthis.
Acknowledgingthenecessityofmacroprudentialpoliciesisbasedonacceptingthefactthatfinancialmarkets have limitations in regulating themselves and on recognizing the fact that systemic risks mayarisefromanexcessivepro-cyclicality inthefinancialsystemandfromverylargeandhighlyinterdependent institutions in the global financial system. In the emerging countries, the crisesexperiencedpreviously–theAsiancrisis,theRussiancrisis,theMexicancrisis,andtheArgentinecrisis–havemademacroprudentialregulationmorerelevant.Thedefinition,scope,andimplicationsof the term “macroprudential” are currently being discussed in academic and political forums.
The term “macroprudential” and the objectives of macroprudential policies
Althoughthereisnoofficialrecordofwhenthetermwasfirstused,Clement(2010)suggeststhatthishappened in 1979 in a meeting of the Cooke Committee, the forerunner of today’s Basel Committee on Banking Supervision. Even though the term is relatively new, the concerns inherent to it were not. In the1970’spoliticianswereworriedabout the implications that the rapidgrowthof thefinancialsystemcouldhaveonmacroeconomicandfinancialstability.Afeatureofthetermmacroprudentialisthatitregainsimportanceaftereventsofeconomiccrises,asthefigurebelowillustrates:
NUMbER OF SEARCH OF THE TERM “MACROPRUDENTIAL”(Thousands)
300
250
200
150
100
50
01994
Source:Google.
35
1995
28
1996
7
1997
39
1998
39
1999
98
Asian and russian crisis
International crisis
2000
70
2001
39
2002
49
2003
35
2004
46
2005
46
2006
53
2007
46
2008
105
2009
245
2010
238
2011
196
104
CENTRAL RESERVE BANK OF PERU
Objectives of macroprudential and microprudential policies
Themost important goal of macroprudential policies is to promote financial stability, the latterbeingunderstoodasthesoundnessrequiredbythefinancialsystemtobeabletofaceinternalandexternal shocks.
Intermsofspecificobjectives,macroprudentialpolicyseekstoaddresstwospecificdimensionsofsystemic risk15: a time dimension, which involves analyzing how risk has evolved over time, and a cross-sectionaldimension,whichhastodowithhowriskisdistributedwithinthefinancialsystemat any point in time.
AccordingtoBorio(2003),themicroprudentialandmacroprudentialapproachestoregulationandsupervisiondifferintermsofobjectivesandintermsofthemodelusedtodescribetherisk.Asregardstheobjectivesofthesepolicies,whilethemacroprudentialapproachseekstolimitepisodesandthecostofaggregatefinancialdistressatthelevelofGDP,themicroprudentialapproachseekstolimitsituationsoffinancialdistressatthelevelofindividualinstitutions.Thus,whilemacroprudentialregulation is developed in the frame of a macro-economic tradition, microprudential regulation is mainly understood in terms of depositor/investor protection.
As regards the model used to describe the risk, macroprudential regulation assumes that therisk is endogenous to the behavior of the financial system,whereasmicroprudential regulationassumes that this risk is exogenous. Other aspects to be considered are the similar exposures that institutionshavewithinthefinancialsystemaswellastheinterconnectionbetweenthesefinancialinstitutions, and the calibration of prudential tools to prevent or control systemic risk.
Thisvarietyof instrumentsseekstominimizetheex-anteandex-postimpactoffinancialcrises.The empirical evidence on the effectiveness of macro-prudential instruments is not abundant and is still being discussed.
BOX 9DEDOLLARIZATION OF THE PENSIONS INCLUDED IN THE PRIvATE PENSION SYSTEM
Theintroductionofadjustablefixed-ratepensionsinsolesasfrom2011hasbroughtaboutarapidprocessofpensions’dedollarization.SinceQ2-2011,newpensionersintheprivatepensionsystem(SPP)arechoosingmostlythepensionplanthatoffersanadjustablepensioninsolesatanannualfixed-rateofnolessthan2percent.InQ4-2011,forexample,90percentofnewpensionerschosepensionplansinnuevossolesfortheirannuities(mostchosethefixed-rateoption).ThispreferenceforpensionplansinsolesimpliesareversalofthetrendobserveduntilQ1-2011,whenover90percent of new pensioners chose pension plans in dollars.
