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

– 2023 did not take off as expected in the second half of the year and the reasons continue to be what happened in the first two months. Why couldn’t we reverse the trend?

I believe it is a combination of many things, but in particular it is a significant forecast error regarding the impact of El Niño Costero on the Peruvian economy. It seems to me that, suddenly because of history, there was a concentration in terms of analysis of what the impact of El Niño in the summer could represent. And when we realized, the impact was really significant starting in the second quarter and even stronger in the third quarter.

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

A box from the inflation report that came out last week tries to isolate the shocks that the Peruvian economy received, including climate issues, and ends in 1.5 impact points. I dare say that it is a little more, close to 2 points. Because that is also quite consistent with an analysis that we did in 2017 that concluded that when there is a strong El Niño – which in the end is what ended up happening in 2023 -, the impact is 2 points on growth. Definitely, El Niño Costero was significant. Let us remember that the performance of agriculture has been the worst in 25 years and that of fishing in 31. That would say that it is the main factor that led to the economy not being able to respond in the second half.

-And is the low business confidence in 2023 also attributed to this factor?

It feeds back. What happens is that, in the midst of this situation where the year started with a lot of uncertainty due to social protests, it also ends up happening that when El Niño comes, confidence drops again. As you point out, recovery was expected in the second semester and it appears that it did not arrive. There is an additional effect on the economy due to lower confidence. It is the combination of all the factors. All the planets were misaligned for Peru.

– That being the case, what degree will the rebound be in 2024?

Peru is definitely going to rebound because 2023 was very bad. Our projection is 2%, which seems like a very sensible number to me at this time. In the case of total investment, we estimate that it will rise 0.8% in 2024: private investment does not grow and public investment grows 4%. Mining investment fell more than 20% in the first half of 2023 by Quellaveco. That’s a one-time effect that’s statistically going to rebound next year. Even with the announcement of new investments, what we are going to have is that mining investment is not going to fall but will be positive. Another point is that, even if agriculture and fishing do poorly due to El Niño, the falls will not be 60%. The statistical basis is different. The El Niño Phenomenon may affect, but the impact in 2023 has been so strong that the statistical basis is more favorable. Let’s hope that the FEN is less strong than initially expected.

– Beyond the rebound, more structural growth is of concern.

We do have concerns that the economy’s potential growth is declining. Beyond the rebound and growing by 2% in 2024, the truth is that long-term growth at rates of 3% does depend a lot on reactivating confidence and private investment.

– Given the situation of trust, do you see a renewal of the cabinet of ministers as positive?

I feel that the Government has made efforts in its announcements to reactivate confidence, that is good news. It has committed 2.5 points of GDP to face El Niño. That’s on the right track. And, the announcement of new projects is good news. Now, it is very difficult to make long-term decisions still with the uncertainty of what will happen next. Beyond 2024, I believe that there has to be greater political stability from the point of view that Congress and the Executive stop proposing counter-reforms. I would not start by saying that it is the Cabinet, but rather a joint work of all the authorities. I still think that there are no reforms.

“Changes in the Cabinet? We have had so many in recent years and not much happens there. I think that this cabinet is definitely more technical than the one Castillo had. Beyond what the ministers can do, it depends on what is can work together. It’s a mix of things, I wouldn’t say it’s just the Cabinet.”

-And about reforms? The MEF has opted for reactivation plans that have been more of a response to the situation.

Let’s start by not continuing to approve reforms that threaten long-term growth. In fact, the impact of pension fund withdrawals on structural growth is already beginning to be evident. It is evident: if you withdraw savings, national savings fall and, consequently, there is less investment. Spot. It is a fundamental equation. Unless foreign flows enter at a significant level, but this is not the case. Later, regarding specific reforms, I always talk about a fundamental one in Peru, which is the labor market.

– The fiscal issue is another point that has been questioned by the MEF due to the decisions made to meet the goal. Has fiscal credibility been damaged?

I would make more reference to the risk rating agencies. There is contradiction. Some say that if it is a one-time effect, it becomes understandable. The other said it doesn’t look very good, but it can be forgivable if it happens just once. I would tell you that in a year like 2023, this type of thing does not generate so much noise. But it should definitely be a one-time practice. In general, I still think that in extraordinary years it is really valid to take extraordinary measures. It is a context in which we seek to have fiscal responsibility and avoid an increase in public debt. It generates some noise, yes; but it raises more concerns about its use in the future.

– What will it matter to the rating agencies when evaluating Peru?

What is really worrying is economic and political growth. Beyond the fiscal issue, stagnation means that economic growth will be lower in the future. I think that the rating agencies are evaluating that, if in 2024 we will have a sustained rebound in activity or if in 2025 we will fall a little again and that puts the fiscal accounts at risk in a more structural way. Without growth there is nothing.

– Today there is already a tax revenue problem. Does the rebound guarantee a real recovery?

Indeed, there will be a rebound tied to economic growth. In any case, it must be recognized that many taxes are tied to the performance of the economy in 2023. You still have a burden during the first part. The good news is that in the midst of this complex scenario, the price of copper is expected not to fall. That will greatly benefit tax revenue. At this moment there is a consensus that the price of copper will not fall further and that it is the most attractive metal in the medium and long term. The metal theme will play an important role. So, there will be a rebound but it will not be important or necessary. There are still public spending pressures with everything committed to El Niño.



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