Bmi Andean 19 05

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May 2019
Vol 36 Issue 5 ISSN: 0265-9093
Contents
Latin America Monitor

Venezuela: New Government
Would Significantly Improve Fiscal
Outlook 4
Andean Colombia: Increasing Import
Demand To Keep Current Account
Venezuela Crisis: Updated Scenarios For In Deficit 6
The Weeks Ahead PEN: Sol Likely To Hold Its Value In
Key View Coming Months 8
• Widespread popular and international support for opposition leader Juan Guaidó
Ecuador: IMF Deal Will Help Ensure
has pushed Venezuela's years-long crisis to a potential turning point.
Stability In External Accounts 10
• Of the range of possible outcomes, we at Fitch Solutions believe that a transition to
the opposition is most likely.
• We do not believe a foreign intervention by the US is likely, given a lack of domestic
appetite for a new foreign conflict.
Venezuela's years-long economic and political crisis has reached a potential turning
point. Increased diplomatic recognition of Venezuelan opposition leader Juan Guaidó
as interim president, combined with growing fractures within sections of the security
forces, suggest that the odds of regime change in Venezuela are currently at the highest
point since the failed coup against former President Hugo Chávez in 2002. In this piece,
we update our key scenarios for how the current crisis could play out in the weeks and Copy Deadline: 22 March 2019
Analysts: Peter Giblin, Lee Sutton,

...continued on page 2 Andrew Trahan, Jesse Wheeler
Editor: Katherine Weber

Peru: Political Risks Likely To Subside In 2019 7
Sub-Editor: Liezl Grobler
Political risks in Peru are diminishing, due to low unemployment and improving sentiment
Subscriptions Manager: Lyan Chan
towards the government under President Martin Vizcarra. At end-2018, unemployment fell to
5.7%, a five-year low, which will lead to improved social stability in Lima and other major cities. Marketing Manager: Julia Consuegra
Production: Anshu Kumar
Bolivia: Current Account Deficit To Narrow 11

Bolivia will run sizable current account deficits in the coming quarters as import demand for
capital and household goods remains robust. Over the longer term, increased investment
in the primary sectors will boost production and goods exports, leading to a narrowing of
the current account deficit.
REGIONAL INDICATORS
Andean 2017 2018e 2019f 2020f
Nominal GDP, USDbn 700.9 727.5 731.5 808.9 Head Office
Population, mn 140.9 142.5 144.0 145.6 30 North Colonnade, London
GDP per capita, USD 4,975.0 5,106.1 5,078.0 5,556.2
Real GDP growth, % 1.8 2.4 2.9 3.6
E14 5GN, UK
Inflation, % 3.0 2.0 2.8 3.1
Goods Exports, USDbn 143.9 153.2 153.2 164.0
Goods Imports, USDbn 123.8 140.9 148.4 165.3 Company Locations
Notes: e/f = estimate/forecast. Andean = Bolivia, Colombia, Ecuador, Peru, Venezuela. Weighted by nominal GDP. London | New York | Singapore
Source: Fitch Solutions
Hong Kong | Dubai | Pretoria
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Andean | May 2019
ANDEAN RISK INDEX

Our Country Risk Index scores countries on a 0-100 scale, evaluating short-term and long-term political stability, short-term economic
outlook, long-term economic potential and operational barriers to doing business. For a detailed methodology, visit fitchsolutions.com
or contact us using the details on page 1.
RISK INDEX TABLE

Short Term Long Term Operational Country
Political Economic Political Economic Risk Risk
Peru 60.2 68.5 62.5 67.6 48.8 59.4
Colombia 63.2 65.8 60.4 64.2 48.4 58.4
Ecuador 51.3 58.3 49.1 58.3 45.8 51.4
Bolivia 51.5 55.8 50.0 62.5 35.3 48.4
Venezuela 29.2 25.6 44.8 24.9 30.8 31.0
Regional Average 51.1 54.8 53.4 55.5 41.8 49.7
Global Average 63.1 52.8 62.0 54.1 49.7 55.1
Source: Fitch Solutions
VENEZUELA – POLITICAL OUTLOOK

...continued from front page
months ahead (see 'Venezuela Crisis: Key Scenarios For The Weeks Ahead', January 25). Risk Of Regime Change Underpin Weak Score
Latin America – Short-Term Political Risk Index
Most notably, we now believe that the most likely scenario is the opposition coming to
power, though we note that we have also raised the probability of an internal conflict or
foreign intervention. We note that there is room for overlap between various scenarios,
such as an internal conflict precipitating a foreign invasion.
Scenario #1: Opposition Assumes Power (45% probability)