SPP: FLOWS OF CONTRACTS OF PENSION OF RETIREMENT ANNUITY(%.2011)
100908070605040302010
0Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec.
US$Readjustable S/.ReadjustableUS$ S/.VAC
Source:SBS.
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CENTRAL RESERVE BANK OF PERU
SPP: DOLLARIZATION OF RETIREMENT PENSIONS OFANNUITY GRANTED1
Until 2010, pensioners who chose annuity as their pension plan only had the annuity options of pensions in nominal US dollars, inflation-indexed pensions in soles, or a combination of both.Because insurance companies,which are the organizations that provide annuities, did not findenough inflation-indexed securities to cover their pension obligations, they offered an inflation-indexedpensionthatwaslowerthanthepensioninUSdollars(whichdidnotrequiretobeadjustedbyinflation).Thisledpensionerstochoosethelatteroptionduetothegreaterincometheywouldreceiveintheinitialstageoftheirlifeaspensioners(monetaryillusion).However,thisgeneratedtwo problems: on the one hand, pensioners received lower pensions than the ones they should receive due to the appreciatory trend of the foreign exchange rate observed in recent years and, on the other hand, this promoted dollarization in other areas of the economy. Today, current legislation is neutral in terms of currencies since pensions in nuevos soles may alsobeupgraded toanannualfixed rateofno less than2percent.Becauseof this, insurancecompaniescanbemorecertainaboutthetemporalprofileoftheirliabilitiesinthatcurrencyandcanthereforeobtaincoveragefortheirobligationspurchasingfixed-ratebonds.Theycanalsoprovideadjustable pensions in soles that aremore competitivewith the pensions inUS dollars,whichsince2011mustalsobeadjustable.Furthermore,disabilityandsurvivorshippensionswillalsobeincluded in this new pension scheme as from this year.
Asaresultofthis,theratioofdollarizationofpensionannuitiesshowsasteepdeclineafterhavingdropped from 94 percent in March 2011 to 87 percent in December 2011.
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PENSIONS: FORMS OF BENEFIT PAYMENT AT RETIREMENT AND CURRENCIES
Forms of Benefit Payment Before AfterProgrammed Withdrawal Nuevos Soles X X
Family Life Annuity Inflation-indexednuevossoles X X
Family Life Annuity Fixed-rate indexed nuevos soles X
Family Life Annuity US dollars X
Family Life Annuity Fixed-rate indexed US dollars X
Temporary Income with Deferred Life Annuity Nuevossoles(TI)andinflation-indexedsoles(DLA) X X
Temporary Income with Deferred Life Annuity Nuevossoles(TI)andUSdollars(DLA) X
Temporary Income with Deferred Life Annuity Nuevossoles(TI)andfixed-rateindexednuevossoles(DLA) X
Temporary Income with Deferred Life Annuity NuevosSoles(TI)andfixed-rateindexedUSdollars(DLA) X
Mixed Income Nuevossoles(PW)andUSdollars(FLA) X
Mixed Income NuevosSoles(RP)andfixed-rateindexedUSdollars(FLA) X
Life Annuity in soles and dollars Inflation-indexednuevossoles,andUSdollars X
Life Annuity in soles and dollars Inflation-indexedorfixed-rateindexednuevossoles,andfixed-rateindexedUSdollars X
(innuevossoles)andLifeAnnuity infixed-rate indexedUSdollars.TheoptionofProgrammedwithdrawalandLifeAnnuity infixed-rateindexed nuevos soles is not available.
VI. Inflation83. Inthefirstmonthsoftheyear,last12-monthinflationhasbeendecliningasaresult
of thebeginningof thereversalofsupplyshocks. Inflation inFebruary recordeda rate of 4.17 percent, a level above the upper band of the target range. Thegradualdeclineofinflationarypressureswhichiscurrentlybeingobservedisalsoconsistentwithaneutraleconomiccycleduring2012,whichwillfavorinflation’sconvergencetowardsthetarget.
