Peru : Assessment of the Impact of the Proposed Arrangement Under the Flexible Credit Line on the Fund’S Finances and Liquidity Position

Request for Arrangement Under the Flexible Credit Line-Press Release; Staff Report; and Statement by the Executive Director for Peru

Abstract

Request for Arrangement Under the Flexible Credit Line-Press Release; Staff Report; and Statement by the Executive Director for Peru

Introduction

1. This note assesses the impact of the proposed Flexible Credit Line (FCL) arrangement for Peru on the Fund’s finances and liquidity position, in accordance with the policy on FCL arrangements.1 The proposed arrangement would cover a 24-month period with access in an amount of SDR 8,007 million (600 percent of quota). The authorities intend to treat the arrangement as precautionary. In their view, it would complement existing buffers to provide insurance against elevated external risks—including those that would arise from a more protracted economic fallout of a wider outbreak of the Covid-19 pandemic. As the external risks subside, the authorities plan to reduce access under the arrangement, in line with their strategy that considers the use of the FCL, and the eventual exit from it, as depending on the evolution of risks.

Background

2. Peru has an exemplary track record of meeting its obligations to the Fund under past Fund arrangements. Peru had several arrangements in the 1980s and 1990s. Since June 1999, Peru has had one EFF and four Stand-By Arrangements, but made no drawings. Its last arrangement with the Fund expired in 2009, and Peru has no outstanding credit to the Fund (Annex 1).

3. Helped by very strong policies and policy frameworks, Peru was able to achieve impressive macroeconomic outcomes and reduce vulnerabilities.2 Growth averaged nearly 5¼ percent over the past 15 years, consistently above the average for the region. This has enabled Peru to make significant progress in reducing poverty. The inflation targeting regime, in place since 2002, has contributed to low inflation, with inflation expectations anchored around the central bank’s (BCRP) target range (2 +/- 1 percent). The fiscal rule framework in place since 1999, with periodic modifications in its numerical parameters, has supported, together with prudent fiscal management, a reduction in government debt to less than 27 percent of GDP by end-2019. As indicated in the 2018 Financial System Stability Assessment (FSSA), strong financial sector supervision has helped preserve financial stability while enabling the country to make considerable progress in implementing the Basel regulatory reform agenda.

4. The Covid-19 pandemic is posing an unprecedented challenge. The first case in Peru was confirmed in early March, and by May 11 the number of cases had risen to almost seventy thousand, in spite of nationwide lockdowns that started in mid-March. The economy is heading for a recession this year. The price of copper—Peru’s main export product—is down by over 18 percent (year-to-date). Peru’s financial markets have experienced significant volatility and sharp declines in valuations, even though the country has shown remarkable financial resilience when compared to other emerging market economies, both within and outside the region, not least because large buffers have allowed the government to respond with a very strong policy package to contain the pandemic and mitigate the economic fallout.

5. Total external and public debt levels remain moderate and are expected to remain stable over the medium term. Peru’s external debt has been broadly stable around 35–38 percent of GDP over the past 5 years (Table 1), remaining at modest levels compared to other emerging markets. External public debt accounted for about 17 percent of GDP in 2019. Public sector debt stood between 24 and 27 percent of GDP in 2015–2019, of which nearly one third was denominated in foreign currency in 2019. Reflecting the temporary Covid-19-related increase in the fiscal deficit, public debt is projected to reach 37. 2 percent of GDP in 2020. It is, however, expected to decline under 36 percent of GDP by 2025, as a result of stronger growth, and improving fiscal balance, and the expiration of the government guarantees. Debt sustainability analyses suggest that both external and public debt would remain manageable under a range of standardized scenarios.

Table 1.

Peru: External Debt and Debt Services, 2015–201/

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Sources: National Authorities and IMF Staff Estimates.

End of period, unless otherwise indicated.

Assumed potential disbursement under the proposed FCL and related interest are not included. 2020 GDP is based on baseline projections.

The New Flexible Credit Line Arrangement— Impact on the Fund’s Finances and Liquidity Position

6. Risks and impact on Fund finances from Peru’s FCL arrangement are assessed in the context of a downside scenario. Consistent with the idea that the FCL serves as insurance in the face of the potential realization of downside risks, and that the authorities intend to treat the FCL arrangement as precautionary, any drawings on the FCL would be expected to take place only when macroeconomic conditions notably worsen vis-à-vis the baseline projections. Therefore, risks and impact on Fund finances are assessed in the context of a downside scenario. Table 2 provides a comparison of the main macroeconomic assumptions underlying the baseline and adverse scenarios.

Table 2.

