“The impact of El Niño in 2024 could be, at the extreme, one point less growth”

—Credicorp has highlighted the improvement in business expectations in the country. How do you break down the factors that are influencing this fact?

It is no coincidence that Peru has the worst performance of its internal demand in more than 20 years with the highest interest rates in more than 20 years. The first thing that would be expected in any country is that to the extent that there are expectations of reduced inflation and interest rate cuts, businessmen little by little have more optimism. To a large extent, the recovery of confidence is explained by that. To that you add, in my opinion, political stability. A few months ago, at the beginning of Dina Boluarte’s Government, the best bet was that the Government would not last more than a month and a half. Today the consensus of the market, of investors, economists and I would say businessmen is that they will be around until 2026. And obviously that gives you a boost of confidence. I think it’s a mix of 2 things. Difficult to give a weight to each one. Furthermore, in the first part of the year, Peru faced strong climatic shocks and it is expected that this will not be repeated indefinitely.

—This greater confidence and perception of political stability is not properly attributable to the actions taken by the current Government, but is a clear improvement compared to the government of Pedro Castillo. Let’s say, an almost instant improvement.

There is agreement among political analysts that Castillo’s period was one of the most complex that Peru has experienced. Let us never forget that during that period there was the largest capital outflow in history. The arrival of Boluarte immediately improves your conditions a little. Indeed, without doing much. Just with the change coming. From the start you enter with such a low barrier that [las expectativas] They improve you immediately. Personally, I have applauded that the Government has committed a lot of money to preventive works to address recent climate difficulties. We are talking about two points of the GDP of committed resources. Simultaneously, an attempt is being made to send a very positive investment message. So, from an advertising point of view, more trust is being gained. The question is whether it will be executed. Unfortunately, one of the great challenges for Peru is the non-execution of public spending.

—So we are not talking about an improvement in closed trust, but one that is still expectant.

I would say that the market is cautious, but above all that it does have the perception that the balance is fragile. In the sense that you have Congress and Boluarte with low popularity. Something tells you that it is not fully consolidated. The balance is also fragile due to the El Niño phenomenon. That’s particularly important because, while it’s not a scenario as such, there is a risk. If the El Niño phenomenon is strong in the summer, if there is a significant impact and the resources that have been committed do not arrive, socially there may be an effect. If you ask me, but the El Niño Phenomenon can suddenly bring tensions. That’s where it’s key for the Government to arrive.

—Speaking of which, I ask you about the fiscal scenario and the contingencies against El Niño. You project a deficit of 2.5% at the end of the year, one tenth above the legal limit. Would that be a problem for the country?

It is controlled because in Peru there are several fiscal rules. My opinion is that the most important, by far, is the level of debt. And for now there is a rule that allows debt to be below 40%. Almost the entire decade is at 32%. So, it’s not a risk. Under any circumstance in any country in the world, if you have a climate phenomenon, that is one of the escape valves to temporarily break a rule. Because, indeed, it is something that is completely extraordinary.

—And wouldn’t it affect the country’s credit rating or fiscal credibility?

Not for me. As long as it is well justified, no. Now, can they lower Peru’s rating? I believe that everything is possible. In fact, all the ‘outlook’ are negative. So it is possible. But, honestly, I would hope that the rating agencies do not do it because there is greater political stability – which was the first threat when they lowered the ‘outlook’ – and because of the level of debt. I always make the comparison with Chile: a country with three grades above Peru and with a debt of 40%. So, why should the rating be affected by a country that, if the deficit increases a little, is because it needs to do so due to the El Niño Phenomenon? Anything can happen. Rating agencies sometimes look at things that you are not looking at in detail. But you look at public debt, deficit, political stability and I believe that everything should remain the same.

—Your deficit projection is 2% for 2024. Also because of El Niño?