84. Inflation expectations for 2013 –a relevant time horizon for monetary policyactions–continuetobewithinthetargetrangeandhavebeendeclininginthelastmonths,inlinewiththelowerrateofinflationobserved.
onfoodprices.Inthelastdecade,forexample,whiletheannualaverageinflationrateinthefirstquarterswas4.6percent,thisratedeclinedto1.8percentasanannual average in the next months –April to December–, reflecting mainly thehigherseasonalinflationofperishablefarmingfoodproductsinthefirstmonthsoftheyear.
Table 34
CPI AND PERISHABLE AGRICULTURAL FOODAnnualizedaveragechangeofperiod2001-2011
91.When we analyze the main components that have affected the evolution ofinflation at February, we see that meals outside the home registered a growthof 7.1 percent in the last 12 months associated with the higher prices of foodproducts.Educationcostsalsorose4.3percentduetotherisesregisteredinthetuitionandfeesofuniversitiesandhighereducationinstitutes.Electricityrecordedariseof7.5percentasaresultofthequarterlyadjustmentinelectricitygenerationratesandtheincreaseinthepricesofcrude,naturalgas,andthewholesalepriceindex.
92. InFebruaryinflationinthelast12monthsshowedalevelabovetheupperbandof the target range recording a rate of 4.17 percent. As in the Inflation Report
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Inf la t ion Report . March 2012
ofDecember, the central forecast scenario considers that inflationwillgraduallyconverge towards the target range since Q3-2012, provided that all the costpressuresgeneratedby the significant rises in commoditypricesdisappear andthat inflationexpectations remainwithin the target range. The inflation forecasttakesintoaccounttheupwardrevisionintheforecastonthepricesoffuelsandalsoconsiderstherisksofamorepersistentincreaseinthepriceofcrude.
Non core inflation is forecast to showa rate close to2.0percent in2012afterhavingreachedalevelof6.8percentinDecember2011.Theconductofnoncoreinflationin2011reflectedcostpressuresassociatedwithshocksintheinternationalpricesoffoodandfuels.In2012,theconditionsconstrainingtheglobalsupplyoffoodareexpected todisappear,whichwouldoffset theupward revision in theforecastonthepriceofcrude.Moreover,itisalsoexpectedthatthenegativetrendobservedininflation’simportedcomponentwillcontinueover2012,whichwouldreducetheupwardpressuresofexternalpricesonthedynamicsofinflationintheforecasthorizon.This isconsistentwiththelowergrowthforeseenintheglobaleconomy.
isconsistentwith the forecastofhigherpublic spending–and theexpansionarymonetaryandcreditconditionsindollarsthatwouldbeobservedininternationalmarketswillhaveapositivecontributionontheoutputgap.Thiswouldbeoffsetbythelowergrowthexpectedinourmaintradingpartners.
94. Inflationexpectationsarealsoexpectedtoconvergefromtheircurrent levelsof2.5–3.0percenttoa levelof2.0percent, thusremaininganchoredwithintheinflationtargetrange.Thehigherlevelsofinflationexpectedduring2011reflectedthehighratesof inflationobservedinthatperiod–abovethetargetrange–asaresultofpersistentsupplyshocksonthepricesoffoodandfuels.Thistemporaryriseinthelevelofexpectedinflationshouldsubsideastheimpactoftheseshockson inflation reverses, inflation returning thereafter to its path of convergencetowardstheinflationtargetof2percent.
considers that themonetarypolicypositionwillnotbesubstantiallydifferent intheshorttermfromtoday’smonetaryposition.Anappropriatemonetarystancecontributestomaintaininflationexpectationsanchoredtothetarget,particularlyin a context of persistent significant shocks that affect sensitive CPI products.Therefore,theCentralBankwillcontinuetooverseetheevolutionoftheglobaland
Theoutputgap is estimatedusing statisticalmethodsof signals extraction.A set of equations that relate unobservablevariableswithobserveddataarespecified.Twoequationsshouldbepointedout:thefirstoneistheidentitythatequates(thelogarithmof)GDPwiththesumof(thelogarithmofthe)potentialGDPplustheoutputgap;thesecondisanequationofaggregatesupply(knownasthePhillipscurve)thatdescribesinflationasafunctionofseveraldeterminants,theoutputgapamongthem.Therefore,theoutputgapisinterpretedasthetransitorycomponentofGDPthatismorecloselyrelatedtoinflationovertheeconomiccycle.