The most likely scenario is that the opposition comes to power, following either a successful
military coup or negotiations with the Partido Socialista Unido de Venezuela (PSUV)-led
regime driven by concerns about a military coup. We believe that the foundations for a coup
have been in place for several years, given increasingly dire economic conditions for the
Note: Scores out of 100. Higher score = Lower risk. Source: Fitch
rank-and-file members of the military and repeated breaches of democratic norms by the Solutions
PSUV regime. Mass public protests and international support have increased the pressure
on military figures, and the emergence of a viable alternative executive willing to offer
amnesty to military defectors could lead to discontent that forces military leadership to
manage a handover of power to the opposition. We also note that an increasingly credible
threat of a foreign invasion could result in a military coup, as we believe that the armed
forces would prefer to remove Maduro from power than face a war with the US or a coalition
of Latin American militaries. Continued PSUV Rule Would Prolong
Economic Depression
Venezuela – Real GDP Growth, % y-o-y
In addition, we believe that Venezuela's ongoing economic collapse poses a severe threat
to the PSUV's hold on power whether or not the opposition is able to maintain its current
momentum in the months ahead. The PSUV's economic policies are in large part responsible
for the hyperinflation and collapsing oil production that have crippled Venezuela's economy,
and oil sanctions imposed by the US will exacerbate these trends while also likely driving
gas shortages in the country (see 'Quick View: US Trade Sanctions Against Venezuela Raise
Risks To Maduro', January 29). As living standards continue to decline, the potential for social
unrest will remain extremely high, raising the risk of fractures within the security apparatus
and government. We expect this risk will persist for as long as Venezuela's economic crisis
continues.
e/f = Fitch Solutions estimate/forecast. Source: BCV, Fitch Solutions
www.fitchsolutions.com Page 2
THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings’ Credit Rating. Any comments or data included in the report are
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Andean | May 2019
Scenario #2: PSUV Remains In Power (25% probability)

Through a combination of repression of political opposition, surveillance of internal security forces, diplomatic maneuvering and
continued provision of benefits to military leaders, the PSUV could weather the current crisis and keep the armed forces loyal in the
months ahead. Over the last two years, internal surveillance has reportedly prevented several coup attempts from overthrowing the
government, and senior military leaders have broadly indicated their support for the PSUV government despite pressure from Guaidó
and foreign governments, suggesting a break at the top is not imminent.
This scenario would likely see opposition leaders such as Guaidó eventually arrested or forced into exile, as previous opposition figures
have been. Without clear leadership to continue to ratchet up public pressure on the Maduro government, the likelihood of a break
between the regime and the armed forces would fall considerably. As we have written elsewhere, long-term rule by the PSUV has negative
implications for Venezuela's economic and political outlook (see 'Venezuela's Political Crisis: Four Scenarios', May 22 2018). We reiterate
that ongoing economic decline would present a major challenge to the Maduro regime's hold on power for the foreseeable future.
Scenario #3: Prolonged Internal Conflict (20% probability)

Additionally, the situation in Venezuela could break down into a protracted, multi-sided internal conflict. We see two primary paths to
this scenario. The first is that escalating violence against protestors by paramilitary groups such as the colectivos radicalises elements of
the opposition, resulting in frequent armed confrontations between these groups and government-aligned forces. The clashes between
protestors and colectivos amid opposition efforts to bring humanitarian aid into the country on February 23 offer an example of how
public protests can escalate into violence with government-aligned forces.
The second path to an internal conflict would result from a fracture within the armed forces, such as an attempted coup by elements
of the military that fails to rapidly seize control of power in the country. This would likely spark an armed conflict between loyalist and
anti-government elements of the military, the stakes of which would be raised if loyalist forces received assistance from Russia or anti-
government elements received assistance from the US (see 'Q&A: Venezuela's Foreign Relations Would Shift Significantly After Regime
Change', February 19).
An internal conflict would have severely negative implications for political and economic stability in the country, likely pushing Venezuela
into 'failed state' status. While the specific impacts would be determined by the scale and duration of such a conflict, we see several
potential implications:
• An escalation of the Venezuelan migrant crisis, spreading social instability into neighbouring countries. The breakdown of
Venezuela's healthcare system suggests that this could also result in the spread of a variety of diseases such as malaria, tuberculosis
and HIV around the region.
• Major disruptions to the Venezuelan oil sector, potentially impacting global oil markets by disrupting supply.
• Without a central government to enforce the country's borders, Venezuela would become a base of operations for criminal and
militant groups from both Venezuela and neighbouring countries.
• The risk of some sort of foreign military intervention would increase, creating the risk of a proxy conflict involving the US, China and
Russia, among others.
Scenario #4: Direct Foreign Military Intervention (10% probability)

We believe that a direct foreign military intervention is the least likely outcome of the current crisis. We do not believe there is domestic
appetite in the US for an intervention, either among members of Congress or the general public, and most countries in Latin America
would oppose US intervention in the region. However, we do acknowledge that the risk of an intervention has risen over recent weeks,
given increasingly aggressive rhetoric coming from both the US and Guaidó. While this is most likely a tactic to frighten Venezuela's military
leaders into a negotiated transition, we cannot rule out that a desire to resolve the crisis ultimately pushes anti-Maduro governments to
intervene directly.
Under this scenario, either the US or a coalition of Latin American militaries directly intervenes in Venezuela, deposing the Maduro
regime and installing a transition government. We think that the Maduro regime would quickly fold in the face of a foreign invasion, given
Andean | May 2019
poor morale among the rank-and-file of the military. However, we note that a significant proportion of the Venezuelan population would
likely strongly oppose such an intervention, and pro-PSUV forces could wage an insurgency. Overall, the intervening forces would likely
face a severe governability crisis in the wake of an invasion, which we have addressed at greater depth in some of our other research (see
'Massive Governance Challenges Await PSUV's Successor In Venezuela', November 9 2018).
VENEZUELA – DATA & FORECASTS