Yes, because we believe that the Government will have a hard time executing. The El Niño Phenomenon takes you to that, but the discussion itself [el mayor déficit] It leads to a loss of credibility… I would tell you the following: today in Colombia they are discussing whether the 2024 fiscal rule will be violated. Is the probability high? I would say yes. In Brazil, it is curious, they committed to a deficit and everyone was happy. But they presented the budget and it kind of didn’t add up. Mexico made a really incredible move two weeks ago: they said they expected a deficit of 2 and a half and now it’s 4%.

“In relative terms, Peru continues to be infinitely better fiscally than the rest of the countries”

—By 2024 you expect economic growth of 2% for Peru. Under what El Niño scenario?

Moderate.

—And if El Niño were more serious, that projection would tend to go down. How much?

The El Niño Phenomenon in Peru is different. If the planets misalign and the El Niño Phenomenon also continues to be strong in the summer, it means that the country would have the longest phenomenon in the region and the effect accumulates. We have always estimated that a strong El Niño costs growth more than 2 points. What we have seen this year already basically reflects it. We had a growth projection for this year of 2.3% and we are already at 0.6%. With this, it is not that I am telling you that next year – which we estimate 2% – El Niño subtracts two points and growth could be zero. No, because there is already a great effect. Fishing has already been paralyzed, and agriculture has already had an effect. Eventually it could be something much smaller than those two points. As we have already been feeling the impact, I would not say that 2% is going to go to zero. But you can lose between half a point and one point.

—How long would the impact last? The events that occurred in the first half of the year with Cyclone Yaku and El Niño Costero had an impact on the entire first semester. Even today they have delayed effects on the harvest of some crops.

The first trimester is the most complicated. What we have seen in Peru is very interesting: the effect is really temporary, especially in prices, agriculture and so on. And that’s why I do believe that, for example, there could be short-term inflationary effects, but what we usually see is that in the second half they are almost completely corrected. Now, it is worth saying that the impact now depends a lot on the Government’s action: if they do absolutely nothing and a strong Niño arrives, then things do get complicated. That’s why I tell you that I believe that we have a very positive factor: the statistical base effect of the first half of the year is very positive.

“For Peru to have 0% next year, something really scandalous would have to happen”

—Speaking of inflation, the BCR -as a result of El Niño- It already seems difficult for the year to close at 3%. Do you see a similar situation?

There’s something interesting there. Usually the El Niño Phenomenon, when it arrived earlier, inflation rose. But because we were in normal inflation. Now it caught us with abnormal inflation. So effectively my opinion is that there is no risk that the FEN arrives and inflation rises again. Indeed, what I believe is that you end up having an impact is in the speed with which it falls. Something very positive or at least very favorable in relative terms is that Peru is the only country in the region where underlying inflation is below total inflation. And that is an anchor. We do recognize the risk that the decline will be slower with the FEN, but for now it will not change the closing projection for 2024, which is 3%. Now, about this year’s goal…We had always differed from the projection of the Central Reserve Bank of Peru, but the underlying inflation does help you a lot. In that order of ideas, Velarde has been very emphatic in saying that he has to be very careful with lowering rates.

—The FED has already mentioned a possible rate hike. That would limit the decisions made by the BCR.

In some way I read the message from the Central Bank and I would even hope that it would pause in October, that they would not lower it. Maybe every two months, for now. Because lowering rates and the FED raising in November can further complicate the situation.

—And, returning to my initial question, wouldn’t all of this hit the part of business expectations that relied on the reduction of the rate?

Not necessarily and that’s a good point. We have said and there is a risk that the decline will be slow, but the final level of the rate does not change us at all. And, of course, in the short term, an investor can say ‘no, but they are going to take a while to lower the rate.’ But, let’s say, at most it will be three or four more months. After such a blow from what we have seen in the last two years of monetary policy, you should hold on a little longer… Anyway, in the end, lowering rates does not immediately hit the economy. Really, a minimum rate drop in the economy will be felt in six months from now. So the message is that Velarde is going to be cautious, but the final level of the rate is not going to change.