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Latin America Monitor

Andean Vol 33 Issue 5 May 2016

BMI Research’s monthly regional report on political risk and macroeconomic prospects

VENEZUELA This month's top stories

Maduro Unlikely To See Out Colombia: Final Hurdles To Peace

Process Surmountable

Term Amid Growing Unrest

Disagreements between the FARC and Colombian govern-
ment on the implementation of a peace accord will continue
to delay the conclusion of the country's years-long peace pro-
BMI View: Venezuelan President Nicolás Maduro is unlikely to re- cess. Nevertheless, a peace deal remains highly likely in the
main in office through to the end of his term in 2019 as economic coming months given significant incentives for both parties.
deterioration and widespread social unrest severely undermine his page 4
support. Irrespective of the manner in which he is removed, we see
Peru: Modest Deficits Will Persist In
a significant period of social unrest and limited scope for significant
economic reforms in the near term.
Response To Slower Growth
Peru's fiscal deficit will widen in 2016 as the country's on-
• We now see a more than 50% chance faltering backing from these two going economic rebound weighs on revenue growth and
that President Nicolás Maduro will crucial pillars of support. encourages expenditure expansion. However, prudent fiscal
be forced from office before 2019. • Political unrest will remain elevated policy will ensure the deficit begins to narrow in 2017, sup-
• The opposition Mesa de la Unidad in the coming quarters in almost porting the government's sovereign credentials.
Democrática (MUD) coalition has all possible scenarios, and there page 5
few avenues through which it can are few outcomes in which a new
force the president out, and the Venezuelan government will take Peru: PEN – Bottom In H116,
heavy influence the ruling party substantial steps to address the Modest Rebound Thereafter
exerts over the judiciary and electoral country's fundamental macroeco- page 6
committee means that a recall refer- nomic weaknesses.
endum or constitutional amendment Ecuador: Oil Price Pressures To Weigh
would be easily blocked. We now see it as more likely than not On Output
• However, the prospect of sustained, that President Maduro will be forced page 7
opposition-led social unrest will from office before the end of his term by
likely galvanise the armed forces or the opposition, his own party, the army Bolivia: State-Led Growth Ahead
Maduro's own Partido Socialista page 8
or, more likely, a number of these groups
Unido de Venezuela (PSUV) into ac- acting in concert. In recent quarters,
tion, especially given the president's ...continued on page 2

RISK INDEX TABLE

BMI's Country Risk Index scores countries on a 0-100 scale, evaluating short-term Regional Indicators
and long-term political stability, short-term economic outlook, long-term economic
potential and operational barriers to doing business. For a detailed methodology, visit 2014 2015e 2016f 2017f
bmiresearch.com or contact us using the details below. Andean Indicators

Short Term Long Term Operational Country Nominal GDP, USDbn 1,291.4 840.5 869.9 1,234.9
Political Economic Political Economic Risk Risk Population, mn 135.9 137.6 139.2 140.8
Peru 65.0 66.7 61.5 67.6 52.1 61.0
GDP per capita, USD 9,501.0 6,108.9 6,248.3 8,768.4
Colombia 66.0 59.2 63.0 63.1 50.3 58.7
Ecuador 53.3 46.5 49.2 55.8 46.1 49.5 Real GDP growth, % 0.4 -0.1 -0.3 1.5
Bolivia 51.5 53.5 47.7 58.2 40.3 48.5 Inflation, % 1.8 3.1 3.3 2.1
Venezuela 44.2 25.2 48.8 39.7 36.3 38.4 Goods Exports, USDbn 210.1 145.9 126.3 138.6
Regional Average 56.0 50.2 54.0 56.9 45.0 51.2
Goods Imports, USDbn 187.2 165.0 150.7 154.8
Global Average 64.1 50.0 61.0 52.6 49.9 54.5
Note: Andean = Bolivia, Colombia, Ecuador, Peru, Venezuela. Weighted by nominal GDP.
Source: BMI
e/f = BMI estimate/forecast Source: BMI