2015e 2016e 2017e 2018e 2019f 2020f 2021f
Nominal GDP, USDbn 957.6 19.0 30.7 26.0 9.7 28.6 55.5
Real GDP growth, % y-o-y -6.2 -16.5 -10.6 -13.2 -14.2 8.6 7.3
GDP per capita, USD 30,736 600 961 803 294 863 1,654
Population, mn 31.16 31.57 31.98 32.38 32.78 33.17 33.56
Consumer price inflation, % y-o-y, eop 180.9 376.0 3,979.0 1,117,690.1 4,208,260.5 20.0 15.0
Consumer price inflation, % y-o-y, ave 116.2 219.5 1,243.2 225,538.2 2,662,975.3 200.0 35.0
Exchange rate VES/USD, ave 0.00 0.01 0.21 157.28 40,586.40 16,234.56 11,364.19
Exchange rate VES/USD, eop 0.00 0.11 78.75 20,371.84 28,410.48 13,799.38 10,511.88
Budget balance, VESbn 0.0 0.0 -0.7 -576.8 -111,724.7 -58,943.1 -45,432.6
Budget balance, % of GDP -14.2 -13.9 -10.8 -14.1 -28.5 -12.7 -7.2
Goods and services exports, USDbn 38.8 29.1 32.8 30.0 20.6 20.6 19.8
Goods and services imports, USDbn 50.8 24.8 20.1 24.2 23.0 31.1 41.9
Current account balance, USDbn -20.4 1.1 3.8 3.8 -3.4 -9.5 -23.1
Current account balance, % of GDP -2.1 6.0 12.4 14.8 -35.6 -33.3 -41.6
Foreign reserves ex gold, USDbn 16.4 11.0 5.0 8.0 11.0 14.0 17.0
Import cover, months 3.9 5.3 3.0 4.0 5.7 5.4 4.9
Total external debt stock, USDbn 175.1 184.6 135.2 121.0 137.0 245.8 445.4
Total external debt stock, % of GDP 18.3 973.2 439.8 465.1 1,419.2 858.3 802.3
Crude, NGPL & other liquids prod, 000b/d 2,536.0 2,337.0 2,070.8 1,460.4 1,020.6 867.6 817.8
Total net oil exports (crude & products), 000b/d 1,951.6 1,836.6 1,657.1 1,137.4 750.3 611.2 564.2
Dry natural gas production, bcm 22.9 23.4 23.0 22.5 22.2 22.6 23.0
Dry natural gas consumption, bcm 16.7 14.5 13.3 11.8 11.0 10.7 11.0
e/f = Fitch Solutions estimate/forecast. Source: National sources, Fitch Solutions
VENEZUELA – ECONOMIC OUTLOOK
New Government Would Significantly Improve Fiscal Outlook

