Peru – Still a Bright Star In South America
Economic growth appears to have softened a bit in the closing months of last year, in part due to reduced government spending, but it has retained a healthy gait and should hold up well during 2017, propelled by external demand and a return of fixed investment to an upward trajectory. Business confidence, which Banco Central’s indicator showed at 56.7 in January, below the 57.3 points registered in December, is still significantly above the 50.0 mark that constitutes the threshold between optimism and pessimism. Inflation was last reported at 3.1% in January, slightly down from 3.2% in December. It is now believed to be just within the Central Bank’s target range of 1%-3% and the monetary authorities expect it to finish at 2.0%-2.5% for all of 2017. This has encouraged the CB to leave its key interest rate (the tasa de interes de referencia de la politica monetaria) unchanged at 4.25% at this month’s policy meeting.
The numbers suggest that Peru’s economy will continue to be a bright ray in South America, stable and enjoying good growth. It can no longer count on the boost it has been getting from the surge in the production of iron ore and copper due to capacity increases coming from large new mines such as La Bamba and Cerro Verde and from booming Asian (especially Chinese) demand. But the economy is now well diversified, with the services sector having become the man contributor to GDP, responsible for nearly 60%. Telecommunications and financial services account for nearly 40% of GDP. And the performance of the external sector will continue to be robust. The country has natural resources in abundance, with ores and minerals currently making up more than half of all shipments abroad and food accounting for another 21%. These days, thousands of farm workers are planting peppers, asparagus, artichokes, grapes and mangos for export in an ongoing effort by the government to lessen the country’s reliance on mining. “Non-traditional” export products also include shoes, textiles, ceramics and chemicals. Peru has free trade accords with the United States, China and the European Union. It joined Mercosur in 2005 and between 2006 and 2016 signed a number of bilateral treaties with other Latin American and Caribbean countries. In 2016, the Pacific Alliance (a trade agreement including Chile, Colombia, Mexico and Peru) came into force. Peru has undertaken enormous water projects to irrigate dry coastal land and attract investment from abroad.
If the external sector has one key weakness it lies in the fact that it exports natural resources that are exposed to substantial price volatility, while it imports mainly industrial goods with much less volatile prices. This means that it is vulnerable to changes in the terms of trade, when export prices fall whereas those on the import side of the ledgers stay high. Fortunately, the country has enjoyed a steady improvement in its terms of trade since 2000. Even so, the foreign trade balance swung into deficit in 2014 and 2915, but last year it was back in the black to the tune of USD 1.7 billion. It should remain positive in the current year, if to a smaller extent (USD 500-600 million). Also, Peru has been able to build up a handsome cushion of international monetary reserves that covers the cost of more than a year and a half worth of imports. The ample kitty allows Banco Central to ensure that the sol remains broadly stable in the foreign exchange markets, where official policy is a “managed float.” This is to say the Central Bank allows the market to set the trend of the exchange rate, but intervenes on and off to avoid excessive fluctuations. A stable sol is important as the financial system is still highly dollarized and companies and individuals alike frequently borrow dollars but buy and sell products in local currency.
In the political arena, all attention is currently focused on a corruption scandal that has prompted Peruvian prosecutors led by Attorney General Pablo Sanchez to request the arrest of former President Alejandro Toledo. Believed to be in Paris, he is being accused of having accepted millions of dollars in bribes from the Brazilian construction company Odebrecht (at the center also of Brazil’s “car wash” scandal swirling around Petrobras) to help the company win contracts to build the Inter-Oceanic highway linking Southern Peru with Brazil. Mr. Toledo, who denies any wrong-doing, governed Peru from 2001 to 2006. He oversaw the country’s transition to a strong democracy with a flourishing economy after the ouster of ex-President Alberto Fujimori’s authoritarian regime. The affair poses no threat to the government of President Pedro Pablo Kuczynski, although his political support is weak as his Center-Right Peruvians for Change party commands only 18 of the 130 seats in Congress.
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