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  VENEZUELA
...continued from front page
Venezuela's endemic goods shortages, soaring
inflation and elevated violence have substan-
tially undermined popular support for the
president. An uptick in oil prices and modest
economic reforms throughout 2016 will begin
to temper pressure on trade and fiscal dynam-
ics and increase flows of hard currency into
the economy. However, this will not make a
sufficient near-term difference in the everyday
lives of the population to blunt their anger at
the president or reverse the deterioration in
Maduro's support among the armed forces
and his own PSUV party.
Below we outline three scenarios that could
see the removal of Maduro, as well as the one
in which he manages to cling to power, exam-
ining the catalysts for each and their impact
on Venezuela's political and macroeconomic
outlook. Ultimately we see this as a binary
situation – either the president will remain in
power or he will be forced out. While the like-
lihood that Maduro remains in power (45%)
is higher than any of the individual scenarios
in which he is removed, taken together, the
likelihood of those scenarios is above 50%,
making the president's departure from office
our core view.
Irrespective of whether or not Maduro
departs, Venezuela is set for significant political
and economic challenges in the years ahead.
In all of the scenarios outlined below we
expect severely elevated social unrest, and in
the vast majority of cases we see limited scope
for substantial economic reforms. Moreover,
while it is not our core view that Venezuela
will default on its external debt, we note that
a period of increased political instability will
elevate the risk (see'Probability of Sovereign De-
fault: A Closer Look', February 3). Indeed, some
opposition leaders have already stated that if
they came to power, they may not honour the
current government's debt obligations. While
we view these statements as largely political
posturing, we note that an increasingly chaotic
political landscape could see the government
default due to poor planning and simple fiscal
mismanagement.
Maduro Forced Out Of Office (55%) –
Scenario 1: Reshuffle In The PSUV
Despite the opposition's hard-line rhetoric
against the president, the most likely scenario
in which Maduro leaves office would be under
pressure from his own party, forcing him to
resign. With Maduro's approval ratings near
all-time lows, and nearly three-quarters of
the population calling for his departure from
office, we believe a growing core of party mem-
2 2 ANDEAN – MAY 2016
bers may see removing the president as a way
to deflect rising public anger while salvaging
the PSUV's reputation as a legitimate govern-
ing force. Prolonged, sizeable demonstrations
by the opposition would act as an effective
catalyst, compelling the party to take action.
An especially poor showing in the December
gubernatorial elections – the PSUV currently
holds 20 of 23 seats but stands to lose a large
number – could also push the party to act.
This scenario would likely see the more
moderate vice president, Aristóbulo Istúriz,
take power. In order to ensure this outcome,
PSUV leaders could attempt to hold off any
leadership changes until January 2017 to en-
sure that the party retains power through the
end of Maduro's term. The constitution stipu-
lates that a resignation of the president triggers
a new election unless it happens within the
last two years of his term in office. However,
we cannot rule out that greater-than-expected
social upheaval could encourage the PSUV
to negotiate a (likely unconstitutional) deal
with the MUD, pushing Maduro out early
in exchange for being permitted to maintain
power through 2019.
There would likely be limited room for a
substantive shift in economic policy by the
government. While Istúriz would likely speed
up adjustments to the multi-tiered exchange
rate regime and the reduction of subsidies,
the government has already begun to move
in that direction in recent months anyway.
Meanwhile, his adherence to the core tenets
of the PSUV's platform would limit scope for
more radical reforms. This suggests structural
economic weaknesses that have long plagued
the Venezuelan economy would persist, in-
cluding inadequate infrastructure, a lack of
productive capacity and limited incentives
to invest in sectors other than oil and gas. As
such, our long-standing core economic views
– sluggish growth, continued elevated inflation
and only a gradual narrowing of the fiscal and
current account deficits over a multiyear time
horizon – would be well in play in this scenario
(see '10 Year Forecast: Growth Outlook In A
Post-Chávez Era', December 1 2015).
There would, however, be an increased
scope for cooperation between the PSUV
and MUD, with Istúriz having previously
indicated a greater willingness to work with
the opposition. This could see the government
agree to allow amnesty for political prisoners,
and even ensure the restoration of some of the
legislative body's powers, after the Tribunal
Supremo de Justicia (TSJ) has recently lim-
ited the Asamblea Nacional's constitutionally
mandated powers of oversight over the judici-
ary. This would help to reduce social unrest,
though with the country facing continued
economic weakness and the more hard-line
wing of the MUD unlikely to be willing to
work with any PSUV led-government, spo-
radic violent protests would still occur.
Scenario 2: Recall Referendum Or
Constitutional Amendment
A second scenario in which Maduro could be
forced out would be through a successful recall
referendum or constitutional amendment by
the opposition. In this case, we would likely
see new elections called and the MUD assume
the executive role.
The PSUV's influence over the TSJ and
Consejo Nacional Electoral (CNE), the
country's highest electoral body, makes it all
but impossible for the opposition to remove
Maduro alone, as both the recall referendum
and a constitutional amendment are subject
to the approval of either the executive or
judicial branch. However, we cannot rule
out a scenario in which either the army or
a dissident faction of the PSUV leans on
Venezuela's legal institutions to ensure that
the results are accepted. There are indications
that the army may be growing wary of backing
the government in the face of overwhelming
popular opposition. Indeed, local press report
that Defence Minister General Vladimir
Padrino López ensured the recognition of
the December legislative elections, allegedly
having told the PSUV that the army would
refuse to support the government in overturn-
ing the results. While the army has no official
role in government, the recall referendum or
constitutional amendment processes, state-
ments that it would not back government
attempts to block these measures would have
a significant impact.
Opposition leaders would struggle with
many of the same problems currently facing
the government and may not be substantially
better at resolving them. In the best-case sce-
nario, the MUD would enact a series of
significant economic adjustments, including a
sharp reduction in subsidies and other current
spending, elimination of capital controls and
measures to attract investment into the non-oil
sector. While these measures would prompt a
further sharp deterioration in growth in the
short term, they would put the country on the
path to more sustained long-term economic
expansion. That said, given that pain from
the policy changes would be felt deeply by
the population, the MUD would likely find
itself facing significant public backlash. As
deep ideological fractures become apparent
in the coalition, this could lead to sclerotic
policymaking, stalling efforts to put Venezuela
www.latinamericamonitor.com
on a more stable economic footing. In such a
situation, sharp policy swings would encour-
age increased private sector caution towards
the Venezuelan economy, undermining ef-
forts to build productive capacity. Moreover,
while multinational bodies and foreign lend-
ers would likely look more favourably on a
transition to a non-PSUV regime, potentially
extending aid or allowing the government to
restructure some of its debt burden, financ-
ing could dry up quickly should the coalition
prove dysfunctional.
Scenario 3: Coup By Army
A coup by the army is the least likely scenario,
in our view, but cannot be ruled out. Top
members of the military have allegedly long
profited from the patronage of the govern-
ment, including gaining preferential access
to housing and cars, being placed in high
positions in government-run enterprises,
and even reportedly being protected by the
government against prosecution for drug
smuggling. However, with the Venezuelan
economy in an economic tailspin, opportu-
nities for self-enrichment by military officers
are likely becoming increasingly limited,
reducing the impetus to continue support-
ing the government. With the military likely
to be called upon for the unpopular task of
suppressing protests as the opposition ramps
up its demonstrations against Maduro, this
could further increase resentment towards the
president within the armed forces. That said,
fading military support is more likely to result
in a reshuffle within the PSUV rather than an
outright power grab. The only way we would
see faltering army support lead to a coup is if
there is a significant escalation in social unrest
and the ruling party is unwilling to take action
to remove Maduro.
At this point, it is nearly impossible to pre-
dict the economic impact of a coup, as it would
depend greatly on which elements of the army
took power. At the very least, though, it would
substantially increase uncertainty over the
country's policy direction in the short term.
In addition, it would also substantially increase
political uncertainty, potentially isolating
Venezuela both from long-time allies in the
region as well as multinational institutions and
Western powers that would likely condemn
the move as an illegal seizure of power. We
would also expect heightened popular unrest.
Unlike the failed 2002 coup, in which Chávez
was temporarily removed from power only to
be restored on the back of massive protests,
we do not believe Maduro commands the
popularity to rally sufficiently large protests
around himself. However, we would expect
to see substantial demonstrations from both
Chavistas – angered that their party has been
ousted from the presidency – as well as from
those who may have disapproved of Maduro
but would be even more opposed to army rule.
Maduro Remains In Power (45%)
While no longer our core view, there is still
some scope for Maduro to remain in power.
The president has proven adept at holding on
to power, even in the face of severe economic
deterioration, while the opposition has shown
an uncanny ability to undermine its own inter-
ests through infighting. Indeed, the coalition
has long struggled with deep divisions over is-
sues from campaign tactics to policy priorities.
Should we see this translate into an inability to
develop a clear message to win over the poor-
est Venezuelans – long Maduro's most ardent
supporters but now suffering under rolling
blackouts, basic goods shortages and soaring
inflation – this could enable the president to
cling on to power through the end of his term.
We note that should the president remain in
power through mid-2017 – by which point
inflation and growth dynamics will begin
to more noticeably improve and his party's
anger over the December gubernatorial losses
will have faded – the likelihood that Maduro
hangs on through the end of his term increases.
In terms of economic policy, a Maduro
administration would involve modest eco-
nomic reforms but limited measures to
address Venezuela's structural economic
imbalances. We've already seen the president
announce a reduction in fuel subsidies and a
consolidation of two of the three exchange
rates in recent months – an effective devalu-
ation of the primary exchange rate. While
modest in scope, these measures represent a
crucial policy shift by the government and
suggest further reforms in the months ahead,
including further fuel price hikes, currency
devaluations and a relaxation of restrictions
on the private sector (see 'Economic Reforms
Are Insufficient But Symbolically Crucial', Feb-
ruary 22). That said, an increasingly divisive
political relationship between the MUD and
government would see political risk remain
elevated, with significant potential for wide-
spread social unrest.