Key View
• We expect that if a new government takes power over the coming quarters, Venezuela's fiscal deficit would narrow significantly due
to spending reductions, though it will take years for revenues to recover.
• However, if the PSUV remains in power over the long term we expect the deterioration in the country's fiscal accounts would
continue indefinitely.
• Under our core scenario of a new government coming to power within the next year, we forecast Venezuela's fiscal deficit will narrow
from 28.5% of GDP in 2019 to 12.7% in 2020, narrowing gradually thereafter.
Our fiscal outlook for Venezuela is highly dependent on political developments in the country over the coming months. Venezuela's
years-long economic and political crisis appears to be approaching a tipping point, given increased diplomatic recognition of opposition
leader Juan Guaidó as interim president, suggesting that a change in regime may be forthcoming. Below we assess the impact of the two
most likely scenarios: one in which the opposition comes to power, and one in which power remains in the hands of the Partido Socialista
Unido de Venezuela (PSUV)-led government (see 'Venezuela Crisis: Updated Scenarios For The Weeks Ahead', February 26).
Under our core view that a new democratic government will be brought to power in the near term, we expect Venezuela's fiscal deficit
would narrow significantly. Venezuela's fiscal deficit has grown massively over recent years, amid a sharp decline in revenues in real terms
and politically-driven spending growth. The government has monetised its deficits, given that it has lost access to international capital
markets. Deficit monetisation has seen the M2 money supply increase 170,223.5% between the January 2018 and mid-February 2019,
fueling a hyperinflationary spiral (see 'Hyperinflation Continues In Venezuela, Despite Currency Re-Denomination', November 9 2018).
Given that deficit monetisation has driven hyperinflation, we expect that fiscal reform will be a key priority for the next government, likely
with the backing of multilateral organisations such as the IMF. This reform will centre on spending reductions, particularly on outlays such
Andean | May 2019
as price subsidies and social transfers. We note that if the next government were to dollarize Fiscal Improvement Contingent On Change In
Government
or adopt a currency board, it would face a hard limit on spending that would force it to cut Venezuela – Fiscal Balance, % of GDP
outlays (see 'What Comes After A Change In Government In Venezuela?', February 5).
However, the next government will need to maintain a certain level of spending, such as
on public services, infrastructure and the oil sector, in order to revive economic growth.
Moreover, any successor government to the PSUV will likely be relatively fragile, suggesting
that it cannot cut aid to the populace and retain its popular support. We expect that
humanitarian aid from multilateral organisations and foreign allies will be needed to
cushion reductions in social spending. The fragility of the next government also presents a
substantial risk of backsliding on politically unpopular reforms over a multi -year timeframe,
particularly if future elections return leftist candidates to power (see 'Structural Weaknesses e/f = Fitch Solutions estimate/forecast. Source: MPPEF,
Fitch Solutions
Underpin Poor Long-Term Growth Outlook', May 30 2018).
Revenues will remain weak for the foreseeable future. Venezuela's intakes are dominated
by revenue from the oil sector, which is in the midst of a protracted decline that will take
years to reverse even with a more market-friendly government in place (see 'Venezuelan
Oil Production: No Recovery In Sight', January 24). While our forecasts assume that non-oil
revenues rise over the coming years as the rest of the economy recovers, this increase will
be gradual.
If the PSUV remains in power over the long term we would significantly adjust down our
current forecasts. As outlined above, the PSUV is reliant on a sprawling public sector and Deficit Monetisation Fueling Surge In Money Supply
generous social safety net to guarantee its popular support. Under a PSUV government, Venezuela – M2 Money Supply Growth
cuts to spending are unlikely beyond piecemeal, largely symbolic changes that fall well
short of what is necessary to rein in the budget deficit. Moreover, revenues would continue
to decline in real terms in the absence of significant free-market reforms to recover oil
production and revive other sectors of the economy.
As a result, in the event of long-term rule by the PSUV we would likely revise our forecasts
to reflect deficits in excess of 10.0% of GDP per year, which would in turn keep inflation
extremely elevated. However, we are skeptical that the PSUV would be able to maintain its
hold on power over a multi -year timeframe amid such conditions, reinforcing our view that
regime change is the most likely outcome to the country's crisis. Source: BCV, Fitch Solutions
Andean | May 2019
COLOMBIA – ECONOMIC OUTLOOK
Increasing Import Demand To Keep Current Account In

Deficit
Key View
• Colombia's current account deficit will remain wide in the coming quarters as demand for consumer and capital imports increases.
• While export growth will remain strong, a corresponding rise in profit repatriation from foreign firms operating in Colombia will
mitigate the impact.
• We have revised our 2019 and 2020 current account deficit forecasts to 3.2% and 2.9% of GDP, from 2.6% and 2.2% respectively,
reflecting higher import demand and a less bullish outlook for global energy prices.
Robust demand for imports will keep Colombia's current account in deficit in the coming quarters. As Colombia's economy saw a
moderate growth rebound in 2018, private consumption was one of the major drivers, spurring demand for imported goods. In Q418,
imports rose 19.5% y-o-y as retail sales growth strengthened while the Colombian peso (COP) weakened. To that end, we have revised
our estimate of the current account deficit in 2018 to 3.2% of GDP, from 2.6% previously.
In 2019, we expect to see increased demand for imports as real GDP growth accelerates, from 2.7% y-o-y in 2018. Private consumption,
the major driver of growth in recent quarters, will trend higher, and Colombians will likely increase purchases of imported automobiles,
electronics and household appliances. Meanwhile, we forecast an expansion in fixed capital investment and construction sector activity
after several years of stagnation, fueling demand for capital goods imports (see 'Stronger Investment Outlook Will Support Colombian
Growth In 2019', January 4).
Export growth will accelerate in the coming quarters after a dip in December 2018. In line with our expectations, exports grew by an
estimated 10.8% y-o-y in 2018 despite a contraction in Q418. The primary sectors will be a major driver of export growth as recent
investment into Colombia's oil and gas, mining and agricultural sectors will boost production. Furthermore, we at Fitch Solutions forecast
oil and metal prices will trend higher in 2019 and 2020, boosting the value of Colombia's major exports. Our Oil & Gas team forecasts
Brent crude oil will average USD73.0/barrel (bbl) in 2019 and USD80.0/bbl in 2020, up from a spot price of USD65.7/bbl (see 'Brent: Set
For Further Gains In 2019', March 1), while we expect to see moderate increases in gold and nickel prices in the short-to medium-term.
Colombia's primary income account deficit and secondary income account surplus will continue to widen. The primary income account
is driven by the repatriation of profits by foreign firms, primarily operating in the extractive sectors. Foreign companies in Colombia will
see increasing profits due to increasing real GDP growth and a more favourable corporate tax programme, passed in December 2018. We
forecast the primary account deficit will widen to 2.9% of GDP in 2019 after averaging 2.4% of GDP in the last three years. Meanwhile, a
tight labour market in the US will likely boost take-home pay for the over one million Colombians in the US, offering tailwinds to remittance
inflows and increasing the secondary income account surplus.
Strong investment inflows will offer stability to Colombia's external account. Due to its significant natural resources and investor-friendly
policies, Colombia will remain an attractive destination for foreign direct investment (FDI) in the coming years. FDI has averaged USD9.0bn
over the last five years even as global commodity prices have slumped. These FDI projects, combined with other capital inflows, will amply
cover external financing needs. President Iván Duque has also been supportive of foreign investment, passing a fiscal reform that lowered
corporate tax rates, from 33.0% to 30.0%, over the next three years, and ushering foreign bids for developing Colombia's renewable
energy and infrastructure sectors.
Andean | May 2019
COLOMBIA – DATA & FORECASTS

