Outlier Peru shows Covid-19’s carnage despite best efforts


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Peru’s laudable coronavirus emergency measures won’t prevent its banks from taking a substantial hit – so what does that mean for less-well-run economies?


There are many countries being roundly criticized for their response to the Covid-19 pandemic, and these bad actors are spread among continents and between emerging and developed markets.

With so much noise when looking for correlations between the mass of countries’ outbreaks, healthcare pandemic policies and fiscal support, it is difficult to look to statistical analysis for clues as to how deep – and how long – the impact will be for the world’s retail banks.

Perhaps individual outliers will be most instructive.

In emerging markets – and certainly in Latin America – Peru has been the outlier across a range of issues.

It was among the first to introduce emergency measures that incorporated the strict lockdown of its population and the closing of its borders.

It is also committing by far the region’s largest fiscal package – worth PEN90 billion or a whopping 12% of GDP – to mitigate the economic and financial impact of a crisis that is going to leave millions in South America unemployed and pushed into poverty.

That swift and strong support package is equally split into three fiscal injections: the first for the containment phase, which is mainly cash transfers for the population and money for healthcare; the second in sovereign-backed guarantees to give the financial system liquidity for companies; and a third portion that will go to public investment and infrastructure plans to kick-start the economic recovery.


However, the insight Peru provides isn’t encouraging. Despite the size and speed of these measures, analysts say the economy won’t return until any semblance of normalization for more than a year – the second half of 2021 – and bank earnings will remain depressed until at 2022 – again, at best.

Peru’s banks will likely see their lowest ever return-on-equity results this year, at 12.5% – or half the pre-crisis’ consensus of 25% – as provisions increase, loan growth slows and the net interest margin is pressured by the 200-basis-point cut made by the central bank.

These results are, for Peruvian banks, not too bleak, but it is what they point to for the less-well-managed economies that is concerning.

For example, Moody’s forecasts that the Peruvian economy will be flat this year and grow 3.7%. For what little forecasts are worth in nominal terms right now, on a relative basis it’s notable that it is impossible to find reputed forecasts for other Latin America countries that avoid contraction this year – and most are sharp.

If Peru’s banks end up being the region’s best performing, what will be the outcome for those operating in distinctly less-well-run economies?