DATA & FORECASTS

2012 2013 2014 2015e 2016f 2017f 2018f

Population, mn 29.9 30.3 30.7 31.1 31.5 31.9 32.3
Nominal GDP, USDbn 380.8 399.3 577.3 219.2 274.8 581.4 588.4
GDP per capita, USD 12,755 13,187 18,809 7,045 8,719 18,211 18,201
Real GDP growth, % y-o-y 5.6 1.3 -3.9 -7.5 -6.2 -0.6 2.1
Consumer price inflation, % y-o-y, ave 21.3 44.7 61.8 116.2 252.9 183.1 107.5
Consumer price inflation, % y-o-y, eop 20.1 56.2 68.5 180.9 236.3 130.0 85.0
Exchange rate VEF/USD, ave 4.29 6.08 6.29 29.27 65.50 85.25 172.31
Exchange rate VEF/USD, eop 4.29 6.29 6.29 47.39 75.38 128.78 230.47
Budget balance, VEFbn -79.5 -176.3 -431.1 -779.4 -3,087.7 -7,139.5 -11,635.8
Budget balance, % of GDP -4.9 -7.3 -11.9 -12.1 -17.2 -14.4 -11.5
Goods and services exports, USDbn 99.5 91.1 76.8 45.5 31.1 39.2 43.3
Goods and services imports, USDbn 77.5 72.8 64.6 55.1 47.4 45.5 45.1
Current account balance, USDbn 11.0 5.3 3.6 -17.0 -23.3 -12.2 -7.7
Current account balance, % of GDP 2.9 1.3 0.6 -7.8 -8.5 -2.1 -1.3
Foreign reserves ex gold, USDbn 29.9 21.5 22.3 15.0 13.0 23.0 25.0
Import cover, months 4.6 3.5 4.1 3.3 3.3 6.1 6.7
Total external debt stock, USDbn 118.9 118.8 169.0 181.7 208.9 231.5 257.8
Total external debt stock, % of GDP 31.2 29.7 29.3 82.9 76.0 39.8 43.8
Crude, NGPL & other liquids prod, 000b/d 2,677.0 2,685.0 2,462.0 2,398.6 2,326.4 2,278.5 2,242.4
Total net oil exports (crude & products), 000b/d 1,959.9 1,953.2 1,713.5 1,635.3 1,555.7 1,500.3 1,456.9
Dry natural gas production, bcm 22.7 21.8 22.0 22.9 24.3 25.4 26.2
Dry natural gas consumption, bcm 24.6 23.6 24.3 25.2 26.2 26.9 27.4
e/f = BMI estimate/forecast. Source: National statistics agencies, BMI