2015 2016e 2017e 2018e 2019f 2020f 2021f
Real GDP growth, % y-o-y 3.0 2.0 1.8 2.6 3.2 3.6 3.7
GDP per capita, USD 6,035 5,806 6,407 6,685 6,592 7,133 7,473
Industrial production, % y-o-y, ave -25.3 3.3 5.3 5.5 5.3 5.0 5.0
Population, mn 48.23 48.65 49.07 49.46 49.85 50.22 50.58
Consumer price inflation, % y-o-y, eop 6.8 5.7 4.1 3.2 3.4 3.5 3.5
Consumer price inflation, % y-o-y, ave 5.0 7.5 4.3 3.2 3.4 3.3 3.3
Central bank policy rate, % eop 5.75 7.50 4.75 4.25 4.75 5.25 4.75
Exchange rate COP/USD, ave 2,745.77 3,053.42 2,951.80 2,956.25 3,172.89 3,113.18 3,156.76
Exchange rate COP/USD, eop 3,174.50 3,002.00 2,937.83 3,254.25 3,091.54 3,134.82 3,178.71
Budget balance, COPbn -27,079.3 -34,925.5 -33,636.0 -30,535.2 -26,983.7 -24,309.5 -23,478.0
Current account balance, USDbn -18.6 -12.0 -10.3 -10.6 -10.4 -10.2 -10.0
Current account balance, % of GDP -6.4 -4.3 -3.3 -3.2 -3.2 -2.9 -2.7
Total external debt stock, % of GDP 38.9 42.6 39.6 38.8 39.9 37.7 36.5
Crude, NGPL & other liquids prod, 000b/d 1,026.0 906.3 874.1 879.8 878.7 874.2 879.2
Total net oil exports (crude & products), 000b/d 695.2 567.7 524.8 521.1 509.4 487.5 476.5
PERU – POLITICAL OUTLOOK
Political Risks Likely To Subside In 2019

Key View
• Peru's political risk profile will improve over the coming quarters as President Martín Improved Risk Scores Underline Progress On
Vizcarra pursues anti-corruption measures, improving the public's opinion towards Anti-Corruption
Peru – Short-Term Political Risk Index
government.
• Vizcarra's investor-friendly policy orientation and the resolution of a six-day truckers'
strike will broadly alleviate the downside risks to economic activity and export growth.
• We have revised up Peru's score in our Short-Term Political Risk Index to 60.2 out of
100, from 58.8, reflecting an improved outlook for 'social stability'.
Political risks in Peru are diminishing moving into 2019, due to low unemployment and
improving sentiment towards the government under President Martin Vizcarra. At end-
2018, unemployment fell to 5.7%, a five-year low, which will lead to improved social stability
in Lima and other major cities. Vizcarra has made anti-corruption his primary policy goal, Note: Scores out of 100. Higher score = Lower risk. Source: Fitch
Solutions
supporting a December 2018 public referendum and challenging political opponents who
forestall his efforts. In addition, the Office of the Attorney General is continuing with the
prosecution of officials connected to the Odebrecht scandal. The resignation of Attorney Modest Fiscal Deficit Narrowing In The Years Ahead
Peru – Fiscal Deficit, % Of GDP
General Pedro Chávarry in January, who reportedly obstructed two Peruvian prosecutors
from investigating bribery allegations and openly quarreled with Vizcarra, will ease public
concerns over the perceived impunity of officials accused of corruption (see 'Exit Of
Attorney General, Reform Referendum Strengthen Peruvian President', January 14). As a
result, we have revised up Peru's overall score to 60.2 out of 100, from 58.8 previously.
President Vizcarra will maintain investor-friendly policies. Since taking office in March 2018,
he has vowed to boost spending on public works and reconstruction while adhering to
fiscal consolidation measures put in place by his predecessor (see 'Fiscal Consolidation To
Continue In Peru', November 29 2018). To boost revenues, Vizcarra has stressed the need e/f = Fitch Solutions estimate/forecast. Source: BCRP, Fitch Solutions
Andean | May 2019
to boost growth and improve tax collection, rather than increasing consumption taxes, a debate that led to the resignation of Finance
Minister David Tuesta in June 2018.
Meanwhile, a weakened Fuerza Popular (FP) will limit opposition to Vizcarra's policy agenda. While the FP remains the largest party in
Congress, it has been wracked by scandals in recent months, limiting its capacity to drive the direction of policymaking. In October
2018, its leader, Keiko Fujimori, was indicted and detained for money laundering, bribery and illicit campaign contributions, while Daniel
Salaverry, the FP-backed President of Congress, left the party (see 'Fujimori On The Ropes As Peru Congressional President Exits FP',
October 24 2018). Since then, several other FP members have defected, weakening its congressional bloc.
The recent resolution of a six-day truckers' strike will ease short-term downside risks to growth. On February 23, Peruvian truckers ended
their strike after the government agreed to hasten cuts to fuel prices and delay the imposition of several highway tolls. In addition, the
government will open a working group between transportation officials and representatives from the trucking industry on February 28.
While anecdotal reports claim that nearly USD250mn, mostly in perishable goods, was lost during the strike, its economic impact falls
well short of a similar truckers' strike in Brazil in May 2018, which led us to revise our real GDP forecast for that year (see 'Truckers' Strike:
Growth To Slow, Election Risks Rise', June 6 2018).
However, given the government's concessions to the truckers' group, this may compel other labour groups or communities to challenge
the Vizcarra government. Recently, indigenous Peruvians have blockaded a highway that services Las Bambas mine in the Cotabambas
Province, claiming that the government illegally built the highway through farmland. An escalation of public unrest would pose risks to
Vizcarra's investor-friendly policy direction.
PERU – ECONOMIC OUTLOOK
PEN: Sol Likely To Hold Its Value In Coming Months

