José Carlos Saavedra, Partner and Principal economist.
The world is suffering the worst crisis of the past 75 years due to COVID-19, and signs of deteriorating economies are increasingly evident. On the healthcare front, the exponential rise of infection cases has collapsed healthcare systems at the global level. On the economic front, several indicators suggest that the economic activity has plummeted all around the globe.
In Peru, although there are signs of a slight flattening of the curve of COVID-19 cases, the more than 40 days of quarantine have not been enough to contain the virus. In this line, the government has been forced to extend the mandatory social distancing measures until May 10.
Given this situation and considering some key assumptions, APOYO Consultoria estimates that this year, GDP will fall 10%-12% in real terms, formal employment will be reduced by 20%, and private investment, by 40%-50%. Because this is an unprecedented crisis and the level of uncertainty is very high, economic growth will depend on the evolution of many factors, such as global economic growth, further extensions of the quarantine, economic measures carried out by the government, among others.
Up to now, the government’s economic response have moved in the right direction to mitigate the impact of this severe crisis. This response has included the granting of a subsidy to the most vulnerable families, a payroll subsidy, tax and financial relief for companies, liquidity lines with State guarantees, “perfect suspension” of work, and the financing of this economic program through external debt with low rates.
However, there are three important risks that could limit impact of the government’s measures on economic activity: i) that shortcomings in public administration and in the healthcare system will jeopardize the control of the virus spread and the reopening of the economy, ii) that social discontent will increase and generate violence, as well as a wave of populist measures, and iii) that the gradual process of reopening economic sectors will not be adequate.
Last month, we identified four pieces of good news for the business environment: (i) lower prices of certain imported goods, (ii) lower political risk, (iii) improved business confidence, and (iv) some stabilization in local financial variables.
Six months into the administration, signs of an impending deterioration in the relationship between the Executive and Congress are starting to surface.
After a challenging start of the year, characterized by social conflicts and heavy rains, the Peruvian economy has begun to show signs of recovery, albeit at a slow pace.