www.latinamericamonitor.com MAY 2016 – ANDEAN 3

  COLOMBIA
POLITICAL OUTLOOK

Final Hurdles To Peace Process administration has long stated that it should
be put to a public referendum, and even
passed legislation to enable this process in
Surmountable December 2015.
However, FARC leaders have previously
BMI View: Disagreements between the FARC and Colombian government on opposed this suggestion, proposing instead
the implementation of a peace accord will continue to delay the conclusion of a constituent assembly that they feel will
be more representative of the Colombian
the country's years-long peace process. Nevertheless, a peace deal remains
population. Colombia's last constituent as-
highly likely in the coming months given significant incentives for both parties.
sembly was convened in 1991 to create a new
The final policy hurdles in the peace process indicated that the FARC's hesitance to agree constitution for the country. Delegates to the
between the Colombian government and the to a specific date for disarmament is a major assembly would be popularly elected and the
Fuerzas Armadas Revolucionarias de Colombia factor in the two parties' inability to reach an power of congress would be suspended dur-
(FARC) are proving to be a significant challenge agreement. In addition, local press reports sug- ing this period. However, local legal experts
but will not derail the conclusion of a peace gest disagreement on the role of disarmament have questioned its validity as a means to
agreement in the coming months. Issues yet to in the peace process, with the government endorse a peace deal.
be agreed include the disarmament of the insur- believing that it is a crucial first step to begin Given the significance of the outstanding
gent group and the implementation of the peace implementing the agreements on reintegration, issues, negotiations are likely to continue at
accord. The two parties unsurprisingly failed transitional justice and political participation. a relatively slow pace in the next couple of
to reach a deal by their self-imposed March 23 In contrast, the FARC reportedly believes that months. Nevertheless, we believe that a deal
deadline. The government of President Juan the other steps must begin to be put in mo- is on the cards in 2016. Santos has staked his
Manuel Santos acknowledged that a deal would tion before the official disarmament process reputation on coming to an agreement and
not be reached in the weeks leading up to the begins. Similarly, there are disputes about the has suggested that his resignation might be
date, and the FARC had long insisted that the presence of military and police officers in the warranted if the process fails. Meanwhile, a
deadline was unrealistic. We maintain that a areas set to be demobilised, with the govern- significant decrease in the FARC's numbers
deal will be reached as early as H116, as there ment indicating that this is crucial for the safety in recent years has reduced its military power,
remain significant incentives on both sides. of all Colombians. Meanwhile, the FARC has making it increasingly vulnerable to a defeat
indicated that it has yet to receive the security by the Colombian armed forces in the next
Disarmament And Demobilisation No guarantees that would allow demobilisation several years. In addition, there are signifi-
Small Task and disarmament to proceed. cant long-term benefits to economic growth
Significant disagreements over the demobilisa- from a peace deal, which would enable
tion and disarmament of the FARC persist, Ratification Process Still To Be Decided On greater rural development and the expansion
meaning that negotiations are likely to continue In addition, the two sides must agree on of infrastructure and industry into areas that
in the next few months at least. Santos has how an accord will be ratified. The Santos are currently relatively underdeveloped.

DATA & FORECASTS

  2012 2013 2014 2015e 2016f 2017f 2018f

Population, mn 46.9 47.3 47.8 48.2 48.7 49.1 49.5
Nominal GDP, USDbn 369.7 380.1 378.3 291.7 261.5 285.9 338.1
GDP per capita, USD 7,749 7,865 7,730 5,888 5,217 5,638 6,594
Real GDP growth, % y-o-y 4.0 4.9 4.4 3.1 2.4 3.3 3.6
Industrial production, % y-o-y, ave -0.3 -1.3 1.5 1.0 3.3 5.3 5.5
Consumer price inflation, % y-o-y, ave 3.2 2.0 2.9 5.0 5.8 4.1 3.8
Consumer price inflation, % y-o-y, eop 2.4 1.9 3.7 6.8 4.6 3.5 3.5
Central bank policy rate, % eop 4.25 3.25 4.50 5.75 6.50 5.75 5.50
Exchange rate COP/USD, ave 1,796.81 1,869.35 2,002.55 2,745.77 3,287.25 3,225.00 2,925.00
Exchange rate COP/USD, eop 1,767.00 1,929.51 2,376.51 3,174.50 3,400.00 3,050.00 2,800.00
Budget balance, COPbn -12,354.5 -15,625.0 -19,844.7 -25,407.7 -31,508.0 -32,453.3 -32,327.9
Budget balance, % of GDP -1.9 -2.2 -2.6 -3.2 -3.7 -3.5 -3.3
Goods and services exports, USDbn 68.0 67.1 63.8 45.4 42.6 44.6 47.0
Goods and services imports, USDbn 68.9 69.9 75.1 63.4 59.2 61.8 64.9
Current account balance, USDbn -11.1 -12.3 -19.6 -18.9 -17.6 -18.6 -22.8
Current account balance, % of GDP -3.0 -3.2 -5.2 -6.5 -6.7 -6.5 -6.8
Foreign reserves ex gold, USDbn 37.5 43.6 47.3 45.9 45.4 46.4 47.7
Import cover, months 6.5 7.5 7.6 8.7 9.2 9.0 8.8
Total external debt stock, USDbn 76.6 89.3 102.3 106.9 115.7 126.6 139.9
Total external debt stock, % of GDP 20.7 23.5 27.1 36.7 44.2 44.3 41.4
Crude, NGPL & other liquids prod, 000b/d 962.6 1,022.0 1,010.0 1,028.4 958.5 926.3 908.9
Total net oil exports (crude & products), 000b/d 648.1 704.5 687.1 702.3 629.2 592.6 570.2
Dry natural gas production, bcm 10.2 10.2 11.2 10.5 10.2 10.0 9.6
Dry natural gas consumption, bcm 7.7 7.6 8.3 8.8 9.2 9.6 9.8
e/f = BMI estimate/forecast. Source: National sources, BMI