Key View
• The Peruvian sol (PEN) will broadly trade sideways in the coming months, bolstered by higher copper prices and a more dovish US
monetary policy.
• Over the longer term, we at Fitch Solutions expect the unit will appreciate modestly, reflecting improving terms of trade and strong
investment inflows.
• We have revised our 2019 and 2020 average FX forecasts to PEN3.29/USD in 2019 and 3.27/USD in 2020, from PEN3.28/USD and
3.20/USD, reflecting a slightly less bullish copper price forecast.
Short-Term Outlook (three-to-six months)

We expect the Peruvian sol (PEN) will trade sideways, between PEN3.24/USD and PEN3.36/USD, in the coming months. While the unit
depreciated in Q418 as global metal prices dropped, we expect commodity prices, particularly copper, will rebound throughout 2019,
boosting Peru's terms of trade. Our Commodities team forecasts copper will average USD6,900.0/tonne in 2019, up from a spot price of
USD6,510.5/tonne, as Chinese demand for minerals increases (see 'Fitch Solutions Vs Consensus: Remaining Mostly Above Consensus',
February 12).
At Fitch Solutions, our relatively weaker expectations for the US dollar will largely be offset by our revised forecast for copper prices. In
January, we went from a bullish to a neutral stance on the dollar, reflecting a less hawkish outlook for US monetary policy (see 'USD: Dollar
At A Crossroads', January 2), which will ease depreciatory pressures on emerging market currencies, such as the PEN. However, while we
still expect copper prices will trend higher in 2019, we revised down our 2019 average forecast to reflect the downside risks of a continued
trade dispute between the US and China (see 'Copper Prices: Downside Revision As Trade Dispute Continues To Impact Prices', December
19 2018).
Furthermore, the Banco Central de Reserva del Perú (BCRP) will maintain its policy of actively intervening in the FX market to keep
the value of the PEN stable (see 'PEN: BCRP Will Allow Modest Appreciation In 2018', November 28 2017). In the last ten years, the unit
Andean | May 2019
depreciated at an average rate of 1.3% annually. With USD60.1bn in foreign reserves as of Volatility Will Remain Relatively Limited
Peru – Exchange Rate, PEN/USD (weekly)
December 2018, the BCRP has the ability, primarily using currency exchange swaps, to
maintain the PEN within a narrow range.
Long-Term Outlook (six-to-24 months)

In the coming years, higher global demand for metals and Peru's attractiveness as a foreign
direct investment (FDI) destination will drive a modest appreciation of the PEN. First, we
forecast copper prices will head higher as Chinese demand recovers, helping to improve
Peruvian terms of trade. Combined with recent investment into Peru's mining sector and
transport networks, this will support exports and narrow Peru's current account deficit to
1.6% of GDP by 2021 (see 'Export Growth Will Narrow Peruvian Current Account Deficit In Source: Bloomberg, Fitch Solutions
Long Term', February 5).
Second, Peru will invite substantial FDI in the coming years as it remains one of the fastest
growing economies in Latin America. Net FDI has averaged USD7.1bn annually in the last
three years, reflecting Peru's investor-friendly policies and substantial mineral deposits. We Copper Price Recovery To Provide Support
Peru – PEN/USD And Copper Price, Three-Month
forecast real GDP growth of 3.8% in the next three years (see 'Strong Domestic Demand Will Rolling Forward
Drive Peruvian Growth', February 21), supporting investment in Peruvian assets and leading
to a moderate appreciation against the dollar.
Risks To Outlook
We believe risks to our FX forecast are weighted to the downside. Should global growth
decelerate more than we expect, it will weigh on commodity prices, which would affect
terms of trade and investment in Peru, a major metal-exporting country. Furthermore, a
severe drop in Chinese growth, brought on by greater trade tensions or more restrained
public spending, would also depress copper prices and put deflationary pressure on the
Source: Bloomberg, Fitch Solutions
PEN.
PERU – DATA & FORECASTS

