Economic Analysis - Copper Exports Will Support Current Account - JAN 2018

BMI View: Strong mining export growth will narrow Peru ' s current account in the coming years. Copper p rice growth and production gains will be the primary driver of gains , while robust capital inflows will amply cover financing needs .

Peru's current account deficit will narrow over the coming years due to strong export growth. Increased production and price levels for Peru's primary export, copper, will be the principle driver of an improving trade balance. However, a substantial primary income account deficit will keep the current account deficit intact as foreign mining firms increase capital repatriation with improving profits.

We forecast Peru's current account deficit will narrow to 1.7% of GDP in 2017 and 1.4% in 2021, from 2.8% in 2016. This represents an upward revision, from 2.0% of GDP previously ( see 'Mining And Investment To Support External Account', August 29), on the back of higher than anticipated export growth over the first eight months of the year. Strong capital inflows, largely comprised of foreign direct investment, will finance the shortfall, with a large accumulation of foreign reserves further supporting external stability.

Improving Tade Balance Will Narrow Current Account Deficit
Peru - Current Account Balance
e/f = BMI estimate/forecast. Source: BCRP, BMI

Copper Rally Driving Current Account Narrowing

Copper, which represented 27.5% of total exports in 2016, will be the primary driver of the narrowing of the current account deficit over the coming years. Copper prices in 2017 have rallied stronger than anticipated, averaging 28.6% higher compared to 2016 prices through November 3. As a result, exports rose 23.5% y-o-y through August, bolstering Peru's trade surplus. While our Mining team expects short-term weakness in copper prices as the current rally fades, which is reflected in our forecast of a marginal widening of the current account deficit to 2.0% of GDP in 2018, the copper sector's strength will support export growth over the next five years ( see ' Copper: Set For A Solid Recovery ' , September 7).

Additionally, rising prices have prompted major investments into expanding production at new and existing mines. Over the first ten months of 2017, mining investment and mergers and acquisitions in Peru totalled USD984mn, far surpassing that of the previous two years as mining sector activity picks up with copper prices ( see ' Peru ' s Project Pipeline To Power Through Local Opposition, Tax Disputes ' , October 31). The sector also boasts a robust pipeline of projects which will draw significant foreign investment, including Anglo American and Mitsubishi Corp.'s USD5.6bn Quellaveco project and Minerals and Metals Group and Jiangxi Copper's USD2.5bn Galeno mine.

Exports Spiking With Copper Rally
Peru - Goods Trade, % y-o-y (6mma)
Source: BCRP, BMI

Shortfall Will Be Covered By Capital Inflows

Strong capital inflows will likely cover the narrower shortfall in the coming years. Foreign direct investment (FDI) will tick upwards in the coming years, as firm expand operations in Peru's mining sector. In 2016 total FDI rose to USD6.9bn, and in Q117 FDI inflows rose to USD2.3bn, representing a 37.7% q-o-q and 82.0% y-o-y increase. Further, a large stockpile of reserves will support external stability. As of September, Peru's international reserves stood at USD64.4bn, providing for 18.4 months of import cover.