4 4 ANDEAN – MAY 2016 www.latinamericamonitor.com


ECONOMIC OUTLOOK
Modest Deficits Will Persist In
Response To Slower Growth
BMI View: Peru's fiscal deficit will widen in 2016 as the country's ongoing
economic rebound weighs on revenue growth and encourages expenditure
expansion. However, prudent fiscal policy will ensure the deficit begins to nar-
row in 2017, supporting the government's sovereign credentials.
• Peru's revenues will return to growth
in 2016, although headwinds to
corporate earnings will keep the
expansion modest.
• Expenditures will remain elevated
as the government seeks to support
growth through increased public
consumption and infrastructure
investment.
• A fiscal policy framework, favourable
debt profile and access to concessional
credit will support the Peruvian gov-
ernment's sovereign credentials.
Fiscal Deficit Will Peak In 2016
Peru – General Government Budget Balance
e/f = BMI estimate/forecast. Source: BCRP, BMI
Peru's fiscal deficit will widen in 2016 and
gradually narrow in the following years, as
economic growth and prudent fiscal policy
rebalances public finances. Although complete
general government fiscal data for 2015 is not
yet available, we have revised our estimates of
Peru's fiscal balance based on central govern-
ment data. We estimate a fiscal deficit of 2.7%
of GDP in 2015, narrower than our previous
forecast of 3.1%. In turn, we now forecast a
deficit of 3.1% of GDP in 2016, from 3.5%
previously. We forecast the deficit to narrow to
2.5% of GDP in 2017 to reach parity in 2020.
Revenue Outlook Constrained In 2016
Government revenues will return to positive
growth in 2016, although the economy's
still-nascent rebound will place a ceiling on
collections. Central government revenues
contracted 7.0% y-o-y in 2015, in line with
our forecast for total government revenues to
www.latinamericamonitor.com
PERU 
capital expenditures on infrastructure projects
will be supported by government initiatives to
ease bureaucratic obstacles to project approval,
which had dampened capital spending in 2015.
While the April presidential election intro-
duces some uncertainty into the path of gov-
ernment spending beyond 2016, we expect the
next Peruvian government to broadly empha-
sise investment spending in a bid to diversify
the Peruvian economy. The field of candidates
shrink 6.0%. The drop was largely driven by has largely coalesced around candidates with
tax cuts implemented in 2014, which reduced centrist and centre-right orientations empha-
corporate and some personal income tax rates. sising fiscal prudence and long-term invest-
As the base effects of these cuts fade, revenue ments. Regardless of the election outcome,
growth will improve. Further, the Peruvian Peru will likely see current expenditure growth
economy will strengthen in 2016, although curtailed as stimulus measures are wound
external headwinds will weigh on corporate down, while capital expenditure expands to
earnings. Peru is heavily exposed to China support long-term growth.
through trade and investment channels, and Public Consumption Will
we expect an increasingly steep downturn Underpin Stimulus Measures
Peru – Central Government
to weigh on Chinese demand for Peruvian Current Expenditures, 6mma, % chg y-o-y
goods. Additionally, our Commodities team 35
forecasts industrial metals prices to remain 30
25
very weak through H116, followed by only 20
a moderate recovery thereafter. These factors 15
10
will weigh on corporate income tax receipts, 5
0
which accounted for 21.7% of total revenues -5
in 2014. That said, we expect revenue growth -10
-15
to gradually improve in subsequent years as
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Dec-11
Mar-12
Dec-12
Mar-13
Dec-13
Mar-14
Dec-14
Mar-15
Dec-15
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Peru's economy sees more robust growth.
Current Expenses (Non-Financial)
Goods & Services
External Headwinds Will Weigh On Salaries & Wages
Corporate Income Source: BCRP, BMI
Peru – Central Government Revenue, 6mma, % chg y-o-y
50
Fiscal Prudence And Concessional Credit
40
Will Support Credentials
30
Persistent fiscal deficits over the next few years
20
will not undermine the government's sovereign
10
0
credentials, as Peru maintains a strong fiscal
-10
policy framework, favourable debt profile and
-20
access to concessional credit. Peru operates
-30 under a fiscal framework that prohibits deficits
Mar-12
Mar-13
Mar-14
Mar-15
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Sep-11
Dec-11
Sep-12
Dec-12
Sep-13
Dec-13
Sep-14
Dec-14
Sep-15
Dec-15
greater than 1.0% of GDP, except as temporary
Current Revenue Corporate Income Tax VAT
counter-cyclical responses to slow growth. We
expect the next government to adhere to its
Source: BCRP, BMI
guidelines, gradually reducing its fiscal deficit
Expenditures Will Remain Elevated as economic growth improves. Peru's debt stock
Expenditure growth will accelerate slightly in remains modest and predominately domestic.
2016 as the government continues to pursue We expect total government debt to peak at
stimulus measures. With many government 26.2% of GDP in 2016 before gradually shrink-
agencies modestly under-spending their budg- ing to 18.0% in 2025. Additionally, the World
ets in 2015, central government expenditure Bank announced in February the approval of
expanded by just 6.5%, below our previous two contingent credit lines, worth USD1.25bn
forecast for 9.0% growth. At the same time, each, to support improvements in education
central government consumption of goods and and public expenditure management. The funds
services expanded 21.3%. In 2016, we expect will be available to the government should its
government consumption to remain elevated. revenues fall in light of external shocks and will
Expenditure growth will be primarily directed at allow it to maintain key parts of its expenditure
healthcare, education and security. Meanwhile, plans without turning to capital markets. 
MAY 2016 – ANDEAN 5
  PERU