Peru: Comparison of macroeconomic assumptions under baseline and adverse scenarios

(in millions of US dollars)

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Source: IMF Finance Department.

7. The adverse scenario reflects external risks from prolonged Covid-19 effects, which lead to increased external financing needs. In particular, under the adverse scenario, the global economy is projected to face a deeper decline over the coming year—of about three percentage points vis-à-vis the April 2020 WEO baseline—while emerging market financial volatility is expected to remain elevated. This scenario would translate into: (i) a decline of Peruvian exports of goods and services of nearly 16 percent via-à-vis the 2020 baseline, primarily driven by a 27 percent decline in copper exports; (ii) lower financial market access for both the government and private entities; and (iii) a reduction in Peruvian GDP growth of slightly over three percentage points vis-à-vis the 2020 baseline as well as a depreciation of the real exchange rate of about 3 percent (also vis-à-vis the baseline). In this context, the current and financial accounts are expected to worsen in 2020 in the order of $4 billion and $14 billion vis-à-vis the baseline (or around 2 and 7¼ percent of GDP), respectively. Nearly 40 percent of the emerging financing needs would be financed through international reserves (which decline by over $8 billion under the adverse scenario). An economic rebound is expected to materialize in 2021 and over the following years as the health emergency dissipates. The economic impact of the shock would be significant, with Peru’s real GDP only returning to its pre-shock level by end-2022.

8. If Peru were to purchase the full amount available under the proposed FCL arrangement in this downside scenario, its capacity to repay to the Fund would remain adequate (Table 3):

  • External debt would rise to about 44 percent of GDP in 2020 and public external debt to nearly 25 percent of GDP, compared to about 40 and 21 percent in the baseline scenario, respectively. These ratios would be close or below the median of other exceptional access cases approved since 2008 (Figure 1). Peru’s outstanding use of GRA resources would account for nearly 13 percent of total external debt, and about 23 percent of public external debt. Fund credit would initially be equivalent to nearly 6 percent of GDP and 19 percent of Peru’s gross international reserves. Peak Fund exposure relative to different metrics would be below or close to the median of recent exceptional access arrangements (Figure 2). Projected outstanding Fund credit in percent of quota around the peak would also be below that of recent exceptional access cases, and close or below that expected in other recent FCL arrangements in the event of full drawdown (Figure 3).

  • External debt service would increase over the medium-term but remain manageable under staff’s macroeconomic projections. Peru’s projected debt service to the Fund would represent only 0.1 percent of GDP in 2020–2022.3

  • While debt service to the Fund would constitute a large share of total public debt service in 2023–25, such debt service would remain small even at its peak (2.4 percent of GDP), given Peru’s overall low external public debt. Fund peak debt service ratios would remain close to the median of recent exceptional access cases (Figure 2).

Table 3.

Peru: Capacity to Repay Indicators, 2019–251/

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Sources: National authorities, Finance Department, WEO, and IMF staff estimates.

Assumes full drawing under the FCL arrangement upon approval. The Peruvian authorities have expressed their intention to treat the arrangement as precautionary.

Includes surcharges under the system currently in force and service charges.

Staff projections for external debt ratios (to GDP, gross international reserves, and exports) adjusted for the impact of the assumed FCL drawing.

Figure 1.
Figure 1.

Debt Ratios of Recent Exceptional Access Cases 1/2/

(EA cases since September 2008)

Citation: IMF Staff Country Reports 2020, 181; 10.5089/9781513545820.002.A002

Sources: Finance Department and IMF staff estimates.1/ Estimates as reported in relevant staff reports on the request of SBAs or arrangements under the EFF approved since September 2008.2/ Asterisks indicate PRGT-eligible countries at the time of the program.
Figure 2.
Figure 2.

Peak Fund Exposure and Debt Service Ratios for Recent Exceptional Access Cases 1/2/

(EA cases since September 2008)

Citation: IMF Staff Country Reports 2020, 181; 10.5089/9781513545820.002.A002

Sources: IMF Finance Department and IMF staff estimates.1/ Estimates as reported in relevant staff reports on the request of SBAs or arrangements under the EFF approved since September 2008.2/ Asterisks indicate PRGT-eligible countries at the time of the program. In Panel F, Georgia’s debt service to the Fund includes one from PRGF loan.3/ Excluding arrangements with members belonging to the euro area at the time of the approval of the arrangement: Greece, Ireland, and Portugal.4/ For arrangements of which total external debt (or debt service) ratio is not available, public external debt ratio is shown instead.
Figure 3.
Figure 3.

