Economic Environment

The conditions in which stock market trading took place in 2017 featured two very different contexts. At the national level, while the Peruvian economy’s growth was acceptable based on the development of the primary sector, investments were affected by the political noise, the continuous disagreements between the executive and legislative branches and the news of corruption brought abut by the Odebrecht case, which generated a climate of distrust and uncertainty. Added to this was “El Niño” phenomenon, which inflicted important damages to the Peruvian North Coast.

The scenario was more favorable at the international level, given that the world economy’s recovery cycle strengthened in the second half of the year, estimating that global expansion must have been 3.7%. Although growth occurred everywhere, the unexpected impulse experienced by the European and Asian economies should be highlighted.

In the European continent the results were encouraging and showed a remarkable recovery. It is estimated that the Euro Zone’s economy grew by 2.4%, with the highlights being the projections for Spain (+ 3.1%) and Germany (+ 2.5%). In the aftermath of the fears and pessimism generated by Brexit, the measures adopted by the European Central Bank (ECB) and the adequate management of leading countries such as France and Germany, promoted a climate of optimism and stability, which stimulated consumer confidence and investors.
With respect to the Chinese economy, fears were averted after GDP recorded its worst result of the past 25 years (+ 6.7%) in 2016. Thus, in spite of the fact that the forecasts at the beginning of the year pointed to a new slowdown, the stimulus, in the form of fiscal and monetary measures adopted by the Xi Jinping administration, enabled a stable development, together with the boom in construction and world demand for its exports, for an estimated 6.8% growth.

On the other hand, the US economy and Wall Street benefited from the positive expectations regarding the expansionary fiscal measures proposed by President Donald Trump, as well as the implementation of a relaxed monetary policy on the part of the Federal Reserve. Therefore, almost all macroeconomic data exceeded analysts’ expectations (unemployment fell to 4.1% and GDP growth is projected to 2.3%), a trend which would remain for the year 2018.

It is in this context that the Federal Reserve System (FED) hiked its benchmark rate three times (in March, June and December 2017), going from the 0.50%-0.75% sort to a 1.25%-1.50% range. These increases were adequately assimilated by the market, which somehow absorbed them in the prices of assets. However, in spite of this favorable scenario, the DXY Dollar’s cycle was negative, depreciating by 9.9% (its biggest loss in the past 14 years).

According to official figures available, the Peruvian economy grew by 2.5% in 2017, a rate significantly lower than in previous years: 4.0% in 2016 and 3.3% in 2015. The monthly performance reveals that the “El Niño” phenomenon significantly affected national production during the months of February, March and April. According to figures released by the International Monetary Fund (IMF), projections show that Latin America grew 1.3%, influenced by rates such as Mexico’s (2.0%) and Brazil’s (1.1%), and the severe recession in Venezuela.
The development of the Peruvian economy was supported by primary activities. Thus, in the Mining and Hydrocarbons sector (+ 3.19%), metal mining stood out with a 4.2% growth due to a greater copper production volume (the main driver of the sector’s growth in the past three years), followed by zinc, molybdenum and iron. It should be noted that copper, molybdenum and iron reported all-time high production levels.

The Farming sector experienced a 2.62% growth, driven by a higher agricultural production (2.58%) and increased livestock activity (2.68%), favored by the normalization of weather conditions and water resource availability in some areas of the country. Fisheries expanded by 4.67% due to a greater capture of marine species, such as anchovy, destined to the preparation of fishmeal and fish oil, and species for direct human consumption.

Other sectors which significantly contributed to domestic production were: Other Services (3.68%), Telecommunications (8.02%), Construction (2.20%) and Trade (1.03%). On the contrary, Manufacturing activity (which has the highest weight in the global GDP calculation) dropped to 0.27%, result explained by the fall of the non-primary manufacturing subsector (-0.93%) affected by the decline of the intermediate goods industry.

Concerning metal prices, the rise in copper and zinc prices (by approximately 30%), gold (13%) and lead (24%) was highlighted by the prospect of a higher demand and further restrictions in the supply. This contributed to an increase in the trade index terms above 7%, allowing the trade balance to reach a surplus of US$ 6.266 billion, tripling the previous year’s figure.

On the government’s budget’s side, tax revenues fell again, causing the fiscal deficit to increase to 3.2% of GDP, greatly exceeding the figure reported in 2016 (2.6% of GDP) and failing to meet the target set by the Ministry of the Economy and Finance – MEF (3% for 2017). It should be noted that within the Multiannual Macroeconomic Framework, it is expected for the deficit to rise to 3.5% in 2018; and then, control it in 2019, and guide it to 1% (by 2021).

Inflation, which since 2014 has been reporting annual variations ranging between 3% and 4%, evidenced a noticeable drop as from the second semester of 2017, closing the year at 1.36%, the lowest rate since 2009. This notable reduction was attributed to the reversal of supply shocks which had affected farming products, the domestic currency’s revaluation, and the drop in inflation expectations.

Given this scenario, and being within the anticipated inflation target range (between 1% and 3%), the Peruvian Central Reserve Bank (BCRP) took an expansionary stance throughout 2017, cutting its benchmark interest rate on four occasions, taking it from 4.25% to 3.25%. Additionally, the BCRP reduced US Dollar reserve requirements in order to offset the slowdown in credit demand.

As for the exchange rate, the Peruvian currency was again revalued against the US Dollar, forcing the BCRP to make net purchases worth US$ 5.246 billion, to reduce volatility. Accordingly, the interbank exchange rate – quoted at 3.36 Soles at the end of last year – closed 2017 at 3.24 Soles per US Dollar.