ECONOMIC OUTLOOK

PEN: Bottom In H116, Modest
Rebound Thereafter
BMI View: The Peruvian sol will base in H116 near its 20-year lows as the Banco
Central de Reserva del Perú reduces its support for the unit. A brightening growth
outlook will draw capital inflows which will gradually strengthen the unit in H216.
Short-Term Outlook (three-to-six months)
The Peruvian sol (PEN) will continue to
weaken in the coming months, testing its 20-
year low of PEN3.632/USD. The unit depre-
ciated 14.6% in 2015, finishing the year at an
average of PEN3.185/USD, slightly stronger
than our forecast average of PEN3.210/
USD. Its depreciation has been driven by
declining copper prices, although interven-
tion from the Banco Central de Reserva del
Perú (BCRP) has stymied downward pres-
sures. Our Commodities team believes that
the bulk of commodity price declines have
passed and that metals prices will bottom in
H116 (see 'Commodities: More Pain In H116,
But Brighter Long Term', January 21). In line
with this view, we expect the peso to base in
the coming three-to-six months.
The BCRP will continue to scale back its
support of the peso, which will improve mar-
ket sentiment toward the unit by allowing it
to trade in line with the country's balance of
payment dynamics. In H215, BCRP exchange
operations declined by 67.7% from H115 and
year-to-date data suggests additional tapering
of support. We have previously highlighted the
BCRP's concern with assuring the stability
of the country's financial sector, in light of
its significant dollarisation (see 'PEN: 20-Year
Lows Will Be Tested In 2016', November 25
2015). Measures introduced in 2015, princi-
pally higher reserve requirements for foreign
currency liabilities, reduced the proportion of
dollar-denominated credit from 38.2% of the
total at end-2014 to 30.3% at end-2015. With
the banking system less exposed to exchange-
related credit risk, we expect substantially less
intervention in the coming months.
Long-Term Outlook (six-to-24 months)
By H216, we expect the PEN to stabilise and
begin gradually rebounding. We forecast an
average exchange rate of PEN3.540/USD in
2016, 11.1% weaker than 2015, but reflect-
ing our view that by end-2016 the unit will
trade near the PEN3.400/USD level at which
it ended 2015. Although weak demand for
commodities will weigh on the value of Peru's
exports, strong production growth in the ex-
tractive sector will put Peru in a strong position
to benefit from stabilising prices in the latter
half of the year (see 'Weakness Abroad Will Mask
Underlying Strength', February 9). In 2017, we
expect the unit to average higher, at PEN3.400/
USD, as Peru's exports return to growth.
Additionally, capital inflows will pick up
in the coming quarters, bolstering demand
for the unit. Peru will draw substantial direct
investment flows, particularly into the extrac-
tive sector. The country's extractive sector has
long been the region's outperformer due to
its abundant reserves, friendly regulatory en-
vironment and low costs (see 'Project Pipeline
To Support Economic Growth', February 2).
Portfolio flows will be drawn to the country's
strengthening equity market, which is set for a
rebound (see 'Bounce In Peruvian Equities Sup-
ports Emerging Market Status', February 24).
Risks To Outlook
The key risks to our forecast lie to the downside
and stem from the potential for a greater-than-
expected downturn in China. With downward
pressures on the Chinese economy mounting,
there are substantial risks of a more severe slow-
down, or even contraction, in the coming years
(see 'On The Brink: Five Scenarios For Growth',
February 3). Among emerging markets, Peru
is among the most exposed to the Chinese
economy (see 'China And Commodity Risks:
Australia, Chile, Brazil, Peru Stand Out', January
28), suggesting that a sharp slowdown in China
could push the PEN below the PEN3.632/
USD level we currently highlight as its bottom.

DATA & FORECASTS

2012 2013 2014 2015e 2016f 2017f 2018f

Population, mn 30.2 30.6 31.0 31.4 31.8 32.2 32.6
Nominal GDP, USDbn 192.8 202.0 202.9 192.2 185.8 209.2 236.2
GDP per capita, USD 6,391 6,609 6,550 6,124 5,847 6,505 7,254
Real GDP growth, % y-o-y 6.0 5.9 2.4 3.3 3.6 4.1 4.2
Industrial production, % y-o-y, ave 6.0 5.1 3.8 3.6 3.5 2.4 2.6
Consumer price inflation, % y-o-y, ave 3.7 2.8 3.2 3.5 3.7 3.6 3.3
Consumer price inflation, % y-o-y, eop 2.6 2.9 3.2 4.4 3.5 3.2 2.9
Central bank policy rate, % eop 4.25 4.00 3.50 3.75 4.50 5.25 5.00
Exchange rate PEN/USD, ave 2.64 2.70 2.84 3.18 3.54 3.40 3.25
Exchange rate PEN/USD, eop 2.55 2.80 2.98 3.41 3.60 3.33 3.18
Budget balance, PENbn 6.7 2.6 -2.8 -16.4 -20.1 -17.5 -11.9
Budget balance, % of GDP 1.3 0.5 -0.5 -2.7 -3.1 -2.5 -1.6
Goods and services exports, USDbn 52.3 48.7 45.4 40.4 40.3 42.7 46.3
Goods and services imports, USDbn 48.5 49.9 48.5 45.1 44.2 46.9 50.7
Current account balance, USDbn -5.2 -8.5 -8.0 -9.0 -7.3 -7.4 -7.6
Current account balance, % of GDP -2.7 -4.2 -4.0 -4.7 -3.9 -3.5 -3.2
Foreign reserves ex gold, USDbn 64.0 65.7 62.3 61.5 63.0 65.0 67.0
Import cover, months 15.8 15.8 15.4 16.4 17.1 16.6 15.9
Total external debt stock, USDbn 54.1 56.7 66.5 68.9 72.3 76.4 80.6
Total external debt stock, % of GDP 28.1 28.0 32.8 35.9 38.9 36.5 34.1
Crude, NGPL & other liquids prod, 000b/d 156.0 170.5 175.0 172.7 169.2 170.9 174.9
Total net oil exports (crude & products), 000b/d -63.6 -51.0 -51.1 -60.3 -70.9 -77.7 -82.5
Dry natural gas production, bcm 11.9 12.2 12.6 13.1 13.6 14.2 14.7
Dry natural gas consumption, bcm 6.6 5.9 6.2 6.6 6.8 7.1 7.6
e/f = BMI estimate/forecast. Source: National sources, BMI