2015 2016e 2017e 2018e 2019f 2020f 2021f
Population, mn 31.38 31.77 32.17 32.55 32.93 33.31 33.69
Central bank policy rate, % eop 3.75 4.25 3.25 2.75 3.25 4.00 4.25
Exchange rate PEN/USD, ave 3.18 3.38 3.26 3.29 3.29 3.27 3.26
Exchange rate PEN/USD, eop 3.41 3.36 3.24 3.37 3.28 3.26 3.25
Budget balance, PENbn -12.6 -16.9 -22.8 -19.3 -19.9 -18.9 -18.9
Crude, NGPL & other liquids prod, 000b/d 151.9 136.3 136.1 141.5 144.9 148.6 151.2
Total net oil exports (crude & products), 000b/d -77.5 -106.9 -115.1 -122.5 -128.5 -132.8 -137.9
Andean | May 2019
ECUADOR – ECONOMIC OUTLOOK
IMF Deal Will Help Ensure Stability In External Accounts

Key View
• Ecuador's current account deficit will narrow over the coming quarters, as rising oil prices support export growth and an economic
slowdown dampens demand for imports.
• We maintain our forecast for a current account deficit of 0.1% of GDP in 2019, from an estimated 0.4% in 2018.
• A USD4.2bn International Monetary Fund (IMF) arrangement, along with other multilateral lending, will likely ensure stability of
external accounts over the medium term.
Ecuador's current account deficit will narrow in 2019. Rising global oil prices will support Ecuador's terms of trade and drive export growth.
At the same time, import growth will slow as an economic downturn saps demand. We forecast real GDP growth to slow to 0.8% in 2019,
from 1.4% in 2018, as President Lenin Moreno attempts to rein in Ecuador's sizable fiscal deficits via public spending cuts, on investment
and consumption (see 'Public Cuts Will Weigh On Ecuadorian Growth', January 8 2019). Additionally, a weaker US dollar, the currency of
Ecuador's dollarised economy, relative to major South America trading partners will further weigh on import demand (see 'USD: Dollar At
A Crossroads', January 2 2019). As a result, we forecast imports will increase 2.5% y-o-y in 2019, down from an estimated 18.0% in 2018.
However, Ecuador's adherence to OPEC-mandated oil production cuts and oil price weakness at the beginning of 2019 will weigh on
exports and keep the current account in deficit over the near term. We forecast a total current account deficit of 0.1% of GDP in 2019,
from 0.4% in 2018.
Rising oil prices will help lift Ecuador's current account into surplus by 2020. Our Oil & Gas team forecasts Brent crude oil prices will
average 75.0/bbl in 2019 and USD82.0/bbl in 2020, compared to a spot price of USD67.0/bbl. Although we expect production growth in
Ecuador will remain weak, further price gains will drive export growth of 4.0% in 2019 and 8.7% in 2020, pushing the current account into
a modest surplus of 0.2% of GDP in 2020.
IMF and multilateral funds will likely ensure external stability in the medium term. While we expect Ecuador's current account to post
small deficits or modest surpluses in the coming years, a large fiscal deficit and limited foreign reserves have offered little cushion against
a potential oil price shock or other external events in recent years. As of January 2019, Ecuador only had sufficient reserves to cover 1.9
months of goods imports.
ECUADOR – DATA & FORECASTS

2015e 2016e 2017e 2018e 2019f 2020f 2021f
Real GDP growth, % y-o-y 0.1 -1.6 3.0 1.4 0.8 1.8 2.4
Population, mn 16.14 16.39 16.62 16.86 17.10 17.34 17.57
Consumer price inflation, % y-o-y, eop 3.4 1.1 -0.2 0.3 2.5 3.5 4.0
Consumer price inflation, % y-o-y, ave 4.0 1.7 0.4 -0.2 1.4 3.0 3.9
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 -5.1 -7.3 -4.7 -4.0 -3.6 -3.3 -2.9
Current account balance, USDbn -2.1 1.4 -0.3 -0.4 -0.1 0.2 0.1
Current account balance, % of GDP -2.1 1.5 -0.2 -0.4 -0.1 0.2 0.1
Total net oil exports (crude & products), 000b/d 297.3 313.9 305.3 299.5 310.2 316.1 317.0
Andean | May 2019
However, a recently agreed upon IMF Extended Fund Facility will greatly expand this cushion, buttressing Ecuador's external accounts
(see 'Ecuador-IMF Deal Will Help Shore Up Substantial Financing Needs', February 21 2019). The agreement reached in February will
provide USD4.2bn for Ecuador, with the first disbursement of USD652mn likely in the coming days after the IMF board approved the
arrangement on March 11. The IMF funds will support an economic policy plan laid out by the Moreno administration and will accompany
an additional USD6.0bn in funds from multilateral lenders, including the World Bank and the Inter-American Development Bank (IDB).
BOLIVIA – ECONOMIC OUTLOOK
Current Account Deficit To Narrow Over The Long Term