Nominal % change 11. Currency in circulation 25.4 12.9 14.5 17.5 11.5 13.012. Credit to the private sector 4/ 21.0 18.9 13.5 14.5 11.5 12.5
% GDP 13. Grossfixedinvestmentrate 25.1 24.1 25.6 25.7 26.1 26.214. Current account of the balance of payments -1.7 -1.3 -2.2 -1.5 -2.1 -1.815. Trade balance 4.4 5.3 3.6 4.5 3.9 4.616. Grossexternalfinancingtotheprivatesector5/ 7.9 6.4 4.6 4.9 5.3 5.117. Current revenue of the general government 20.0 21.0 21.0 21.2 21.0 21.218. Non-financialexpenditureofthegeneralgovernment 19.2 18.1 18.9 18.9 18.4 18.719. Overallbalanceofthenon-financialpublicsector -0.3 1.9 1.0 1.1 1.5 1.420. Total public debt 23.4 21.7 20.1 19.9 18.6 18.3 IR:InflationReport.1/ Forecast.2/DifferentialbetweenGDPandpotentialGDP(%).3/ Survey on exchange rate expectations.4/ Includes loans made by banks’ branches abroad.5/ Includes foreign direct investment and private sector’s long term disbursement.
Given that the forecast process is not free from uncertainty about futuredevelopmentsinthedomesticandintheglobaleconomies,alternativescenariosincludingshocksthatdivertinflationfromthebaselinescenarioarealsoevaluatedinthebalanceofrisks.
Thebalanceof risks results fromassessing the relative significance thateachoftheriskfactorshasontheinflationforecast.Theexpectedimpactofariskfactoroninflationdependsontwocomponents:first,themagnitudeofdeviationoftheinflationforecastintheriskscenariocomparedtothebaselinescenariobase,andsecond,theprobabilityofoccurrenceassignedtotheriskscenario.Together,thesetwofactorsdeterminethebiasoftheinflationforecastinthebalanceofrisks.
97.Themainrisksthatcoulddiverttherateofinflationfromthebaselinescenariointhe forecast horizon are associated with uncertainty about the evolution of theglobaleconomy,theevolutionofdomesticdemand,andtheimpactofthepricesofcommodities.Graph103showstheexpectedimpactofeachoftheseriskfactorsontheinflationforecast.
The downward risks in the inflation forecast are both external and domestic.Theexternalrisksareassociatedwiththepossibilitythataninternationalfinancialcrisismayunfold,whilethedomesticrisksareassociatedwithacontextofslowerdemandgrowthduetothepostponementofsomeinvestmentprojects.
a. Uncertainty about the evolution of the world economy
Thebaselinescenarioconsidersalowergrowthrateintheworldeconomythisyear(3.3percentvs.3.7percentin2011)andarateof3.8percentin2013afterarecoveryintheeconomy.Theriskofaglobalrecessionhasdecreasedinrecentmonthsduetothe lesspessimisticviewthat internationalmarketshaveadoptedingeneralvis-à-vistheEurozonefinancialandfiscalproblems.However, should such an adverse scenario develop, this situation wouldcontribute to weaken external demand and affect the domestic economythroughthefinancialandtradechannels.
Thisscenariodescribesadropinglobaleconomicactivitycoupledbyadeclinein the termsof trade.Additionally, a rise inglobal uncertainty could create
Iftheserisksmaterialized,theCentralBankwoulduseitsavailableinternationalreservesandthevariousmechanismsithastoinjectliquidityinbothdomesticandforeigncurrencytooffsettheimpactofsuchshocksondomesticfinancialconditions. The monetary policy stance in the forecast horizon would beexpansionarytopreventdeflationaryrisks.
b. Evolution of domestic demand
In a scenario of higher uncertainty, there is the risk that domestic agents’expectationsmaydeteriorate,especiallyinthecaseofinvestment,whichcouldgeneratea lowerdynamisminaggregatedemandandleadtheeconomytogrowbelowitspotentialgrowthrategeneratingdownwardpressuresoncoreinflation.Inthisscenario,theCentralBankwouldeaseitsmonetarypositioninorderthatinflationfallswithintheinflationtargetrange.