Projected Fund Credit Outstanding in the GRA around Peak Borrowing 1/

(In percent of quota)

Citation: IMF Staff Country Reports 2020, 181; 10.5089/9781513545820.002.A002

Sources: Finance Department and IMF staff estimates.1/ t represents the time when outstanding credit to the Fund is at its peak. Time is expressed in months. For illustrative purposes it is assumed that Peru’s FCL is fully drawn down at the time of Board approval.

9. The proposed arrangement for Peru under the FCL would have a limited impact on the Fund’s liquidity. The Fund’s Forward Commitment Capacity (FCC) would decline by about 4 percent (Table 4). If Peru were to draw under the FCL arrangement it would be automatically excluded from the Financial Transaction Plan (FTP) and the FCC, which is currently only based on quota resources, would decline by another SDR 1.1 billion.

Table 4.

Peru: Impact on GRA Finances

(Millions of SDR, unless otherwise noted)

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Sources: Finance and IMF staff estimates.

The FCC is defined as the Fund’s stock of usable resources less undrawn balances under existing arrangements, plus projected repurchases during the coming 12 months, less repayments of borrowing due one year forward, less a prudential balance. The FCC does not include resources from currently unactivated lines of credit, including the New Arrangements to Borrow or bilateral commitments from members to boost IMF resources.

Current FCC minus access under the proposed arrangement.

Burden-sharing capacity is calculated based on the floor for remuneration at 85 percent of the SDR interest rate. Residual burden-sharing capacity is equal to the total burden-sharing capacity minus the portion being utilized to offset deferred charges and takes into account the loss in capacity due to nonpayment of burden sharing adjustments by members in arrears.

10. The proposed FCL would have a moderate impact on the concentration of the Fund’s lending portfolio, both in terms of regions and among Fund facilities:

  • Regional concentration to Latin America would increase slightly. Currently, the Western Hemisphere accounts for about 62 percent of GRA credit and undrawn balances, including for precautionary arrangements (Figure 4). With the proposed FCL for Peru, that share would rise to 64 percent. The Fund experienced comparable regional concentration in the past, including in the aftermath of the global financial crisis, when lending to Europe accounted for the bulk of the Fund’s lending exposure.

  • Among the Fund’s different facilities, the share of FCL commitments would rise moderately. Commitments under FCLs, which represent the bulk of precautionary arrangements, stood at SDR 52.4 billion in mid-May 14, 2020, or 49 percent of total GRA commitments (Figure 4). With the proposed FCL for Peru, the share of commitments from FCL arrangements would increase to 53 percent.

Figure 4.
Figure 4.

IMF Lending Concentration—By Region and by Lending Instrument

Citation: IMF Staff Country Reports 2020, 181; 10.5089/9781513545820.002.A002

11. If the resources available under the FCL arrangement were fully drawn, the GRA credit exposure to Peru would be a sizable share of the Fund’s outstanding credit.

  • Fund credit to Peru would represent 10.4 percent of total GRA credit outstanding as of May 14, 2020, and 9.4 percent of GRA credit outstanding including Peru’s purchase. Peru would also be the third largest Fund exposure. The concentration of Fund credit among the top five users of GRA resources would decrease marginally to about 74 percent, from 77 percent as of May 14, 2020.

  • Fund credit to Peru would be nearly 49 percent of the Fund’s current precautionary balances.

Assessment

12. The proposed FCL arrangement would have a manageable impact on the Fund’s finances. The arrangement would cover a 24-month period with access in an amount of SDR 8,007 million (600 percent of quota). On approval of the proposed new FCL arrangement, the Fund’s liquidity position (FCC) would decline by about 4 percent. While the Fund’s overall liquidity position is expected to remain adequate after the approval of the proposed FCL arrangement, in view of highly elevated risks to global growth and financial stability at present, a close monitoring of the liquidity position is warranted. In particular, the scale of potential new demand for Fund resources in the aftermath of the global Covid-19 pandemic is subject to large uncertainty and could be unprecedented.

13. If the proposed arrangement were drawn in full, the GRA credit exposure to Peru would be about 9 percent of the Fund’s outstanding credit. Peru intends to treat the proposed FCL arrangement as precautionary. If Peru were to purchase the full amount available under the proposed FCL arrangement, its capacity to repay to the Fund would remain adequate. Moreover, the risks from the Fund’s potential credit exposure to Peru are mitigated by Peru’s adequate buffers as well as the country’s very strong policy framework and track record of economic performance. Also, while Peru’s overall external debt and debt service ratios would deteriorate somewhat in a downside scenario and assuming full drawing under the proposed arrangement, they would remain close to the median of recent exceptional access cases.