6 6 ANDEAN – MAY 2016 www.latinamericamonitor.com

 ECUADOR 
ECONOMIC OUTLOOK

Oil Price Pressures To Weigh Fiscal Pressure Limits Government Stimulus

Traditionally, the government of Ecuador
would respond to falling investment through
On Output large public investments in infrastructure or
bringing online new extractive assets. However,
BMI View: The Ecuadoran economy is set to contract for the second con- the government's ability to spend has been
secutive year as the country's large oil industry will be unable to attract significantly restricted by falling oil prices.
Revenues fell 13.1% in 2015, and despite new
significant investment. Reduced fiscal revenues will force the government
attempts to implement higher income and
to pull back spending, ensuring that stimulus cannot fill the gap presented
sales taxes, revenue is likely to fall for a second
by falling investment.
consecutive year in 2016. Debt costs for the
Ecuador's recession will deepen in 2016 price environment, Ecuador will be one of government have reached double digits, further
as low oil prices, an unfavourable regula- the largest losers in the region from low oil limiting current and capital spending in the
tory environment and slowing government prices. With prices for Ecuadoran oil trading Ecuadoran economy. We expect the govern-
spending undermine the country's real well below USD30.0/bbl, even given a recent ment to move to cut expenditures rather than
output. Previously, we had forecast Ecua- rally in US benchmark WTI oil prices, this boost them, which will lead to government
dor's economy to contract 0.9% in 2016; has made the industry highly unprofitable. consumption falling 0.5% in 2016, presenting
however, the country's economic activity As well, Ecuador has only modest and declin- further headwinds to the economy.
index, traditionally a strong proxy for head- ing reserves, as well as high royalties to the
line growth, fell 3.1% in 2015 and high government, making it highly unattractive Consumer Confidence In Freefall
frequency indicators suggest any economic for foreign investors. Private consumption will fall significantly in
recovery will be sluggish. With this in mind, Government attempts to draw private sec- 2016 as labour market deterioration feeds
we now forecast a real GDP contraction of tor investment into Ecuador's mining industry through to an erosion in consumer spending.
2.7% in 2016, and a return to only modest will prove insufficient to offset the declines of Layoffs have risen in the country as oil firms
growth in 2017 as the economy bottoms out the hydrocarbon industry. Though Ecuador wind down operations, and limited lending
with oil prices in H216. has significant gold and copper reserves, both capacity from banks has led many businesses
commodities have seen prices fall significantly to shut down. Since the middle of 2015,
Investment Capped By Weak Oil over the past three years. Moreover, invest- consumer confidence has been in freefall, with
Investment ment into these industries will face the same respondents ranking their current economic
Gross fixed capital formation in Ecuador will regulatory headwinds as the oil industry, situation as the worst since 2000 as of January
fall in 2016 as investment into the country's notably high royalties. Given the comparative 2016. The indicator has shown little sign of
oil industry collapses. Though certain Latin attractiveness and size of neighbouring Peru's decelerating its declines in the coming months,
American economies, such as Mexico and mining assets, many firms will be reluctant to and we believe that there is little upside for
Argentina, will be able to attract investment invest in Ecuador, limiting mining's ability to consumer spending. We forecast private do-
into their hydrocarbon sectors, even in a low offset falling hydrocarbon investments. mestic demand to fall 1.0% in 2016.

DATA & FORECASTS

2012 2013 2014 2015e 2016f 2017f 2018f

Population, mn 15.4 15.7 15.9 16.1 16.4 16.6 16.9
Nominal GDP, USDbn 87.6 94.5 100.5 98.6 104.5 111.5 120.4
GDP per capita, USD 5,682 6,032 6,322 6,107 6,376 6,705 7,137
Real GDP growth, % y-o-y 5.2 4.6 3.8 -0.8 -0.9 2.0 4.1
Consumer price inflation, % y-o-y, ave 5.1 2.7 3.6 4.0 4.0 4.0 4.0
Consumer price inflation, % y-o-y, eop 4.2 2.7 3.7 3.4 4.0 4.0 4.0
Exchange rate USD/USD, ave 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Exchange rate USD/USD, eop 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Budget balance, USDbn -0.8 -4.3 -5.3 -7.8 -8.9 -9.6 -8.3
Budget balance, % of GDP -0.9 -4.6 -5.3 -7.9 -8.5 -8.6 -6.9
Goods and services exports, USDbn 26.4 27.7 28.9 21.6 20.8 21.4 24.2
Goods and services imports, USDbn 27.7 29.7 30.2 29.5 29.3 31.1 33.2
Current account balance, USDbn -0.2 -1.0 -0.6 -7.0 -7.9 -9.2 -8.5
Current account balance, % of GDP -0.2 -1.0 -0.6 -7.1 -7.6 -8.2 -7.1
Foreign reserves ex gold, USDbn 2.5 4.4 3.9 2.7 2.3 2.0 5.5
Import cover, months 1.1 1.8 1.6 1.1 0.9 0.8 2.0
Total external debt stock, USDbn 16.9 20.3 26.3 29.3 32.8 37.0 41.0
Total external debt stock, % of GDP 19.3 21.5 26.2 29.7 31.4 33.2 34.1
Crude, NGPL & other liquids prod, 000b/d 504.7 527.2 557.1 546.0 537.8 532.5 537.8
Total net oil exports (crude & products), 000b/d 254.0 273.0 292.8 279.1 266.9 257.5 257.4
Dry natural gas production, bcm 0.5 0.5 0.7 0.7 0.7 0.7 0.7
Dry natural gas consumption, bcm 0.5 0.5 0.5 0.5 0.5 0.6 0.6
e/f = BMI estimate/forecast. Source: National statistics agencies, BMI