On the other hand, there are two risks on the upside for inflation associatedmainlywithhigherforeigncapitalinflowsandhighercommodityprices
c. Increased capital inflows
The high availability of liquidity in international markets due to the aggressiveexpansion of central banks’ balances in developed countries, together with thescarce attractive investment options observed in today’s context of high globaluncertainty, could lead to a flow of foreign capitals to emerging countries suchasPeru,generatingasimilarsituationtotheoneobservedpriortothecrisisthatstarted towards the endof 2008.On theonehand, an increased capital inflowwouldacceleratetheexpansionofcredit,thusstimulatingaggregatedemandandinflation.Ontheotherhand,thiswouldcauseappreciatorypressuresontheforeignexchangeratethatwouldtranslateintolowerdomesticinflation.Itisestimatedthattheneteffectofanincreasedcapitalinflowoninflationwouldbeslightlypositive.
In this scenario, the Central Bank would adjust its monetary policy includingmacroprudentialpolicy instruments,suchastheratesofreserverequirements, ifapaceofcreditexpansionthatcouldaffectmonetaryandfinancialstabilityisperceived.
d. Imported inflation or adverse climate conditions
Thereistheriskthatglobalinflationarypressureswillbemorepersistentthancurrently estimated in the baseline scenario. Uncertainty about how policymakerswillcopewithfinancialproblems,especiallyintheEurozone,ishavingastrongimpactonthelevelofglobaleconomicactivity.Amoredetermined
In this scenario, theCentralBankwouldadjust itsmonetarypositiononly ifimportedinflationaffectedeconomicagents’expectationsofinflation.
98.Our Inflation Report of December included in its balance of risks the possibilitythattheexpectationsofinflationofhouseholdsandbusinesseswouldpersistentlyremainabovetheinflationtargetgiventhattheinformationgatheredthroughtheBCRPsurveysshowedaslightincreaseinthelevelofinflationexpectedtowardstheendof2011.However,accordingtothelatestsurveycarriedout,thisincreasehas reversed,whichwouldbe indicating that the riskof higher inflationdue toexpectationsofhigherinflationwillnotmaterialize.
99.Theeffectsoftheriskfactorspushinginflationupwardswouldbecounterbalancedby theeffectsof the risk factorspushing inflationdownwards. In summary, thebalance of these risks is neutral for the inflation forecast for end 2012; that is,there is the sameprobability that inflation will fall above or below the forecastconsideredinthebaselinescenario.
Graph 103bALANCE OF RISkS AGAINST THE bASE SCENARIO
0.100.080.060.040.020.00
-0.02-0.04-0.06-0.08-0.10
Expe
cted
impa
ct =
pro
babi
lity x
impa
ct (p
oint
s of i
nflat
ion)
0.100.080.060.040.020.00
-0.02-0.04-0.06-0.08-0.10
Risksontheupside
Risksonthe
downside
Deterioration of theinternational environment
Lower demandgrowth
Higher inflationexpectations
Greater inflows of capital
Memo: TheriskassessmentdescribeshowexogenousfactorswouldaffecttherateofinflationforecastforDecember2012ifsuchrisksmaterialized.Eachbarinthegraphillustratesthemagnitudeanddirectionoftheeffectofthesefactors,i.e.,theexpectedimpactinalternativeforecastscenarios.Thisimpactiscalculatedasthedifferencebetweenthe inflation forecast in the baseline scenario and inflation projections in several scenarios considering differentassumptions,multiplyingthisdifferencebytheprobabilityofoccurrenceassignedtosuchalternativeassumptions.Thesumofthebars–theriskbalance–indicateshowtheseriskfactorsasawholewoulddivertinflationfromthebaselinescenarioinDecember2012.