Key View
• Bolivia will run sizable current account deficits in the coming quarters as import Current Account Deficits Will Persist In Coming Years
Bolivia – Current Account
demand for capital and household goods remains robust.
• Over the longer term, increased investment in the primary sectors will boost production
and goods exports, leading to a narrowing of the current account deficit.
• At Fitch Solutions, we have revised our 2019 current account deficit forecast to 4.9% of
GDP, from 4.6% previously, as we expect import demand to head higher in the coming
months. Our 2019 forecast represents a modest narrowing from an estimated 5.1% of
GDP in 2018.
We expect Bolivia will run wide current account deficits in the coming quarters. While exports
have seen significant y-o-y increases in the last three years, growth slumped in the second
e/f = Fitch Solutions estimate/forecast. Source: BCB, Fitch Solutions
half of 2018 as economic activity sputtered in Brazil and Argentina, Bolivia's two largest
export markets. However, we expect to see improving economic activity growth in both
countries in the coming months, offering tailwinds to Bolivian exports, which we forecast
will increase 10.2% y-o-y in 2019. In addition, recent capital investment into Bolivian mining
facilities will boost production as global metal prices continue to rise.
However, demand for imports will largely offset export gains. First, leftist President Evo
Morales will increase public expenditures for 2019 as he seeks a fourth consecutive
term in office. The Morales government doubled holiday bonuses in Q418 for public
sector employees and announced plans to expand universal health care in 2019. These
programmes will lift both public and private consumption, fueling demand for imported
household items and medical supplies. Second, increasing investment in mining, natural
gas and public sector projects will drive imports of capital goods (see 'Bolivia Set To Pace
South America In 2019 Growth', January 31).
Exports Set To Rally After Poor H218
Bolivia – Exports, USDmn (by segment)
Significant capital investments will boost export growth and help to narrow the current
account deficit in the long term. Bolivia is one of the riskier destinations for investment
in Latin America, placing last out of 17 markets in the 'Trade and Investment Risk' sub-
component in our Operational Risk Index. That said, Bolivia's substantial lithium and zinc
reserves will continue to drive inbound investment, which will help boost exports in the
longer term (see 'Foreign Investment To Spur Growth In Bolivia', July 18 2018). In February
2019, the state lithium company Yacimientos de Litio Bolivianos (YLB) announced a
USD2.3bn partnership with a Chinese consortium, after finalising a separate venture with
German company ACI Systems in December 2018. These agreements will help drive
lithium production, which is highly capital-intensive in Bolivia. By 2023, we forecast Bolivia's Source: BCB, Fitch Solutions
current account deficit will narrow to 3.3% of GDP.
Andean | May 2019
Capital inflows and robust foreign currency reserves will provide stability to Bolivia's external accounts. Over the last three years, net
capital inflows have averaged USD2.6bn, significantly larger than Bolivia's current account shortfalls. We expect foreign direct investment
will trend higher, as will foreign assistance from the Chinese government and multilateral organisations. Furthermore, Bolivia will maintain
sizable foreign currency reserves, estimated at USD7.2bn or 9.1 months of import cover at end-2018. These will offer support should
Bolivia experience an external shock to its balance of payments.
BOLIVIA – DATA & FORECASTS

2015 2016e 2017e 2018e 2019f 2020f 2021f
Population, mn 10.72 10.89 11.05 11.22 11.38 11.54 11.71
Exchange rate BOB/USD, ave 6.90 6.91 6.91 6.91 7.01 7.16 7.29
Exchange rate BOB/USD, eop 6.90 6.93 6.91 6.91 7.10 7.22 7.36
Budget balance, BOBbn -15.7 -16.9 -20.3 -19.6 -20.7 -19.5 -19.3
Total net oil exports (crude & products), 000b/d -8.7 -15.9 -14.7 -17.8 -19.3 -19.9 -20.8

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IMPORTANT NOTICE:

Latin America Monitor

Analysts: Peter Giblin, Lee Sutton,

Editor: Katherine Weber

Production: Anshu Kumar

Bolivia: Current Account Deficit To Narrow  11

ANDEAN RISK INDEX

RISK INDEX TABLE

VENEZUELA – POLITICAL OUTLOOK

Scenario #1: Opposition Assumes Power (45% probability)

Scenario #2: PSUV Remains In Power (25% probability)

Scenario #3: Prolonged Internal Conflict (20% probability)

Scenario #4: Direct Foreign Military Intervention (10% probability)

VENEZUELA – DATA & FORECASTS

VENEZUELA – ECONOMIC OUTLOOK

New Government Would Significantly Improve Fiscal Outlook

COLOMBIA – ECONOMIC OUTLOOK

Increasing Import Demand To Keep Current Account In

COLOMBIA – DATA & FORECASTS

PERU – POLITICAL OUTLOOK

Political Risks Likely To Subside In 2019

PERU – ECONOMIC OUTLOOK

PEN: Sol Likely To Hold Its Value In Coming Months

Short-Term Outlook (three-to-six months)

Long-Term Outlook (six-to-24 months)

PERU – DATA & FORECASTS

ECUADOR – ECONOMIC OUTLOOK

IMF Deal Will Help Ensure Stability In External Accounts

ECUADOR – DATA & FORECASTS

BOLIVIA – ECONOMIC OUTLOOK

Current Account Deficit To Narrow Over The Long Term

BOLIVIA – DATA & FORECASTS

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Bolivia: Current Account Deficit To Narrow 11