www.latinamericamonitor.com MAY 2016 – ANDEAN 7

  BOLIVIA

ECONOMIC OUTLOOK
State-Led Growth Ahead
BMI View: Bolivia will enter a period of relatively slower growth over the
coming years, as structurally lower hydrocarbons prices generate substantial
headwinds. Government-led development of petrochemicals and lithium will
ensure continuing growth.
Lower Energy Prices Will Strain
Government Resources
Structurally lower hydrocarbons prices will
undermine the Bolivian economy by creating
sustained fiscal and current account deficits.
The rapid growth of the Bolivian economy
over the last decade was driven by elevated
oil prices, but prices will remain low in the
coming years. With its key source of revenue
and foreign exchange under pressure, the
government will utilise its fiscal buffers and
new debt issuances to support the economy
by funding investment. We expect gross
government debt to reach 48.8% of GDP by
2020, up from 33.0% in 2014. Much of this
debt will be domestic, potentially crowding
out private investment.
State-Led Development Will Deliver Gains
We expect government investment to support
the development of new industries, including
refined hydrocarbons products, mining and
agriculture. However, we caution that weak
external demand, regional competition and
domestic unrest will present headwinds. Ad-
ditionally, the Bolivian government will be
challenged to attract foreign investors.
The lowest-hanging fruit will be the de-
velopment of petrochemical industries, led
by national oil company YPFB. YPFB's Bulo
Bulo plant, its first petrochemical venture, is set
to come online in 2016. The company is also
exploring plans to build plastics processing fac-
tories. Bolivia is most likely to realise progress
in these industries, given that it has substantial
infrastructure in place and has improved its
relationships with foreign energy firms.
Commodity Headwinds Will Be Substantial
However, mining will be stymied by low com-
modities prices and a poor operational envi-
ronment. Bolivia attracts few foreign firms due
to frequent labour unrest, complex regulations
and underdeveloped infrastructure.
The bright spot within the mining sector
will be lithium, a rare earth mineral vital to
the reusable batteries. Bolivia holds approxi-
mately 70% of the world's known reserves of
lithium and hopes to profit from sales of both
the raw material and processed products. We
expect that lithium exports will pick up in the
coming years, although there is significant risk
of political unrest surrounding new extractive
projects. President Evo Morales has generated
substantial discontent in recent years by open-
ing previously protected tracts of indigenous
land to extraction.
Efforts to develop Bolivia's agricultural
sector are likely to deliver modest gains at best.
First, Bolivia's best chance for gains lies in
soybeans, where it will have difficulty gaining
market share. We expect global demand growth
will remain steady and prices well below previ-
ous peaks. In the years it could take to build up
Bolivia's productive capacity, Argentina will be
fully reintegrated into the global market, while
other regional producers, including Paraguay
and Brazil, will increase production.
Second, agricultural investments are likely
to be driven by political expediency. The east-
ern flatlands are the country's agricultural
heartland, but they are bastions of opposition
to President Evo Morales. At the same time,
coca farmers in the western highlands have led
a rising tide of discontent against Morales in
areas that have been his strongholds. Morales
is likely to use funds designated for agricultural
investment in order to shore up support from
restive elements of his support base, despite the
limited commercial value of coca.

DATA & FORECASTS

2012 2013 2014 2015e 2016f 2017f 2018f

Population, mn 10.2 10.4 10.6 10.7 10.9 11.1 11.2
Nominal GDP, USDbn 27.0 30.6 33.0 34.4 36.4 39.5 42.5
GDP per capita, USD 2,640 2,940 3,123 3,206 3,341 3,570 3,788
Real GDP growth, % y-o-y 5.2 6.8 4.3 4.5 3.1 3.9 3.9
Consumer price inflation, % y-o-y, ave 4.5 5.7 5.8 4.1 5.0 5.0 4.0
Consumer price inflation, % y-o-y, eop 4.5 6.4 5.3 3.0 5.0 5.0 4.0
Exchange rate BOB/USD, ave 6.92 6.91 6.91 6.90 6.87 6.85 6.80
Exchange rate BOB/USD, eop 6.91 6.91 6.91 6.90 6.85 6.83 6.83
Budget balance, BOBbn 3.3 1.4 -7.7 -9.4 -22.3 -25.0 -25.6
Budget balance, % of GDP 1.8 0.7 -3.4 -3.9 -8.9 -9.3 -8.9
Goods and services exports, USDbn 12.2 12.5 13.5 10.4 9.9 10.7 11.3
Goods and services imports, USDbn 9.6 10.9 12.9 12.0 12.2 12.4 12.6
Current account balance, USDbn 2.3 1.0 0.0 -2.0 -2.7 -2.1 -1.8
Current account balance, % of GDP 8.4 3.3 0.0 -5.7 -7.4 -5.3 -4.1
Foreign reserves ex gold, USDbn 13.9 14.4 15.1 13.1 12.4 12.7 13.0
Import cover, months 20.2 18.5 17.2 15.8 15.1 15.3 15.4
Total external debt stock, USDbn 6.6 8.0 8.8 10.2 11.7 12.7 13.2
Total external debt stock, % of GDP 24.3 26.2 26.6 29.8 32.1 32.1 31.0
Crude, NGPL & other liquids prod, 000b/d 55.9 63.1 66.0 64.6 68.5 71.4 75.5
Total net oil exports (crude & products), 000b/d -15.4 -9.0 -7.0 -9.3 -6.4 -4.6 -1.7
Dry natural gas production, bcm 18.2 21.3 21.8 22.1 23.3 24.3 25.1
Dry natural gas consumption, bcm 3.7 5.4 5.4 5.6 6.5 7.0 7.4
e/f = BMI estimate/forecast. Source: BCB, BMI

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