14. The authorities consider access to the FCL to be temporary with exit dependent on the evolution of external risks. The requested level of access is meant to provide insurance against a wider range of adverse external shocks, preserve investor confidence, and support the authorities’ macroeconomic strategy. As the external risks subside, the authorities plan to reduce access under the arrangement, in line with their strategy that considers the use of the facility, and the eventual exit from it, as depending on the evolution of risks.

Annex I. History of Peru’s Arrangements with the IMF

This annex provides a brief overview of Peru’s Fund arrangements from 1984 to present1.

1. Peru has a strong track record, built over nearly three decades, of meeting its obligations to the Fund under past Fund arrangements. Peru had several Fund arrangements in the 1980s and 1990s and fully repaid its remaining outstanding credit in 2007 (Table I.1). Although Peru ran arrears to the IMF in 1985, as the country unilaterally imposed a ceiling on external debt payments equivalent to 10 percent of foreign exchange earnings2, these arrears were cleared in 1993.3

2. From 1984 to March 1999, Peru had one Stand-By Arrangement (SBA) and two arrangements under the Extended Fund Facility (EFF):

  • 3. In March 1993, the Fund approved extended arrangement under the EFF equivalent to SDR 1.0 billion (218 percent of quota) to carry out macroeconomic adjustment and structural reform aimed at sharply reducing inflation and creating the conditions for sustained economic growth and a progressive return to external viability. Under that arrangement, Peru made purchases totaling SDR 0.6 billion, and its outstanding credit stood at SDR 642.7 million (138 percent of quota) at end-1993. Peru made repurchases after 1997 on time. Performance under this program was impressive: during 1993–95, output growth averaged 8.5 percent a year, inflation was reduced to 10 percent during 1995, and the net international reserves position of the Central Reserve Bank improved significantly.

  • In July 1996, an EFF equivalent to SDR 0.3 billion was approved to support the Government’s medium-term economic and reform program during the period 1996–98. Solid performance under the program supported by this EFF allowed Peru to fully repay all its outstanding obligations to the Fund.

4. Since June 1999, Peru has had one EFF and four Stand-By Arrangements but made no drawings.

  • June 24, 1999: approval of a two-year EFF arrangement equivalent to SDR 383 million to support Peru’s economic policies and structural reforms.

  • March 12, 2001: approval of a Stand-By Arrangement equivalent to SDR 128 million.

  • February 1, 2002: approval of a two-year Stand-By Arrangement with access increased to SDR 255 million.

  • June 9, 2004: approval of a two-year Stand-By Arrangement for an access of SDR 287 million.

  • January 26, 2007: approval of a two-year Stand-By Arrangement for an access of SDR 172 million.

Annex Table I.1

Peru: IMF Financial Arrangements, 1984–2020

(In millions of SDR)

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Source: Finance Department.

As of end-December.

1

See “Flexible Credit Line – Operational Guidance Note” which documents the requirement for an assessment prepared by FIN/SPR on the impact of the proposed FCL arrangement on the Fund’s finances and liquidity position, as a supplement to the staff report.

2

Peru―Request for an Arrangement Under the Flexible Credit Line.

3

The projected figures on debt service used are calculated assuming that the full amount available under the arrangement is purchased upon approval of the arrangement, and that all repurchases are made as scheduled.

1

The first IMF arrangement for Peru was approved on February 18th, 1954. This appendix focuses on the most recent arrangements.

2

Following a series of natural disasters, falling export prices, and the international debt crisis of the early 1980s, Peru faced a severe balance of payment crisis.

3

Peru was part of the Rights Accumulation Program (RAP) in 1991–1993. Under this program, a member country with long overdue obligations to the IMF, while still in arrears, accumulates “rights” toward a future disbursement from the IMF on the basis of a sustained performance under an IMF-monitored adjustment program. Japan and the United States provided a bridge loan to Peru in March 1993 to settle its arrears to the IMF. Once these were cleared, the amounts accumulated under the RAP were disbursed upon approval of an Extended Fund Facility arrangement (1993–96) and served to repay the bridge loan from Japan and the United States.

Peru: Request for Arrangement Under the Flexible Credit Line-Press Release; Staff Report; and Statement by the Executive Director for Peru
Author: International Monetary Fund. Western Hemisphere Dept.
  • View in gallery

    Debt Ratios of Recent Exceptional Access Cases 1/2/

    (EA cases since September 2008)

  • View in gallery

    Peak Fund Exposure and Debt Service Ratios for Recent Exceptional Access Cases 1/2/

    (EA cases since September 2008)

  • View in gallery

    Projected Fund Credit Outstanding in the GRA around Peak Borrowing 1/

    (In percent of quota)

  • View in gallery

    IMF Lending Concentration—By Region and by Lending Instrument