Peru: The External and Internal Adjustment Challenge

Abstract

This paper sketches some of the main external and internal macroeconomic challenges confronting Peru over the nearand medium-term. It argues that Peru’s main macroeconomic challenges could be summarized in three main headings: First, the Peruvian economy is currently in a period of transition from the biggest resource boom since the mid- 1950s to a “new normal” characterized by weaker foreign demand, falling metal prices and expectations of rising interest rates at the international level. Transition to a “new normal” has its own challenges, which, in the case of a small open economy like Peru, are currently being heightened by the abovementioned global conditions. Second, transition to a new normal is happening under robust initial conditions, which could be summarized by the Peruvian economy’s sound macroeconomic fundamentals, and its underlying flexibility. Such flexibility helped the economy dealing with the upswing of the mining development boom and should help us in the downswing. Third, macroeconomic policy—particularly monetary and exchange rate policy—is helping in this adjustment, although a successful transition may need to be supported by a number of structural policies, that are noted in the paper.